Glossary term
General Anti-Avoidance Rule (GAAR)
Subject: Legal, Tax and Reporting, Tax Compliance and Governance
Also known as: Anti-avoidance rule
A general anti-avoidance rule lets a tax authority deny the tax benefit of an arrangement whose main purpose is to obtain that benefit in a way that defeats the intent of the law.
Explanation
Specific tax rules can always be sidestepped by structures their drafters did not foresee. A GAAR gives the authority a broad power to look at the substance of an arrangement and set aside the advantage, even if each step follows the written law. Most versions ask whether the main or one of the main purposes was a tax benefit, and whether the arrangement lacked real commercial substance or was abnormal in the circumstances. Many countries have one, and some set up an independent panel to review cases before the rule is applied, to protect taxpayers from misuse. Taxpayers still have the right to choose between legitimate options, such as using a tax-free savings scheme. Boards and advisers assess major transactions against the rule. Deal teams ask what a tax officer would say the purpose was, not only whether each step is lawful.
Example
Just before year end, a retail group merges a loss-making shell into a profitable subsidiary, with no business reason other than using the shell's tax losses. The tax authority applies its general anti-avoidance rule, denies the losses and charges the tax due, plus interest. The argument that every step met the legal wording is not accepted.
Not to be confused with
- Tax evasion
- Evasion is illegal concealment or false reporting. GAAR targets arrangements that are technically lawful but abusive.