GAAR Disharmony

“Chaos was the law of nature; order was the dream of man.” 
― Henry Adams, U.S. Historian

Adams’ description of chaos appears in his book, “The Education of Henry Adams,” which he wrote a century ago to describe his attempt to come to terms with the start of the 20th century, a period of rapid change and turmoil. The quote also crystalizes the experience of many tax professionals at the dawn of the 21st Century as they try to make sense of the chaotic jumble of tax-enforcement approaches and increasing use of general anti-avoidance regulations (GAARs) that vary dramatically – and confusingly – from country to country.

The depth of this chaos became clear throughout the presentations and off-line discussions that took place at a late-February Tax Executives Institute (TEI) seminar on international tax issues held in Atlanta. Presenters shared insights on GAARs as well as how governments within individual country tax codes are adopting different tax strategies.

For background, GAARs are principles-based rules that reside within a country’s tax code and are meant to broaden the government’s ability to thwart perceived avoidance of tax. GAARs are defined as broad rules. Other the other hand, specific anti-avoidance rules (SAAR) target known tax avoidance schemes and have a very limited scope of application.

One presenter pointed out the U.K.’s statements about wanting to become the most competitive tax regime in the G20. This stance differs markedly from the aggressive tax and auditing approaches currently embraced by countries such as Spain, France and India. Clearly, governments are trying to strike a balance between raising more revenue and becoming more business friendly. As a recent special report in The Economist put it, governments around the world are trying to raise “the largest possible amount of revenue with the smallest possible amount of economic and political damage.”

• A firm understanding of the company’s risk profile and risk appetite (both of which should be clearly articulated);
• A careful approach to creating legal entity structures when entering new countries;
• A clear understanding of the relationship between business operations and legal entities; and
• Tax operations that interact with the rest of the business in an aligned and risk-intelligent manner.

These are big, strategic undertakings. From a tax perspective, they require significant time, resources, planning and communications – which are absolutely necessary if tax professionals are to help their companies operate in an optimal fashion despite the chaos.