TaxMatters@EY - March 2013

Living with GAAR: leading practices for tax lifecycle management

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Extract from GAAR rising: Mapping tax enforcement’s evolution

In an increasingly complex and constantly evolving environment for tax, there is a growing recognition of the close linkage between the tax planning, tax provision, tax compliance and tax controversy processes. These processes and their interdependencies can be described as a tax “lifecycle.”

Today, decisions are best made with the entire tax lifecycle in mind, recognizing that its phases are interconnected. Through its different stages, the lifecycle addresses tax in the context of the whole business.

Tax lifecycle

The use of a model such as the tax lifecycle is especially important when set against the context of the growing adoption of general anti-avoidance rule (GAAR) measures around the world. It provides a framework against which the tax department can assess and manage overall GAAR readiness.

Tax is but one of many issues that boards of directors need to consider when carrying out their directorial duties. Making sure that the proper tax procedures are in place is critical to keeping the enterprise from being unnecessarily exposed to the application of GAAR and the significant penalty, interest or reputational ramifications that may follow.

How a corporation manages GAAR should be dictated by its overall risk appetite. That is, what level of risk is the corporation willing to accept in a transaction? That risk appetite should be decided at the board level, and it will determine the manner in which transactions are planned and executed.

Leading practice in this area — and something that tax administrators continue to encourage — is for the corporation to operate under a tax corporate governance framework that includes a documented process for significant transaction sign-off. At the highest level, this framework should outline the process for escalating transactions that are material or that have particular characteristics that may attract tax authority scrutiny.

With this in mind, C-suites and boards may consider asking themselves and their tax directors some key questions regarding those transactions that could potentially result in the application of a GAAR regime.

Eight questions for the C-suite and board to ask in relation to GAAR

  1. Does the transaction/structure have a valid commercial purpose?
  2. Is the transaction/structure unique and complex?
  3. Is the tax benefit material to the financial statement?
  4. Could the transaction/structure be undertaken in a different manner, without attracting the potential application of GAAR?
  5. Has an opinion been obtained that the transaction/structure will more likely than not withstand a GAAR challenge?
  6. Is the transaction/structure defendable in the public eye?
  7. What is the corporation’s tax risk profile both globally and locally?
  8. How comfortable is the corporation with litigation if it is required to defend the transaction/structure?

The presence of a GAAR regime does not affect the need to plan appropriately, taking into account tax consequences. Rather, it means that tax planning should continue in a thoughtful manner, with practical steps taken through all stages of the tax lifecycle to protect the business from a GAAR challenge.

To learn more, read our publication GAAR rising: Mapping tax enforcement’s evolution.