Tricky terrain of tax avoidance
The Hindu Business Line
Ernst & Young
The General Anti-Avoidance Rule will apply from April 1, 2013. The draft guidelines for implementation were released for public comments on June 28.
GAAR may be taken to establish a broad rule that has the effect of invalidating, for fiscal purposes, an arrangement entered into by a taxpayer for obtaining a tax advantage. Consequentially, Revenue is granted the power to adjust the assessment to counteract the tax advantage. GAAR aims to enable Revenue to counteract tax avoidance achieved through contrived transactions.
It recognises the impossibility of foreseeing every contingency to be covered by specific anti-avoidance rules (SAAR). GAAR is the shotgun approach of legislators attempting to cover a wide range of tax avoidance practices.
On the other hand, businesses need a high degree of certainty on the tax liability their transactions would attract. The problem with the GAAR approach is that as it does not cover specific areas in detail, there is too much uncertainty. Those engaged in business need to be assured that the route they have chosen to conduct their business does not lead them to unexpected tax burdens. They are often unsure whether GAAR would apply to genuine commercial transactions, and they need to be certain that Revenue would act with consistence and common sense.
The opposite views have led to some countries deciding not to introduce GAAR provisions. Tax planners exploit the differences in tax rates within the tax framework of a country or those between two or more countries. The tax planner takes advantage of this tax differential — from highly taxed to lesser-taxed and non-taxed situations. It would be near-impossible to eliminate the variation of tax rates within an income tax act or between the rates imposed by other fiscal statutes in a single country. When international income is considered it is clear that such differentials between nations can never be eliminated.
Tax avoidance, as an industry, will not disappear in the foreseeable future. The vast plethora of ingenious tax avoidance plans that are being devised will make it near-impossible for Revenue to combat with SAAR. It is only with GAAR that Revenue would be able to control blatant tax avoidance. GAAR shifts the burden of combating tax avoidance to Revenue, and thereby involves the Judiciary in the role of defining the ever-shifting boundaries that separate acceptable from unacceptable forms of tax behaviour.
The business sector does not like the idea of permitting the Judiciary and the bureaucracy to make laws. They prefer laws to be enunciated by the legislature in clear and unambiguous terms so that they can structure their commercial affairs with a certainty and avert unforeseen tax liabilities. This is the dilemma.
Tax avoidance itself is an indefinable concept that is constantly changing. Tax laws too are highly fluid and prone frequently to transformation. Tax planners therefore, by necessity, have to be flexible and innovative if they are to derive significant advantages. In such a nebulous scenario it would be too much to expect the legislature to provide certainty to tax planners by limiting the anti-avoidance armoury to SAAR.
Need for certainty
To achieve some degree of certainty, GAAR needs to be written in clear language, ensuring its purpose is readily apparent; clearly identify the hallmarks that would trigger application of GAAR; provide for pre-transaction rulings; state how Revenue would treat a scheme caught by GAAR; and the burden of proof for tax avoidance should fall on Revenue.
The draft guidelines seek to address some concerns. The draft recognises that taxpayers are entitled to mitigate their tax liability and will not be vulnerable to GAAR if they do. It also reaffirms that the primary burden of proof for invoking GAAR would be on Revenue. Also welcome is the clarification that GAAR will generally not be invoked where SAAR is applicable. The examples in the draft provide a general indication on the kind of transactions that may attract GAAR. However, one hopes for more clarity to prevent indiscriminate use of GAAR. The draft may be viewed as a first step towards implementing a more balanced and reasonable GAAR.
However, a lot more work is still needed to ensure GAAR is implemented in a manner that provides certainty to investors.