GAAR – An International Perspective
Professor Yariv Brauner
University of Florida
Brauner@law.ufl.edu
Mumbai, July 2012
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Introduction
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What is a GAAR?
Rules v. Standards
The GAAR debate
GAARs and anti abuse rules
International Developments
What is a GAAR?
• Core difficulty: words must be interpreted
• Deference to Agency
– Beyond general Power
– Chevron, Mayo and recent developments (U.S.)
– Specific, wide discretion
• Attempt to generalize the distinction between
acceptable and inacceptable tax planning
• Use of principles or standards (words) to
overcome the interpretation difficulties
Rules v. Standards
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Rules are the most constraining and rigid. Once a rule has been interpreted
and the facts have been found, then the application of the rule to the facts
decides the issue to which it is relevant (unless the case falls within the
penumbra of a rule with vague content).
– A rule is harder if both the conditions for its application and the consequences that follow are
defined by bright-line distinctions that admit of easy application. Rules become softer as they
criterion for the application and/or the consequences to which they lead become fuzzier.
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If your goal is ex ante predictability and certainty, then rules are usually the way to go. Predictability and
certainty are particularly important when the law seeks to guide future conduct.
Standards provide an intermediate level of constraint. Standards guide
decisions but provide a greater range of choice or discretion; standards define
a set of mandatory considerations.
– Standards are less constraining than even "soft" rules. Whereas a rule defines a triggering
condition and a consequence, a standard may define a set of relevant considerations and
options.
– Some standards give the decision maker substantial guidance, by specifying relatively specific
and concrete factors the decision maker should consider and the relative weight or
importance of those factors. Other standards are much more open ended, requiring
consideration of factors that are general and abstract. Standards that refer to "all the
circumstances," "the interests of justice," or "equitable considerations" are particularly soft.
Rules v. Standards
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if our goal is to insure ex post fairness, then standards may be the way to go. Standards permit
flexibility and the consideration of mitigating circumstances.
• Principles are even less constraining. Principles provide mandatory
considerations for judges. Whereas, standards identify an exhaustive set
of considerations for adjudication or policy making, a principle identifies a
nonexhaustive set, leaving open the possibility that other considerations
may be relevant to the decision.
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Principles by themselves do not resolve legal issues.
principles are particularly well suited to give legal form to concerns which operate in a wide variety
of particular contexts – operate across doctrinal fields
Difficult to choose one methods over the other in tax law
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Probably the main issue is the willingness to extend deference to agency
The GAAR Debate
• Purpose
• Trust of agency – political difficulties
• choice between rules and standards affects costs
– Rules typically are more costly than standards to
create, whereas standards tend to be more costly for
individuals to interpret when deciding how to act and
for an adjudicator to apply to past conduct.
– Costs of circumvention / change
• Over and under inclusiveness of rules
• Corruption & shift of norms over time
GAAR, SAARs and Anti Avoidance Rules
• Judicial doctrines
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Substance over form
Business purpose
Step transaction
Sham transactions
• Power to Agency in specific cases
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Debt / Equity
De facto mini-GAAR in Transfer Pricing
Legal approach - minimal
Economic substance
• Recent limited legislation
• History
Anti Abuse Rules
• Judicial doctrines implemented by the courts
– but in the U.S. the Supreme Court refrained from
providing guidance
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Anti deferral regimes
Thin capitalization rules
Expatriation taxes
Transfer pricing
Limitation on hybrids
Anti-conduit regulations
Reporting and Compliance
Anti Abuse Rules (Cont.)
• Treaty related rules
– Beneficial ownership
– Limitation on benefit clauses
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Public company test
Ownership test
Base erosion test
Active trade or business test
– Residence related limitations
– Triangular arrangements rules
International Developments
• Canada & U.S. (covered elsewhere)
• The Aaronson report in the U.K., November
2011.
• China 2008
• Issues with long standing Australian rule
• India..
• A variety of jurisdictions evaluating approach
facing the crisis