General+Anti+Avoidance+Rule (GAAR)

Since the typically used specific and detailed rules to tax legislation only combat certain kinds of tax avoidance, many tax systems introduced general rules in order to fight the more creative forms of tax avoidance. These general anti-avoidance rules (GAAR) enable tax authorities to disregard schemes and actions that would elsewise reduce tax liability. The comprising rules of the GAAR are applied for transactions that are void for tax purposes.

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=1. Definition = The term general anti-avoidance rule describes a set of broad principles-based rules designed to combat the perceived avoidance of tax. The concept provides the taxing authority a mechanism to deny the tax benefits of transactions believed not to have any commercial purpose than to generate a tax benefit.

 The general anti-avoidance rule shifts the legal tax system’s focus to situation-based economic analyses and allows thereby a structural coupling between the legal system and the economic system. The objective of general anti-avoidance rules is to make the legal system reflect the economic system by acting like kind of a gateway between the different systems.

=2. Countries applying GAAR = So far, general anti-avoidance rules are introduced in Australia, The Netherlands, France,Germany, Sweden, Singapore, Canada, Brazil, Ireland, South Korea, Italy, South Africa, China, Indonesia and Belgium. The United Kingdom and India both proposed to introduce GAAR as well.

=3. Criticism = It is critized that the framework of a general anti-avoidance rule would contravene the principles of the rules of the law which says that a law has to be certain to conform the principles. The concept of GAAR does not fulfill this requirement. On the other hand, it is said that a general anti-avoidance rule cannot be effective if it is precise. This may mean some sort of uncertainty for tax-payers but the benefit of the flexible wording and the enabled possibilities of adressing new arrangements of avoidance predominate this loss.