Vol 11 (2014) - Issue 5

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The Good, the Bad and the GAAR: Tax Avoidance in the 21st Century – Part Two

In Part One it was highlighted why specific anti-avoidance legislation, the disclosure rules and the modern interpretation of the Ramsey doctrine, have not been effective overall at preventing the creation and use of artificial tax avoidance schemes. Part Two will now analyse what lessons might be learnt from GAARs belonging to two Commonwealth jurisdictions, in addition to why the European Court of Justice’s abuse of rights doctrine cannot provide a satisfactory answer to the problem. Following this the article will consider whether the UK GAAR is too wide, including an example of how the 'double-reasonableness' test might have fared against a highly artificial scheme which prevailed in HMRC v Mayes. Lastly the safeguards for the taxpayer are assessed, revealing how, worryingly, the dangers reflected by Australia’s GAAR may already be taking effect here.

3. GAARs Overseas
Having accepted the limitations of Ramsey show that a GAAR may be beneficial, the discussion now moves on to how successful GAARs have been in other countries. Across the globe aggressive tax avoidance is high on the agenda of national legislatures. In India a GAAR will come into effect by 2016, following in China’s footsteps who introduced their equivalent version in 2008. The examination here focuses on the Commonwealth countries Australia and Canada, to mitigate the usefulness of any parallels being distorted by legal culture. It reveals that GAARs, whilst perhaps good ideas in principle, can and often do create problems of their own. The possibility of extending the doctrine of abuse of rights is also considered.
Australia
This serves as a classic example of what commentators label 'administrative creep', a process whereby amendments transform a general anti-abuse rule into a wider general anti-avoidance rule, potentially applying to what many consider normal, commercial transactions. Australia’s GAAR, introduced in 1936 was amended in 1981, after dissatisfaction with the judiciary’s highly literal interpretation. Even after these reforms, it was still only intended to target 'blatant, artificial and contrived arrangements'.
It applies where a person has entered into a scheme 'wholly or predominantly to obtain a tax benefit', and operates with penalty charges. However, the application of the new fairly wide test continued to be constrained by the judiciary. The High Court of Australia only allowed it to successfully apply if obtaining a tax benefit was the scheme’s 'dominant purpose', interpreted in Spotless Services to mean 'the most influential and prevailing or ruling purpose'. Moreover determining whether there was a 'tax benefit' required the court to consider the transaction parties would reasonably have entered into in the scheme’s absence. Many taxpayers found it easy to argue that there was no reasonable comparator, so that the GAAR could not apply.