UK committee recommends a GAAR, but not of the "broad spectrum" variety
At a time when New Zealand's general anti-avoidance rule ("GAAR") has become increasingly controversial, the United Kingdom has moved one step closer to enacting a GAAR. However, the experts considering the proposal have highlighted the need for safeguards to ensure that any GAAR does not deter investment in the UK, or give discretionary power to the tax authorities. The General Anti-Avoidance Rule Study Group recently released its findings on whether the UK should implement a GAAR. The report recommends against introducing a broad spectrum GAAR, but supports a GAAR targeted at abusive arrangements with a number of safeguards for taxpayers. The report was prepared by leading tax lawyer, Graham Aaronson QC, with input from an advisory committee that included Lord Hoffmann as well as two current Judges.
The report, while recommending the implementation of a targeted GAAR, stresses the importance of safeguards to ensure certainty in its application. The report advises that a broad spectrum GAAR would "undermin[e] the ability of business and individuals to carry out sensible and responsible tax planning," 1 which would "erode the attractiveness of the UK's tax regime to business." 2
Many of the specific findings are of particular interest in the New Zealand context. For instance it has been suggested in the New Zealand context that the ability to obtain a binding ruling is a "cure" to the uncertainty created by a broadly worded GAAR. 3 The report, however, concludes that such an approach would impose "very substantial resource burdens on taxpayers and [tax authorities] alike", and would "inevitably in practice give discretionary power to [the tax authorities] who would effectively become the arbiter of the limits of responsible tax planning". 4
The report also considers whether a special penalty regime should apply for cases in which the GAAR applies, so as to increase the "deterrent effect" of the GAAR, as is the case in New Zealand and Australia for example. The report rejects such an approach, on the basis it would present an "irresistible temptation to [the tax authorities] to wield the GAAR as a weapon rather than to use it, as intended, as a shield". 5
The report argues that the GAAR should target "highly abusive contrived and artificial schemes which are widely regarded as intolerable, but that it should not affect the large centre ground of responsible tax planning." 6 In order to specifically address concerns relating to discretionary power, several safeguards are proposed, including:
- explicit protection for reasonable tax planning;
- explicit protection for arrangements which are entered into without any intent to reduce tax;
- placing the burden of proving that an arrangement is not reasonable tax planning upon the tax authorities;
- having an Advisory Panel, comprised of experts, the majority of whom are not employed by the tax authorities, to advise whether the tax authorities would be justified in seeking counteraction under the GAAR. This Advisory Panel should publish (appropriately anonymised) digests of its advice;
- giving taxpayers and the tax authorities the right to refer to material or information which was publicly available when the tax planning arrangement was carried out; and
- requiring that the potential application of the GAAR be authorised by senior officials within the tax authorities, to ensure consistency and responsibility in the GAAR's application.
Appended to the report is a draft illustrative GAAR. The draft GAAR comprises 16 sections running to over 10 pages.
As well as reflecting the safeguards summarised above, the illustrative draft GAAR tackles the question of reconstruction, which has been the cause of some controversy in New Zealand. For this purpose, the draft legislation distinguishes between two types of arrangement: (i) those that viewed as a whole have no significant purpose apart from being contrived to achieve an abusive tax result; and (ii) those that viewed as a whole do have a significant purpose apart from being contrived to achieve an abusive tax result.
For the first category of arrangement, the relevant tax advantage is to be counteracted by treating the tax-advantaged party as if the arrangement had not taken place. But for the second category of arrangement, the relevant tax advantage is to be counteracted by treating the tax-advantaged party as having been party to a non-abusive arrangement, that is, an arrangement which would enable the achievement of the purposes the actual arrangement was intended to achieve, but without achieving the abusive tax result.
Implications for New Zealand
The release of the UK report comes at a time when the operation of New Zealand's GAAR has become increasingly controversial. Representatives of New Zealand's Crown Law Office have spoken out in favour of New Zealand's GAAR applying whenever there is a tax benefit and that tax benefit depends on a divergence between legal form and economic substance. 7 (Such an approach would see the GAAR override mainstream tax planning, since tax legislation, as well as much of our commercial law, frequently allows for a given economic outcome to be achieved by a variety of legal means, often with different tax consequences.)
By contrast, there is concern within the private sector about the uncertainty generated by such an expansive approach to the interpretation of the GAAR. Motivated by this concern, representatives from the private sector have recently prepared, and presented at a symposium held at the University of Auckland Business School, a report containing recommendations to improve the operation of New Zealand's GAAR.
The recommendations set out in the New Zealand report are similar in many respects to the recommendations set out in the more recently released UK report. The recommendations in the New Zealand context include:
- considering (based on review of international precedents) legislative criteria for distinguishing cases of tax avoidance from cases of legitimate tax planning;
- more sophisticated rules governing Inland Revenue's reconstruction power, so as to ensure that only the tax advantage resulting from tax avoidance would be overridden by the GAAR, and not other tax consequences of the arrangement that do not result from tax avoidance;
- requiring Inland Revenue and Crown Law to publish written guidance as to its interpretation of the GAAR, including examples, and that Inland Revenue and Crown Law personnel be required to act consistently with that interpretation;
- establishing an independent panel which includes private sector input concerning tax avoidance cases; and
- establishing a formal internal escalation process within Inland Revenue for circumstances where tax avoidance is alleged, and requiring a full disclosure of that process to the taxpayer.
The UK report represents a balanced approach to tackling the challenges posed by tax avoidance. Its recommendations address many of the issues which are causing concern in New Zealand. It is therefore to be hoped that policy-makers in New Zealand will look to the findings set out in the UK report for ways of improving the way in which the New Zealand tax system counters tax avoidance.
To view a copy of the UK report, please click here.
To view a copy of the New Zealand report, please click here.
Contributed by Brendan Brown and Stephen Whittington
1 Graham Aaronson QC "GAAR Study"at [1.5].
2 GAAR Study, at [1.4].
3 Glenharrow Holdings Limited v CIR [2008] NZSC 116 at [49].
4 GAAR Study, at [1.6].
5 GAAR Study, at [5.48].
6 GAAR Study, at [5.1].
7 Harry Ebersohn "Tax Avoidance and the Rule at Law" (paper presented to Legal Research Foundation Tax Avoidance Symposium, Auckland, April 2011) at [81].