Market leading insight for tax experts
View online issue

A GAAR cannot rewrite international tax principles, peers are told

printer Mail

There is an argument that transfer pricing rules enable multinational groups of companies to shift significant amounts of profit into tax havens because, in some cases, the rules ‘do not do enough to look at the group as a whole’, a senior HM Treasury official has told peers.

Mike Williams, HM Treasury’s director of business international tax, and Judith Knott, HMRC’s director of corporation tax international anti-avoidance, were giving evidence to the House of Lords economic affairs Finance Bill sub-committee last Monday, 4 February.

More on this story:

ICAS calls on government to explain limited scope of general anti-abuse rule

Tax avoidance: Peers to scrutinise general anti-abuse rule

Williams said the OECD’s current project on tackling tax base erosion and profit shifting would need to focus on two areas:

‘Selling in: The existing tax rules make a distinction between trading with a country and trading in a country where you have some sort of presence … We now have a world where it is easier to transact physical goods over the internet, which means that where the service is provided is less clear.

‘Transfer pricing: There is an argument on transfer pricing. It is fair to say that the rules were devised primarily by lawyers who looked at them on a company by company basis. They were considering things like creditors’ rights in liquidation. In some circumstances the rules do not do enough to look at the group as a whole; that is, the economist’s concept of a firm. The fact that this is looked at company by company enables a group to segregate capital and put a lot of it into a tax haven. You have to accept that the capital has to be remunerated, and if you accept the segregation, you will end up accepting that a fair amount of profit has to go to a tax haven.’

General anti-abuse rule

The proposed general anti-abuse rule (GAAR) provides HMRC with an additional tool to tackle avoidance, and setting the ‘bar’ lower would give rise to uncertainty that could harm the economy, Williams said.

Knott said HMRC drew a ‘three-way distinction’ between legitimate tax planning, tax avoidance and abusive tax avoidance. GAAR was targeted at abusive tax avoidance.

‘What we mean by legitimate tax planning is tax planning that is very much in line with parliament’s intentions when it passed the rules,’ she said.

‘A good example of that would be putting cash into an ISA account. That is legitimate and what parliament intended to happen.

‘Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that parliament did not intend. It is often accompanied by artificial transactions – trying to seek a result that was not intended. That is tax avoidance and we would continue to use the tools in the form of the various anti-avoidance rules we currently have to tackle it, but the GAAR will come in at the abusive end of tax avoidance in cases where it is not reasonable to take that particular course of action.’

Baroness Noakes noted that the GAAR was concerned only with arrangements that can be treated as abusive using the double reasonableness test: ‘That is, something that cannot reasonably be regarded as a reasonable course of action. It seems to us to leave a substantial area where the GAAR is unlikely to apply and therefore where HMRC would continue to need to challenge specific arrangements. We are searching to find out where the GAAR is going to add value to what it is you are trying to achieve,’ she said.

HMRC would continue to tackle ‘avoidance that is not abusive’, Knott said. ‘We would not use quite the same language as that of Graham Aaronson about the centre ground of tax planning, but certainly there is a brand of avoidance that is not abusive that we would continue to tackle.’

HMRC had been ‘quite successful’ in recent litigation. The GAAR would allow HMRC to tackle ‘the sort of case where it is not possible to tackle avoidance under the existing law’, and would ‘deter abusive tax avoidance and potentially deter other sorts of avoidance as well’.

Lord Hollick suggested that some avoidance that HMRC was not categorising as ‘abusive’ could hardly be described as ‘reasonable’.

‘There may be some cases of tax avoidance where people would have different views’, Knott replied. ‘Some might regard something as reasonable and others might not, but at the abusive end, it is something that, when anyone considers it, looks abusive and not something that would be reasonable.’

Williams explained there was some avoidance ‘where the taxpayer may say that the main purpose was not for tax avoidance and to reduce a tax bill, but that it had some commercial purpose’.

In those circumstances, he said, ‘it is more difficult because there will be a dispute which is partly factual as to the motives that predominated, and often there will be an element of commerciality in the arrangement’.

The GAAR was ‘at the very least’ an additional tool to tackle avoidance, he argued. ‘Setting the bar lower would ‘potentially bring into consideration a much wider range of tax planning that would bring with it uncertainty and could in turn impact on business decisions and investment, and thus be harmful to the economy’.

‘Public expectation’

Baroness Kramer suggested that Williams was saying, in effect, that the GAAR would strengthen – but not move – the boundary ‘between tax planning and abuse’.

She asked how that would square with the ‘public attitude’, which had ‘shifted quite strongly in a negative direction against quite a wide range of avoidance that does not yet fall into the abuse category’.

A new boundary might be drawn instead, she suggested, one that is ‘more in line with public expectation’.

Williams agreed the GAAR would strengthen the existing boundary. There had been occasions when the courts had ‘clearly wanted’ to find that transactions were abusive but had not been able to do so within the existing law.

‘We may get closure more quickly on some quite egregious avoidance that simply does not really work, and which the courts ultimately find does not work,’ he said.

The difficulty with moving the boundary ‘further into avoidance’ was that ‘inevitably you will move into a less clear and less certain world’.

Kramer asked: ‘Are you not concerned that you are legitimising avoidance?’

Williams replied: ‘No, because we are clear that this is an extra weapon in the armoury used in the fight against avoidance and abuse.’

General anti-avoidance principle

Lord Bilimoria asked whether a wider general anti-avoidance principle, as set out in Michael Meacher’s private member’s bill, would be a more effective defence against avoidance ‘that is not abusive but is nevertheless objectionable’.

In broad terms that bill, drafted by tax campaigner Richard Murphy, was designed to counteract tax advantages arising from arrangements having tax avoidance as their main purpose. Arrangements would represent tax avoidance ‘if … it would be reasonable to conclude that tax is not paid by the right person, or at the right time, or in the right place’.

Murphy is a member of the GAAR interim advisory panel.

Williams replied: ‘Trying to define and police tax avoidance through a range of different terms is extremely difficult. What is objectionable to one group may be regarded as perfectly ordinary by another, which would probably include a lot of the ordinary, sensible tax planning which takes place.

‘[Michael Meacher’s] proposal for a general anti-avoidance principle covers a much wider range of tax planning than the GAAR, and in considering whether it lies on one side of the line that that principle would draw or on the other, businesses would have to make quite difficult decisions and consider this particular bill in a wide range of commercial transactions.’

Williams reminded peers that there is a range of targeted anti-avoidance rules ‘across the tax code’.

‘Policing the line between what is reasonable and what is not reasonable, what ought to be taxable and what not, is much clearer with specific, targeted rules. Also, if we did try to apply a broad rule in circumstances where in reality we may want or seek to make quite fine distinctions, that might cause difficulties for the courts,’ he said.


Lord Lipsey said it was ‘pretty clear’ that the GAAR was not going to catch some of the prominent cases featured in the media in recent months. There were examples of ‘despicable but apparently perfectly legal tax avoidance by big companies’, he suggested. ‘Could there be a GAAR that would catch those arrangements, and should there be one?’

Knott replied: ‘Looking at the way multinationals operate, I would say that they adopt a range of structures. Some multinationals adopt abusive structures which I would categorise as avoidance, and some have what I would call legitimate tax planning.

‘Where the structures are abusive, the GAAR will apply to multinationals. But it is true that quite a bit of the media in relation to multinationals has fundamentally been about the way that taxing rights are allocated between countries.

‘That is something which has to be determined in accordance with international principles agreed at the OECD, and it is not something that the GAAR can rewrite. The GAAR does not rewrite those principles and it is difficult to see how it could. The GAAR is not going to fundamentally change that framework. If issues need to be addressed, that needs to be done multilaterally at the OECD, and in fact that is what is happening.’

OECD project

Williams said there had been considerable progress over the past six months. ‘Most countries are clear that what we are talking about is a divvying-up, if you like, of taxing rights between countries that was decided before global communications became so much easier through electronic means. If you are going to revisit that, it has to be done multilaterally and by agreement between a number of different countries, otherwise you will end up with different standards. You will see double taxation and an inhibition of trade. The OECD is addressing this through its project on base erosion and profit shifting.’