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GAAR guidance must give ‘clear perception’ of acceptable tax planning, says Tax Faculty

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Guidance on the general anti-abuse rule should include ‘standard examples of transfer pricing in relation to acceptable international arrangements’, in order to provide a ‘clear perception’ of what is acceptable international tax planning, the ICAEW Tax Faculty has said in response to consultation on the draft Finance Bill.

The GAAR interim advisory panel will ‘review and approve’ HMRC’s guidance, which will be published alongside the Finance Bill on 28 March. The guidance will be ‘key to the adequate functioning of the GAAR’ and the panel’s work will be ‘vital’, the Faculty said last week.

The Faculty had ‘consistently supported’ the proposed GAAR, but remained concerned that it would ‘impose considerable extra administrative burdens on those responsible businesses engaged in the centre ground of tax planning’.

The House of Lords economic affairs Finance Bill sub-committee has been examining ‘how effective ‘[the GAAR] is likely to be in addressing the various types of avoidance recently highlighted in the media’. Earlier this month Lord Lipsey said during an evidence session that there were examples of ‘despicable but apparently perfectly legal tax avoidance by big companies’.

He asked Judith Knott, HMRC’s director of corporation tax international anti-avoidance: ‘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.’

Last week the chancellor announced that the UK would draw up changes to the transfer pricing rules after G20 finance ministers resolved to develop measures to address base erosion and profit shifting. The OECD had warned that gaps in the international tax system were giving multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’.