General Anti-Avoidance Rule (GAAR) 

The General Anti-Avoidance Rule (GAAR) plays an important role in the corporate tax system of the United Arab Emirates (UAE). This article will explore what GAAR is, how it operates under UAE corporate tax law, and the factors considered when applying GAAR.

What is GAAR?

GAAR refers to a general set of rules and guidelines that tax authorities can use to combat tax avoidance and abuse. The overall goal of GAAR is to ensure taxpayers cannot exploit loopholes or deficiencies in tax laws to artificially reduce their tax liability. It gives tax authorities the power to deny tax benefits from aggressive tax planning schemes or arrangements that are deemed to be primarily tax-motivated with little or no economic substance.

Even if a transaction or arrangement follows the literal interpretation of tax laws, GAAR allows authorities to look beyond the form of the transaction and consider its underlying substance. If the main purpose is found to be obtaining an unfair tax advantage rather than legitimate commercial reasons, the stated tax treatment can be denied or adjusted through GAAR. This helps promote the policy objectives and intent behind tax laws rather than exploiting unintended gaps or ambiguities.

Operation of GAAR under UAE Corporate Tax

The UAE introduced GAAR as part of its corporate tax regime which took effect in June 2023. Under the UAE corporate tax decree law, GAAR gives authorities the power to make various adjustments to the tax treatment of transactions if an unfair tax advantage is determined to have been obtained. Some examples of the adjustments that can be made include:

• Calculating taxable income, deductions, or reliefs by disregarding claimed exemptions, deductions or reliefs.
• Reclassifying payments or amounts to reflect their true nature.
• Ignoring parts of the tax law that would otherwise impact the tax treatment.
• Adjusting other taxpayers’ liabilities based on the GAAR decision.

The goal is to correct the tax outcome and reflect what would have resulted from a transaction conducted purely for commercial reasons without any tax planning motives.

Examples of Tax Avoidance Schemes that the GAAR can be Applied to in UAE Corporate Tax

Some examples of tax avoidance schemes that the GAAR can be applied to in UAE Corporate Tax include:

•  Setting up shell companies in tax havens: This scheme involves creating shell companies in low-tax jurisdictions primarily for the purpose of obtaining tax benefits, without having a genuine business purpose.
•  Controlled foreign company (CFC) rules: These rules allow tax authorities to treat certain profits of a foreign company as if they were the profits of a resident company, which can result in double taxation.
•  Thin capitalization: This scheme involves under-capitalizing a business or asset to minimize the taxable gain on a sale or disposal, which can be seen as an attempt to avoid taxes.
•  Aggressive transfer pricing: This involves setting up transactions or structures primarily to reduce tax, pushing the boundaries of what’s permissible under tax laws.
•  Tax evasion: Tax evasion is the illegal act of intentionally evading or avoiding payment of taxes by fraudulent means, such as underreporting income or using other dishonest tactics.
•  Abuse of tax treaties: This involves using tax treaties between countries to obtain tax benefits that were not intended by the treaty’s provisions, such as using the “place of effective management” test to shift a company’s tax residence.
•  Exploiting tax loopholes: This involves taking advantage of gaps, ambiguities, or oversights in tax legislation to obtain tax benefits that were not intended by the law.

The GAAR is designed to counteract these tax avoidance schemes by allowing tax authorities to disregard or invalidate transactions that are primarily structured to achieve tax benefits and by ensuring that taxpayers pay their fair share of taxes

Factors Considered under GAAR

When evaluating whether GAAR applies, tax authorities consider multiple factors related to the transaction or arrangement in question. Some of the key factors examined include:

• The actual method and substance of the transaction, not just its legal form.
• The timing of the transaction and whether it was tax-motivated.
• The financial outcome or position of the taxpayer and any related parties.
• Any additional rights or obligations transferred beyond a typical commercial deal.
• Other relevant details and conditions surrounding the transaction.

Special scrutiny is given to related-party transactions due to the risk of non-arm’s length pricing being used for tax avoidance. The onus is on the taxpayer to prove the transaction’s primary purpose was for valid commercial reasons rather than tax benefits.

Activities Requiring GAAR Evaluation

Certain activities inherently carry more tax planning risk and therefore require careful GAAR evaluation. This includes changes like:

• Altering the financial year-end date which can shift income and deductions between tax periods.
• Corporate restructurings and internal group transactions.
• Entering into new related-party agreements or modifying existing ones.

Proper due diligence and documentation of business purposes is important to withstand potential GAAR challenges in such situations. Taxpayers are advised to consult professional tax advisors with GAAR expertise.

Conclusion

In summary, GAAR plays a key role in supporting the integrity and policy objectives of the UAE corporate tax system. It provides tax authorities necessary powers to address aggressive tax avoidance while still respecting legitimate commercial and business dealings. With careful planning and seeking guidance of professional tax consultants in Dubai UAE, taxpayers can structure their affairs in a GAAR-compliant manner and avoid unwelcome tax adjustments.

Readmore…