the gaar proposal: a national treasury perspective
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The GAAR Proposal: A National Treasury Perspective. Keith Engel – Chief Director Tax Legislation, National Treasury. National Treasury fully supports SARS’s effort to upgrade the GAAR. Previous Treasury Statements. - PowerPoint PPT PresentationTRANSCRIPT
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The GAAR Proposal: A National Treasury Perspective
Keith Engel – Chief Director
Tax Legislation, National Treasury
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National Treasury fully supports SARS’s effort to upgrade the GAAR . . .
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Previous Treasury Statements
• In February 2005, the Treasury Budget Review initially signalled Government’s intent to upgrade the GAAR
• On 3 November 2005, Minister Manuel explicitly recognised the need for a revised GAAR, stating: “What we can't accommodate is a rule which is intended to limit avoidance that is so abused and tatty with wear."
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Treasury Interest
• With the assistance of Parliament, the Minister (via the National Treasury) sets tax policy through the medium of tax legislation
• As administrator, SARS has the task of maintaining that policy through legislative enforcement
• Clever tax planning undermining SARS enforcement accordingly nullifies Treasury policy (Sec. 4.6 of GAAR Discussion Paper)
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The GAAR debate should be viewed as a central part of the longstanding “cat and mouse” game of tax non-compliance . . .
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General Forms of Non-Compliance
• Unintentional failures:– Lack of understanding or awareness of tax
laws– Mathematical or clerical errors– Internal system errors
• Intentional failures– Tax evasion– Tax avoidance
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“Classic” Evasion Versus Avoidance
• Tax evasion usually has a criminal/fraudulent element:– Outright omissions include:
• Failure to register• Failure to disclose gross receipts
– Deliberate factual misstatements include:• Two sets of books• Fabrication of expenses
• Tax avoidance represents a more colourable approach to tax compliance (providing an “air” of legality) (GAAR target)
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Borderline Evasion/Avoidance
• Aggressive (even frivolous) one-sided interpretations of legal “grey” areas– Extremely one-sided readings– Selective historical reconstructions– Factual execution may be impossible (or wholly ignored in
operational terms)
• Endless paper trails– Convoluted transaction steps– Black hole parties (e.g. often protected by secrecy provisions)
• Administrative tactics– Information stalling– Information flooding
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“Letter” Versus the “Spirit”
• Classic tax avoidance is about the age-old legal distinction between the “letter” versus the “spirit”
• As “wordsmiths,” good tax lawyers can elevate the “letter” of the law into a fine art
• Two types of substance:– Legal substance (terms have legal effect, even if
factually neutralised)– Business/Economic substance (terms have a
commercial bearing on the business, such as risk shifting)
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The historic battle between enforcement and tax avoidance typically goes through the following
phases . . .
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Phase #1: Subjective Intent
• In the English tradition, most legal disputes initially centered around the question of intent:– Intentional, reckless, negligent,– Premeditated, crime of passion, insanity
• In terms of tax, one looked to– Bona fide, sole or main purpose
• Unfortunately, the question of intent does not readily adapt to tax settings
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Phase #2: Objective Anti-Avoidance Fortifications
• Tax law has developed a whole series of objective tests to limit avoidance, all of which tend to pile on top of one another
• Examples include the denial or ring-fencing of losses, deemed inclusions or accelerations of income, objective conditions (e.g. “new” versus “used” depreciable assets)
• In the words of General Patton, “Fixed fortifications are monuments to the stupidity of man. If anything made by God can be overcome, anything made by man can be overcome.”
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Phase #3: GAAR – Mobile Counterforce
• The GAAR seeks to overcome artificial gimmicks to overcome the objective anti-avoidance rules of Phase #2
• GAAR operates as a final catch-all based, taking into account a myriad of factors (e.g. intent, tax benefits)
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Since we can all agree tax avoidance is a problem, why all the fuss?
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Tax Avoidance Versus Tax Minimisation
• In terms of UK tax jurisprudence, impermissible tax avoidance “is a course of action designed to conflict with or defeat the evident intention of Parliament”; whereas, permissible tax minimisation is an acceptable course of action that is similarly aimed at tax reduction
• Taxpayers do not have an obligation to pay maximum tax; indeed, many tax laws provide taxpayers with options to reduce tax (e.g. company formation election)
• The dividing line becomes even harder to draw when the decision to undertake a transaction will occur regardless of tax, but the manner of the transaction is heavily infected by tax considerations
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Goliath Versus Goliath?
• Power of SARS:– Power to charge; cashflow
and reputation disruptions– Resources– Contacts– Media access
• Power of large corporations:– Power over the facts;
steps, players and labels– Resources– Contacts– Media access
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Innocent Pedestrians and Rogue Agents
• “Innocent pedestrians Look; Don’t Hit!” - Will the revised GAAR result in innocent road-kill (e.g. unfair taxation of smaller businesses)?
• Can the revised GAAR be trusted in the hands of a rogue auditor seeking to achieve ever increasing targets?
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Beware of the Pendulum!
• SARS has no political interest in abusing its newfound powers – extreme enforcement will only lead to eventual legislative curtailment
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Saints and Sinners
• Not all tax planners (e.g. tax lawyers and accountants) engage in sophisticated tax avoidance; many lack the risk appetite, while others lack the specialised skill
• Indeed, the “saints” of the business can be said to resent the “sinners” who generate deals that:– Unfairly seduce clients, and– Create undue layers of legislative complexity as well
as an undue climate of enforcement suspicion
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Stopping the Avoidance Addiction
• Because the sums are huge, once tax avoidance begins – it becomes hard for the sinners to stop:– Tax professionals
need to maintain fees– Company directors
need to maintain profits
– New deals often must offset old deals
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Whereto from here?
Think “refinements,” not reversals . . .
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Take Note of the Telltale Signs
• The revised GAAR provides a set of factors that act as helpful indicators (i.e. telltale signs) of tax avoidance
• Do these factors go to far or far enough?
• Does the form match the substance?
• Are the steps momentary?
• How does the legal result differ if the excess artifices are removed?
• Does the money flow in a circular fashion?
• Are there any special purpose vehicles?
• Do steps fully cancel or offset one another?
• Do different parties treat the same transaction differently for tax purposes?
• Is their a failure to operate at arm’s length in terms of price or form?
• Does the financial accounting treatment remain neutral despite the alleged tax restructuring?
• Do the parties have a reasonable chance of generating any pre-tax profit?
• Do the tax benefits outweigh the non-tax benefits?
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Civilisation at a Discount
• Like South Africa, governments around the world are increasingly concerned about large corporate tax avoidance in terms of revenue flows and in terms of corporate good governance
• Question: Why should wealthier parties be able to purchase reduced taxes for a legal or accounting fee?
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When we all pay our fair share of tax…
• Should we be successful at targeting the “sinning” few, Treasury again can consider providing further relief for all
• And when we consider the history of the last 5 years, we can see that our Minister of Finance has been consistently generous in this regard