UK must learn lessons from across the globe to avoid uncertainty and deterring multinational investment

Comment by Frédéric Donnedieu de Vabres, Chairman of Taxand

The announcement in yesterday’s budget confirming the UK government’s pursuit of a General Anti-Avoidance Rule (GAAR) to address abusive and artificial tax avoidance, runs the risk of further muddying the waters of what legitimate tax avoidance and illegal tax evasion is. A clear distinction of how to define what abusive tax avoidance is needs to be established to define the parameters of tax planning.

In many ways the GAAR is a fly in the ointment for the UK’s standing as a competitive jurisdiction for attracting business and stands in surprising contrast to measures, such as the gradual reduction of the corporate income tax rate to 20% by 2015. The Government must learn lessons from the impact of similar legislation in other countries in order to avoid a potentially dangerous signal to global business.

The UK is in a different position to many other countries that have previously introduced a GAAR, given the well established and sophisticated body of anti-avoidance case law which is already in place as well as a proliferation of targeted anti-avoidance rules. However, whilst the GAAR may well be seen by Government as a way of reducing the number of targeted anti-avoidance rules in the long run, there is a concern that the legislation will simply sit on top of the existing rules, creating additional complexity and uncertainty for companies when it is introduced.

This type of uncertainty was prevalent in Canada when the rules were initially introduced in 1988 and caused widespread uncertainty for foreign investors. Moreover in Germany and South Africa, who were both relatively early adopters of a GAAR, implementation – meant to simplify anti-avoidance legislation – has actually predicated an increase in the number of specific anti-avoidance rules.  This adds layers of complexity for taxpayers and has proved ineffectual in streamlining the system.

The City -

The City –

Reinforcing concerns over a UK implementation of a GAAR is the experience of Australia, whose anti-avoidance regime is probably the most comparable with the UK Government’s proposals and has been seen by many as having a significantly an adverse impact on the competitiveness of Australia.

But is GAAR implementation realistic?  The global economy continues to evolve at such rapid speed; governments simply can’t legislate at the same pace.  And nor can one country tackle this alone.  In order for the GAAR to work, it would require EU and OECD agreement and implementation.  Looking at the example of Financial Transaction Tax, which is only being implemented in 11 EU member states, proves just how difficult this really is.

Frédéric Donnedieu de Vabres is Chairman of Taxand, the world’s largest independent global organisation of specialist tax advisors to multinational businesses.

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