* Govt sets out draft General Anti-Avoidance Rule
* Companies initially supportive of move
* Say latest proposals too broad and restrictive
* Campaigners warn against too-narrow GAAR
By Tom Bergin
LONDON, Oct 4 The activists who have protested
in recent months at the tax arrangements of some leading British
companies are united with many politicians in wanting to cut
corporate tax avoidance. On how best to do that, there's less
When the government first came out with plans to clamp down
with a so-called General Anti-Avoidance Rule (GAAR), UK
companies were publicly positive, seeing the measure as helping
tackle public resentment at corporate behavior as well as
creating a more level playing field between companies
That view changed when proposals over the summer indicated
the rule would be tighter than first stated.
Now the government faces opposition from companies, raising
the political temperature over the issue and potentially giving
the measure a rockier ride through Parliament.
The CBI, the main UK business lobby, said the draft GAAR was
so broad as to discourage investment at a time when the
government was pushing measures to make the UK's tax system the
most competitive in the G20 group of large economies.
"The uncertainty caused by anything other than a
narrowly-focused GAAR could undermine the positive effect of
these other measures", the CBI said in its response to the
In theory, a GAAR-type rule should be pretty
uncontroversial. Indeed the only surprise is that it took the UK
so long to adopt one, given something similar exists in other
developed countries, including the United States where an
"economic substance doctrine", which functions like a GAAR, was
tacked on to President Barack Obama's healthcare law in 2010.
What's less surprising is that fiscal priorities have forced
the government's hand.
It needs the money to plug its budget deficit, while also
hoping a GAAR will temper public anger at austerity measures by
convincing a weary public that the better off and big businesses
are being made share the burden of tackling the public debt
Business at first backed plans for a GAAR as companies
unable to use aggressive avoidance techniques - perhaps because
of their fear of reputational damage or because they were just
too small - felt it would stop rivals from getting an edge by
gaming the taxman.
More broadly, executives hoped a GAAR would soothe public
cynicism toward big corporations, which could pressure the
government into adopting less business-friendly policies.
"Having something like a GAAR is important to give people
confidence that egregious behaviours can be prevented ... if
your customers feel disaffected because you as a business are
doing things that they think are inappropriate, that doesn't
help you," said Andrew Bonfield, chairman of the tax committee
of the Hundred Group of finance directors, which represents the
biggest companies in the UK.
Yet companies' initial support was largely based on a belief
that the government was planning a rule which would continue to
allow most avoidance techniques employed by business.
Graham Aaronson, the lawyer the government appointed to
study the benefits of a GAAR last year, recommended a
narrowly-focused GAAR, to the annoyance of tax campaigners who
noted Aaronson's history of defending companies in tax cases
against the UK tax authority, Her Majesty's Customs and Revenue
Aaronson's report envisaged barring only highly artificial
offshore schemes, unconnected to any economic activity, whose
only purpose was to cut taxes.
The channeling of profits from genuine sales through tax
havens - something a broader GAAR might capture - would be
However, Bonfield, also finance director of utility National
Grid Plc, said the latest draft GAAR, released by HMRC
over the summer, had spooked businesses.
"There is some concern about whether this is slightly
broader than the Aaronson proposals," he said.
Globalisation and the development of more sophisticated
financial tools have created opportunities for multinational
corporations and high net-worth individuals to cut their tax
bills by constructing arrangements that stick within the letter
of tax law but arguably break its spirit.
Governments regularly update tax rules to close loopholes
that allow such arrangements. But tax advisers simply go back to
the drawing board to find more loopholes.
This leads to a fiscally and economically wasteful cat and
mouse game, according to Judith Freedman, a member of the panel
which formulated plans for a UK GAAR, characterised by "scheme
creation and scheme blocking".
To avoid such games, many countries have adopted so-called
principles-based legislation that allow tax authorities to
disregard arrangements which they feel are designed largely for
tax reduction, rather than for genuinely commercial reasons.
The previous UK Labour government proposed a GAAR in 1997
but the plan was dropped following opposition from big business.
The latest push for a GAAR was led by the Liberal Democrats, the
left-of-centre junior partner in the Conservative-led
Business dropped its opposition to the GAAR, partly because
the political climate changed, but also because it felt
reassured by the language in Aaronson's report.
While Gordon Brown as finance minister said in 1997 he
wanted a GAAR to stop tax avoidance, and current finance
minister George Osborne told parliament earlier this year he
thought aggressive tax avoidance was morally repugnant, the
panel proposed a rule that only targeted "very aggressive"
Tax advisers and campaigners say a "narrow" GAAR would
permit tax-reduction tactics such as intercompany loans, the
charging of inter-company management fees and the charging of
inter-company royalties for the use of intellectual property.
The broad approval to avoid taxes enshrined in a narrow GAAR
has also prompted opposition from tax collectors themselves.
The Association of Revenue and Customs, the trade union for
tax collectors, said in its official response that a narrowly
focused rule would "legitimise what is currently held to be
avoidance. In other words, under the guise of tackling
avoidance, it may actually facilitate it".
In June, the government published its draft legislation and
opened a consultation period that ran to mid-September. It did
not specify exactly what arrangements would be allowed or
barred, but campaigners said the wording confirmed their fears.
"It is setting back the whole campaign against tax
avoidance," Michael Meacher, a legislator for the opposition
Labour Party, said in a telephone interview. Meacher has tabled
his own anti-avoidance bill with stricter language, though
without government support it is unlikely to progress.
Tax advisers said it was impossible to know exactly what
would be allowed under a new GAAR until it was implemented and
challenged in court. Yet, as they digested the draft law over
the summer, they too grew alarmed.
John Overs, tax lawyer at Berwin Leighton Paisner, said the
proposals were "unique and exceptional" in their breadth - going
far beyond Aaronson's recommendations.
"It raises constitutional issues and is generally quite
troubling to the tax community," he said.
David Heaton at Baker Tilley accused HMRC of deliberately
drafting rules that it hoped would spook taxpayers.
"The revenue wants uncertainty. It frightens avoiders ...
(but) even non-aggressive people will be frightful," he said.
HMRC denied the GAAR's wording was chosen to generate
uncertainty and said the planned rules were only targeted "to
deter people from using artificial and abusive avoidance".
The CBI said the proposed bar for what might be considered
abusive avoidance was lower than in other countries with similar
measures, such as China, South Africa and Australia, and more
sweeping than the language India plans to use in its GAAR -
which the CBI has also criticized for being too broad.
The lobby group complained the UK GAAR should only be
triggered if tax avoidance was the sole purpose of an
arrangement rather than "one of the main purposes", as proposed
by the current draft.
Granted, not all tax specialists are critical.
PricewaterhouseCoopers tax partner Alex Henderson said the
proposed UK wording was "common wording you'll find in a lot of
modern anti-avoidance legislation".
Yet the CBI also criticized the fact that tax arrangements
must meet the hurdle of being "reasonable" in the eyes the HMRC
because it said this was "too subjective".
However, GAARs adopted by countries such as Germany, South
Africa and China also put the onus on the taxpayer to prove
their affairs are reasonable, according to PwC.
Henderson said it was too early to tell if the UK's GAAR
will be stricter or more lax than other countries' tax avoidance
rules. Even if the proposed wording is retained, the GAAR's
impact will be heavily influenced by the HMRC guidance document
on how it will be applied - something which is due to be
released by the end of the year.
The final element in the operation of the GAAR could be one
of the most controversial. The government plans a panel to
provide opinions to HMRC on the acceptability of particular tax
arrangements and with the power to rewrite the guidance.
The government expects HMRC representation on the panel but
the CBI wants the majority of its members to be tax experts from
John Christensen, director of the Tax Justice Network, which
campaigns against avoidance, said this could lead to conflicts
of interest, since most tax experts working outside of HMRC are
employed at accounting or law firms which advise on tax issues.
"The vast majority of professionals working at this level
would want to protect the current arrangements," Christensen
said. "They wouldn't take a very critical view."