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A General Anti-Avoidance Rule (GAAR) for the United Kingdom?

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Plus ça change, plus c’est la même chose. The United Kingdom is now seriously considering the introduction of a form of GAAR after having relied for years on judicial doctrines of anti-avoidance as expounded in such cases as WT Ramsay Ltd v. IRC, [1981] STC 174 (HL); CIR v. Burmah Oil Co. Ltd., [1982] STC 30 (HL); Furniss v. Dawson, [1984] STC 153 (HL); Craven v. White, [1988] STC 476 (HL); Ensign Tankers (Leasing) v. Stokes (HMIT), [1992] STC 226 (HL).  The most recent report is dated November 11, 2011 and is entitled “GAAR Study: A study to consider whether a general anti-avoidance rule should be introduced into the UK tax system“.

The uncertain and indeed sometimes contradictory principles developed in the U.K. cases have impelled an Advisory Committee consisting of a distinguished group of practitioners, academics and judges led by Graham Aaronson, Q.C. to advocate a “moderate” rule that targeted “abusive” arrangements, but to reject a “broad spectrum” general anti-avoidance rule. It is difficult for Canadians who have lived for over 20 years with the GAAR in section 245 of the Income Tax Act and observed the Canadian courts in scores of cases grapple with concepts such as “abuse”, “misuse” or “avoidance transactions” not to view with a measure of smug satisfaction – indeed Schadenfreude – the spectacle of a high level panel wrestling with such philosophical conundrums as the distinctions between “contrived and artificial schemes”, “abnormal arrangements” and “responsible tax planning”. The problem in the United Kingdom of codifying an anti-avoidance rule is similar to that in the United States where the judicial anti-avoidance doctrines applied in different circuits have necessitated the enactment of an amendment to § 7701(o) of the Internal Revenue Code to include a complex codification of the economic substance doctrine, one of the principal pillars of United States anti-avoidance jurisprudence. The Advisory Panel has performed a creditable task by analyzing the very problems that Canadian courts have been struggling with since the inception of the Canadian version of GAAR. The philosophical predilection of the United Kingdom courts embodied in Ramsay and its progeny may well influence the interpretation of the English GAAR just as the Duke of Westminster‘s case has implicitly survived GAAR in Canadian jurisprudence and has influenced its interpretation and evolution.

We can expect to see substantial refinement in the development of the “moderate” (or “targeted”) anti-avoidance rule (“TAAR” as opposed to “GAAR”) to ensure that it conforms to the stated objectives of the rule in that it

(a) deters or counteracts contrived, artificial and abusive schemes;

(b) does not undermine or discourage competitiveness that arises from “responsible” tax planning;

(c) eliminates uncertainty in predicting the tax consequences of arrangements that results from, inter alia

(i) “notoriously long and complex” tax legislation;

(ii) differing interpretations of arrangements by courts and tribunals; and

(iii) a battery of specific anti-avoidance rules.

Graham Aaronson and the Advisory Committee are to be commended for producing a competent and commonsensical report that responds realistically to a serious issue. The legislative implementation of the proposals is not certain. The possibility of GAAR was explored in the United Kingdom in 1998 and came to nothing. It may be assumed that if the proposals are enacted, it will take many years for the United Kingdom courts to develop principles that will clarify the application of the rule, in the same way in which the Supreme Court of Canada has reduced the Canadian version of GAAR to manageable proportions in Canada Trustco.

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