The General Anti-Avoidance Rule (GAAR)

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The General Anti-Avoidance Rule (GAAR) is a legal provision designed to prevent taxpayers from exploiting legal loopholes solely for the purpose of reducing their tax liability. Federal Decree-Law No. 47 of 2022 on Corporate Taxation was issued by the UAE Ministry of Finance. Effective from June 1, 2023, this law aims to ensure that transactions are conducted at arm’s length and have genuine economic or legal substance.  

In contrast to tax evasion, anti-avoidance rules are designed to prevent the practice of tax avoidance. Tax evasion involves illegal actions to evade taxes, tax avoidance involves artificially reducing taxes through unconventional means, distinct from genuine tax planning. If a transaction lacks economic substance or is deemed to be artificial, the tax authorities may re-characterize it to reflect its true economic nature. The rule allows authorities to disregard or invalidate a deal that is primarily structured to achieve tax benefits without a genuine business purpose. 

Impacted Areas: The below mentioned arrangements can attract the attention of Authorities.   

• Business modelling 

• Business restructuring 

• Financing arrangements 

• Related party transactions  

• International transactions 

• Sham transactions 

• Unlawful accounting adjustments 

The UAE tax authorities have the authority to challenge transactions that they believe solely structured for tax advantages without valid commercial reasons, like circumstances as below: 

• Receiving a larger refund of UAE Corporate Tax.  

• Avoiding or reducing the Corporate Tax Liability. 

• Delaying the payment of Corporate Tax or receiving a refund before schedule. 

Tax authorities may examine whether a transaction is commercially rational and has a valid business purpose. Transactions lacking economic rationale may be at risk of being challenged. The authorities may take the possible steps: 

• Calculating taxable income, deductions, or relief by determining whether certain exemptions, deductions, or relief should be permitted or disallowed. 

• Giving another person, group, or organization these exemptions, deductions, or reliefs. 

• Reclassifying any payment or amount under the Decree-Law. 

• Adjusting other individuals' or entities' Corporate Tax liabilities in accordance with the Authority's decision. 

The Authority can take various measures to correct or adjust the tax treatment of a transaction if it determines that it provides unfair tax advantages. A proper transfer pricing documentation is crucial to justify the transactions. Taxpayers should document their rationale for transactions. Failure to comply with GAAR may result in penalties. 

The following factors are considered in determining whether the rule applies to a transaction or arrangement: 

• Transaction Method: The manner in which the transaction was conducted. 

• Transaction Nature: A transaction's form and substance. 

• Transaction Timing: When the transaction occurred. 

• Transaction Outcome: According to the applicable law, the outcome of the transaction. 

• Impact on the Taxpayer's Financial Position: The effect of the transaction on the taxpayer's financial position. 

• Impact on the Financial Position of any other Taxpayer: If the transaction impacts the financial position of other taxpayers. 

In the realm of taxation, the General Anti-Avoidance Rule (GAAR) stands as a sentinel against artificial and abusive tax practices. Its purpose is to ensure that transactions are conducted with genuine economic or legal substance, rather than solely for tax benefits. By adhering to the arm’s length principle and emphasizing transparency, GAAR promotes fair taxation and discourages aggressive tax avoidance. As businesses navigate the complexities of tax planning, understanding and complying with GAAR is essential to maintaining financial integrity and contributing to a robust global tax system.