The General Anti-Avoidance Rule
55 Pages Posted: 22 Nov 2019 Last revised: 10 Jul 2023
Date Written: July 7, 2023
Abstract
Abstract The general anti-avoidance rule, or GAAR, is an enforcement mechanism that gives a country's taxing authority broad power to deny a taxpayer tax benefits associated with any transaction. Although GAARs are becoming increasingly common, the presence of the GAAR is generally overlooked, and thus its effect left unstudied. In this paper, we provide an initial investigation by studying the effect of the GAAR on firm-level corporate tax avoidance behaviors. Using an indicator for the enactment or strengthening of a GAAR within a country in a stacked difference-in-differences design, we find GAAR enactment is associated with a statistically and economically significant decrease in firm-level tax avoidance. Additional cross-sectional analyses show that the decline in tax avoidance occurs for conventional GAARs and economic substance-type rules, original and strengthened GAARs, and plausibly domestic and multinational firms. Results also show that the effect is strongest for firms with higher levels of pre-GAAR tax avoidance and for firms incorporated in countries where the burden of proof lies with the taxpayer.
Keywords: general anti-avoidance rule, GAAR, tax avoidance, tax policy, international, tax enforcement
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