The General Anti-Avoidance Rule
51 Pages Posted: 22 Nov 2019 Last revised: 26 Apr 2024
Date Written: April 25, 2024
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 a GAAR is generally overlooked by researchers, and thus left unstudied. In this paper, we provide an initial investigation by studying the effect of GAARs 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 domestic and multinational firms. Results also show that the effect is strongest for firms with higher levels of pre-GAAR enactment 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
JEL Classification: H26, K34
Suggested Citation: Suggested Citation