The General Anti-Avoidance Rule

51 Pages Posted: 22 Nov 2019 Last revised: 26 Apr 2024

See all articles by Mary Cowx

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business

Jon N. Kerr

Brigham Young University - School of Accountancy

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

Cowx, Mary and Kerr, Jon N., The General Anti-Avoidance Rule (April 25, 2024). Available at SSRN: https://ssrn.com/abstract=3485084 or http://dx.doi.org/10.2139/ssrn.3485084

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Jon N. Kerr (Contact Author)

Brigham Young University - School of Accountancy ( email )

United States

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