Curbing Multinational Digital Tax Avoidance with The General Anti-Avoidance Rule

Abstract

Large multinational companies (MNCs) are increasingly leveraging the enormous value embedded in the global digital economy. This has resulted in numerous innovations; however, it las likewise resulted in the loss of billions of dollars in tax revenue to governments due to outdated laws that generally assume a brick-and-mortar economy and residence-based taxation. Governments have tried to respond with a multitude of efforts to capture lost revenue and update tax laws to meet the realities of the digital era, but with only partial success. Resistance from MNC’s and disagreements amongst national governments have resulted in significant delays and half-hearted responses. The result is that current laws do not sufficiently capture lost tax revenue from an increasingly valuable digital environment.

This article proposes that a robust general anti-avoidance rule (GAAR) can help alleviate the problem of costly tax avoidance by MNCs. A GAAR is a mechanism that gives governments a general power to deny taxpayers the tax benefit of a transaction when the transaction’s primary purpose is merely to circumvent the payment of taxes. This manuscript defines the GAAR, presents the advantages and disadvantages of adopting GAARs, and shows how GAARs can be particularly effective in civil law systems. This manuscript then highlights New Zealand’s GAAR as a model of effective drafting and enforcement to stop tax avoidant behavior. Finally, this manuscript presents several carrots and sticks, with particular emphasis on a regime enacted in the UK that specifically deters serial tax avoiders, that can further strengthen GAARs introduced at the national level. The manuscript concludes that GAARs, utilized effectively and enacted in conjunction with strong tax laws, are a necessary and important tool for optimizing enforcement of legitimate tax laws in an increasingly global and digital economy.

Keywords: tax avoidance, general anti-avoidance rule, tax policy, global taxation, digital economy, multinational economy, base erosion, profit shifting, digital services taxes, general anti-avoidance rule, DST, GAAR, BEPS