Current discussion about the adoption of GAAR in Kazakhstan

• Author: Tomas Balco, Xeniya Yeroshenko
• Pages: 1-44

European Tax Studies 1/2015

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1

Current discussion about the adoption of GAAR in Kazakhstan

*

JUDr. T. Balco

1

e X. Yeroshenko

2

1. Introduction to GAAR and the current debate

For the past 30-40 years business models have changed rapidly due to

technological progress and the development of the digital economy, the

ease of doing business simultaneously in several jurisdictions and the

subsequent emergence of the global market. However, tax legislation and

the underlying principles have not kept pace with the changing business

environment

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. This has resulted in gaps in domestic tax systems and the

emergence of loopholes in legislation due to the overlapping of domestic tax

systems

4

. The inability of legislators to foresee all the forms of planning and

structuring by taxpayers in a rapidly changing world has resulted in an

increase in abusive tax arrangements

5

.

These arrangements, which should be distinguished from legitimate tax

planning arrangements, can be divided into two separate groups: tax

avoidance and tax evasion. The line between the two is thin, but it exists.

Tax evasion is generally considered to be the unacceptable and illegal

exploitation of loopholes in legislation, whereas tax avoidance may take

place within the letter of law, but not in compliance with the spirit of the

law. For the purposes of this article, the authors further will concentrate on

tax avoidance and General Anti-Avoidance Rules (GAARs) as one of the

tools to combat tax avoidance. Tax avoidance can be defined as follows:

*

How to quo te this art icle: T. B

ALCO

e X. Y

EROSHENKO

, Current discussio n about the adoption

of GAAR in Kazakhstan, in European Tax Studies, No. 1/2015, (ste.unibo.it), pp 1- 44.

1

JUDr. T. B

ALCO

, LL.M., FCCA, General State Counsel, Ministry of Finance of Slo vak Republic,

previously Director of Central Asi an Tax Research C entre and Associate Professor at KIMEP

University in Kazakhstan (2010-2014).

2

X. Y

EROSHENKO

, PhD Candidate at the University of Ferrara.

3

OECD 2013, Addressing Base Erosion and Profit Shifting, p.5.

4

Ibid.

5

F. V

ANISTENDAEL

, in Tax Law Desig n and Drafting (volume 1; International Monetary Fund:

1996; Victor Thuronyi, ed.) Chapter 2, Legal Framework for Taxation, p.30.

European Tax Studies 1/2015

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2

For tax purposes, avoidance is a term used to describe taxpayer behaviour

aimed at reducing tax liability that falls short of tax evasion. While the

expression may be used to refer to “acceptable” forms of behaviour, such as

tax planning, or even abstention from consumption, it is more often used in

a pejorative sense to refer to something considered “unacceptable”, or

“illegitimate” (but not in general “illegal”). In other words, tax avoidance is

often within the letter of the law but against the spirit of the law. It

generally contains elements of artificiality, e.g. as to the legal form

adopted, and may often be considered to be contrary to the spirit of the

law

6

.

The changing business environment and the increase in abusive tax

arrangements has forced many countries to modernise their tax systems

and implement special anti-abuse rules, in order to prevent or punish the

avoidance behaviour of multinationals. The rules are divided into two

groups: special and general anti-avoidance rules. Special anti-avoidance

rules (SAARs) aim to combat particular tax abuses by denying certain

benefits under certain conditions. They are of a legislative nature and may

be implemented in different forms: transfer pricing rules, Controlled Foreign

Corporation (CFC) rules, beneficial ownership requirements in tax treaties

and domestic rules, thin capitalization rules and many others. On the other

hand, GAARs are rules designed to fight the abusive tax avoidance

behaviour of taxpayers without being specifically tailored to specific

transactions. GAARs have evolved in some countries from judicial doctrines,

but they have become widespread through statutory provisions enacted

both in continental and common law systems. A typical GAAR may be

defined as:

An anti-avoidance measure, generally statute based, providing criteria of

general application, i.e. not aimed at specific taxpayers or transactions, to

combat situations of perceived tax avoidance

7

.

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The definition of tax avoidance is retrieved from the IBFD tax glossary, available at:

www.ibfd.org Examples of tax avoidance include locating assets in offshore jurisdictions,

conversion of income to non- or lower-taxed g ains, spreading of income to other taxpayers

with a lower marginal tax rate, splitting of business activities to avoid VAT registration, and

lease and lease-back arrangements to take advantage of early input tax deduction.

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Definition of GAAR is retrieved from the IBFD glossary, available at: www.ibfd.org.

European Tax Studies 1/2015

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3

GAARs allow the tax authorities and courts to set aside the legal form of a

transaction if it lacks or does not correspond to the economic substance of

the transaction, and to determine the liability of taxpayer as if a certain

transaction or arrangement had not taken place. As rightly noted by Masui,

judges inevitably play an important role in interpreting and formulating the

law, and this is especially the case in the application of anti-abuse laws,

which may be general in nature and require purposive rather than formal

interpretation. “Although judges make decisions in the context of each case,

their decisions inevitably shape broader tax policy. Yet they do so without

openly engaging in a political battle in the law-making arena”

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. The role of

judges and the discretionary power granted to state officials in the

application of GAARs is therefore said to make the legal system uncertain,

which is not well accepted by the public and discourages many countries

from adopting GAARs.

As a result, the acceptance of GAARs and their effects are debatable. As

noted by Silvani,

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GAAR proponents consider GAAR to be the “broad

spectrum antibiotic”

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that should be able to fight tax avoidance. On the

other hand, others, including Silvani, raise the question as to whether “this

antibiotic [should] be prescribed to every country and [whether it would]

trigger the same consequences and side-effects in any of them?”.

In the following, the authors will consider the debate on issues associated

with the introduction of GAARs, as well as arguments and good practice

principles that Kazakhstan, as an example of a young and developing state,

could take into account prior to adopting GAARs. In the first part of the

article the authors will consider more closely the notion of uncertainty

associated with GAARs and the effect this may have on a developing state.

The second part of the article will consider the current situation in

Kazakhstan to assess whether there is a need for a GAAR provision in the

For more on the definition of GAAR see J. P

REBBLE

and Z. P

REBBLE

, Comparing the General

Anti-Avoidance Rule of Income Tax Law with the Civil Law Doctrine of Abuse of Law, Bulletin

for International Taxation, 2008, pp.151-170, 2008.

8

M

ASUI

,

Y

OSHIHIRO

, The Responsibility of Judges in Interpreting Tax Legislation: Japan’s

Experience, Osgoode Hall Law Journal 52.2 (2015) : 491-512, p.493.

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As summarised by C. S

ILVANI

, IFA Research Paper: GAARs in Developing Countrie s, 2013,

p.5.

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Silvani refers in his work to MacNiven v Westmoreland Investments Ltd [2001] UKHL 6 at

49.