Banking News

General Anti-Avoidance Rules (GAAR):


GAAR is a short form of General Anti-Avoidance Rules. The tax avoidance by the individuals and companies is a common fact all over the world. In order to realize more revenues and reduce the revenue loss due to avoidance of tax, the Governments of different countries enact various rules in their country or territory. The rules framed aiming at the reducing the tax avoidance known as “General Anti-Avoidance Rules” or GAAR. Thus GAAR is a set of general rules passed by Governments to check the tax avoidance. There are set of examples how individuals and companies escape from tax nets.
The Governments across the world are aware of tax avoidance strategies of entities, by relocating their income generating assets or activities, to another country, where lower income tax or no tax is applicable. Hence, carefully framed laws by some of these countries treat residence of individual or company is relevant to charge tax. Accordingly they charge their residents on their worldwide income, thereby nullify the tactics of avoiding taxes. In US, the citizens and permanent residents are subject to US federal income tax. It means that US citizen and permanent residents have to pay income tax on their worldwide income, irrespective of where they reside outside United States. Hence, U.S. citizens, as long as they are the citizen of that country, cannot avoid U.S. taxes simply by emigrating from the U.S either on temporary or permanent basis. There are other methods to avoid tax. Some people show personal expenses of their as the expenses of their company. Pleasure trips of individuals are presented as business trip. People creat a legal entity such as company, trust or foundation and transfer their property by way of donation to such entities. The profit gained by such front companies/entities later on transfer back to the individual’s name. Some laws scuttle such attempts through “Specific Anti-Avoidance Rules which is termed as “SAAR”. Some measures like fringe benefit tax, Gift Tax, capital gain taxes etc, are introduced to plug specific loopholes in the collection of taxes. Some Governments do not allow the settler (one who creates the trust) to become the trustee or beneficiary of the trust whereby the settler loses his control over the trust.

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