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International Fiscal Association (IFA), 2012 General Anti-Avoidance Rules (GAAR)

International Fiscal Association (IFA), 2012 General Anti-Avoidance Rules (GAAR). Deal flow. Deal evaluations Greater focus on pre-tax metrics Impact on deal economics Higher taxes on deals Seeking tax protection may be more challenging

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International Fiscal Association (IFA), 2012 General Anti-Avoidance Rules (GAAR)

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  1. International Fiscal Association (IFA), 2012General Anti-Avoidance Rules (GAAR)

  2. Deal flow • Deal evaluations • Greater focus on pre-tax metrics • Impact on deal economics • Higher taxes on deals • Seeking tax protection may be more challenging • Risk consequential to uncertainty likely to be priced in • Contract negotiations • ‘Change in Law’ may trigger in extant contracts consequent to GAAR • Hitherto kosher contract structures may no longer be acceptable • Tax indemnity negotiations to be more intense

  3. Impact to Books • Challenges on booking tax benefits • Nature of GAAR law - ambiguous • Close scrutiny and debate with auditors and other stake holders • Reserving for penalties • Slow litigation process ….several years before reserves could be released • Challenges in quantification of reserves • Wide discretion available to Revenue in case GAAR is invoked …uncertainty over outcome and hence difficult to quantify impact • Principles from jurisprudence will take years to evolve

  4. GAAR guidance … more needed • Multinationals which are not organized along geographies • Not set up for a particular investment • Regional holding activity • Independent Treasury operation • Availability of Treaty • Hybrid equity instruments such as compulsory convertible debt • Instrument is debt until conversion • Pays interest • Interest deductibility • Buyback of shares from a Treaty country based parent • Entity has accumulated earnings …never made any dividend distributions • Buying back shares … entails economic consequences

  5. Finally – stating the ( not so ?) obvious • Tax is a cost, like any other cost influencing business decisions • Business leaders accept tax costs, but hate “don’t know” syndromes • A certain 5 x tax cost more acceptable to 1 x cost, with accompanying 10 x risk • If GAAR more acceptable to policy makers than SAAR, some boundaries are always welcome, even if grey • Nothing wrong for an Angel List to be periodically reviewed and changed • Treaties always better dealt bilaterally rather through GAAR .. It’s ham-handed • Tax paradigm has changed … the new order recognizes greater revenue share to source states

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