The General Anti-Avoidance Rule

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 a GAAR being enacted within a country is becoming increasingly more common, the presence of a GAAR is generally overlooked and thus its effect left unstudied. In this paper, we provide an initial investigation by studying the effect that a GAAR within a country has on corporate tax avoidance behaviors. Using an indicator for the enactment or strengthening of a GAAR, we find a statistically and economically significant increase in aggregate tax collections and a statistically and economically significant decrease in firm-level tax avoidance. Additional analyses show that the firm-level results are strongest for firms with higher levels of tax avoidance, for countries with lower levels of tax enforcement prior to the implementation of a GAAR, and for countries where the burden of proof lies, at least partially, with the taxpayer.