1. Reactions to Avoidance and Aggressive Tax Planning
Lilian V. Faulhaber
Associate Professor
Georgetown University Law Center

2. Overview Interaction between BEPS and SAARs and GAARs
Initial interaction
Growing acceptance of TAARs
Lessons from BEPS about SAARs, TAARs, and GAARs
Lessons from BEPS about the role of anti-avoidance rules in the future
How do trends discussed by panelists reflect the lessons from the BEPS outputs?

3. Definitions GAARs TAARs SAARs Can apply to all transactions
Focused on purpose, substance, artificiality, or avoidance
Apply only to specific transactions
Focused on purpose, substance, artificiality, or avoidance
Apply only to specific transactions
Sets out objective rules to define avoidance

4. The BEPS Project
The most significant international reaction to avoidance and aggressive tax planning in recent history
Instruments used by BEPS Project provide new insights into:
Options for the fight against avoidance
Design options for different instruments
Reasons to choose certain instruments over others
Effectiveness of various instruments

5. BEPS and GAARs Not a focus of the BEPS Project Why not?
Country-by-country divergence and discretion
Agreement may be easier than implementation
Need to identify the causes of BEPS
Disliked by countries because gave too much flexibility to other countries
Disliked by taxpayers because created uncertainty

6. BEPS and SAARs
BEPS Action Items focused on provisions that some countries consider SAARs:
Action 2 (hybrid mismatch arrangements)
Action 3 (CFCs)
Action 4 (interest deductibility)
Action 6 (treaty abuse)
Action 7 (artificial avoidance of PE status)
Action 12 (mandatory disclosure rules)

7. BEPS outputs: a growing acceptance of TAARs?
Action 3 as an example:
“An anti-avoidance requirement is therefore not considered further in this report, but this is not intended to imply that an anti-avoidance requirement can never play a role in CFC rules that tackle base erosion and profit shifting.” (¶ 60)
Substance analyses to be considered as part of CFC rules:
Substantial contribution analysis based on facts and circumstances
Significant people functions analysis
Necessary business premises and establishment analysis
Substantial activities analysis (¶¶ 81-86)

8. Lessons from BEPS
Greater acceptance of TAARs and GAARs than predicted by the BEPS Action Plan
Anti-hybrid rules triggered by lack of substance (change to Parent-Subsidiary Directive resulting from Action 2)
CFC rules with substance analyses (Action 3)
Principal purpose test (Action 6)

9. Lessons from BEPS (cont.)
Recommended SAARs:
Anti-hybrid rules (Action 2)
Linking rules
CFC rules without substance analyses (Action 3)
Categorical analysis – focus on source of income
Excess profits approach – focus on seemingly objective ratio
Interest deductibility rules (Action 4)
Choice between fixed percentage of EBITDA or group ratio rule
Special rules for certain types of income/industries
Guidance on definition of PE threshold (Action 7)
Focus on defining specific activities and parties
Mandatory disclosure rules (Action 12)
Focus on specific hallmarks

10. Role of GAARs, TAARs, and SAARs in the future
GAARs and TAARs play different roles than SAARs:
Easier to agree, so suggest lack of agreement on problem or solution
May also represent willingness to go further if implemented alongside SAARs
Design of SAARs:
Linking rules
Focus on specific identifiers (hallmarks, activities, parties, source of income, industry)
Ratios (group ratios, excess profits)