GAAR: A Comparative Analysis of Developed and BRICS Economies

Legal Framework of GAAR around the Globe: A Comparison between the Developed and Developing Economies

Ubi jus incertum, ibi nullum
Where the law is uncertain, there is no law.
Roman Law

Summary: The paper examines base erosion and profit shifting (BEPS) and the growing use of the General Anti-Avoidance Rule (GAAR) as a legislative response to aggressive tax planning. It analyses the legislative purpose and operation of GAAR, particularly its focus on arrangements whose principal or dominant purpose is obtaining a tax benefit contrary to legislative intent. The paper highlights the subjective nature of GAAR, including the risk of legitimate commercial transactions being recharacterised as impermissible avoidance arrangements and the uncertainty arising from differing administrative interpretations. It compares GAAR and related anti-avoidance approaches in developed jurisdictions and BRICS countries, including Canada, the United States, EU members, India, China, Russia, South Africa and Brazil. The analysis also considers the interaction between GAAR, SAAR, treaty-based anti-abuse measures, economic substance and international tax competition. It concludes that greater objectivity, certainty and procedural balance are necessary for the effective and fair application of GAAR.

Abstract

The paper examines the problem of base erosion and profit shifting (BEPS), which has emerged as a significant concern for the international community. In response, several anti-avoidance measures have been introduced to curb aggressive tax planning, among which the General Anti-Avoidance Rule (GAAR) has gained particular prominence. This paper analyses GAAR to understand the legislative intent underlying its adoption and its primary function of curtailing tax avoidance strategies. GAAR is designed to target arrangements that have the principal or dominant purpose of obtaining a tax benefit and which are not intended by the legislature.

However, the application of GAAR allows considerable scope for subjective interpretation by tax authorities. One of the key risks associated with GAAR is the potential recharacterisation of legitimate transactions as impermissible avoidance arrangements. Additionally, varying interpretations by tax authorities across different jurisdictions or administrative zones may lead to inconsistency and legal uncertainty. Under GAAR, the burden of proof rests on the assessee, who must demonstrate that a transaction is undertaken for genuine commercial purposes and not primarily to secure a tax advantage.

Given the inherently subjective nature of GAAR, the paper undertakes a comparative analysis of GAAR provisions in selected developed countries and BRICS nations to identify commonalities, differences, and regulatory gaps. This comparative approach also highlights the role of tax competition among nations. The paper concludes by recommending that a more objective and balanced approach be adopted in the application of GAAR to ensure certainty and fairness in international taxation.

Keywords: Base Erosion, Profit Shifting, Tax Avoidance, Tax Treaty, General Anti-Avoidance Rule

1. Introduction and Theoretical Framework

In the contemporary world, market forces increasingly influence regulatory and policy frameworks. This competitive global environment and mismatch between tax regimes have facilitated opportunities for tax base erosion at the national level (Pichhadze, 2015; Ault, Schon, & Shay, 2014). The OECD Updated Model Tax Convention of 2025 (OECD MC) identifies one of the primary causes of tax base erosion as the extensive tax treaty network that enables assessees to shift profits from high-tax jurisdictions to low-tax jurisdictions. In doing so, assessees not only avail themselves of the benefits of tax treaties but also take advantage of domestic tax legislation (OECD, 2025).

The actions of multinational corporations (MNCs) in eroding national tax bases and shifting profits have long been a matter of concern. However, these practices gained heightened attention following the economic downturn of 2008. Although the crisis originated in the developed world, its repercussions were also felt significantly in developing economies. (Lin & Yifu, 2019; UNDP, The Global Financial Crisis and Its Impact on Developing Countries, 2009).

To curtail the tax avoidance practices, OECD has come up with the BEPS report. The report consists of 15 action plans, and Action Plan 6 aims to eliminate double taxation without creating opportunities for tax evasion or tax avoidance, including treaty shopping (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6, 2015), which intensively concentrated on the obvious right of the taxpayer to do tax planning (Brauner, 2014).

The G20 and BRICS countries raised these concerns and entrusted the OECD with the task of developing an amicable solution to the tax avoidance practices adopted by multinational corporations, resulting in the BEPS Project, which comprises fifteen action plans (Brauner, 2014). Some commentators have argued that the project has gone beyond its original objective of addressing tax avoidance (Vanistendael, 2016); however, this claim has not yet been conclusively established. BEPS Action Plan 6, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances,” identifies treaty shopping as one of the prevalent mechanisms of base erosion and profit shifting (Brauner, 2014).

Pursuant to the BEPS Action 6 report, the commentary to Article 1 of the OECD Model Convention was amended to address and curb practices of treaty abuse that give rise to double non-taxation (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6, 2015). Double non-taxation can be as detrimental to the international tax system as double taxation (Yonah, 2015). At the same time, it is essential to safeguard taxpayers who are legally entitled to treaty benefits and ensure that they are not deprived of tax relief in situations of double taxation resulting from the denial of such benefits. Tax relief mechanisms exist precisely to prevent unjust double taxation where the taxpayer is otherwise legally eligible.

The single tax principle governing cross-border income allocation posits that the source state taxes active income, while the residence state taxes passive income (Yonah, 2015). However, in the contemporary globalised economy, many countries exhibit characteristics of both source and residence states. This dual character, combined with increasing tax competition among jurisdictions, presents significant challenges in the effective implementation of BEPS anti-avoidance measures, particularly the Principal Purpose Test (PPT), which operates as a form of general anti-avoidance rule (GAAR).

Global estimates suggest that revenue losses due to tax base erosion and profit shifting linked to tax havens amount to approximately USD 400 billion for OECD member countries and USD 200 billion for lower-income countries (Crivelli, De Mooij, & Keen, 2015). In 2023, the Tax Justice Network estimated that nearly USD 5 trillion in revenue had been lost by countries due to tax base erosion and profit shifting practices employed by large multinational corporations and wealthy individuals (Tax Justice Network, 2023). Earlier assessments by UNCTAD in its 2015 report, as well as by Cobham and Janský (2018), estimated global revenue losses of approximately USD 200 billion, including around USD 90 billion borne by low-income countries, as a result of tax avoidance practices.

These figures clearly highlight the corporate tax gap resulting from the use of tax havens and aggressive tax avoidance strategies. Assessees employ various methods to reduce their tax liabilities, among which prominent strategies include debt shifting through the application of high intra-group interest rates, the strategic location of intangible assets and intellectual property, and manipulative transfer pricing practices (Janský, 2019). At the request of the G20 nations, the OECD undertook the task of addressing these anti-avoidance practices under the umbrella of the BEPS Project (Ault, Schön, & Shay, 2014).

This paper focuses on Action Plan 6 of the fifteen action plans under the BEPS Project. Action Plan 6 introduces anti-avoidance measures aimed at restricting tax avoidance practices, particularly in the form of treaty shopping. The report is widely regarded as a game changer, as it seeks to bring an end to the use of shell companies, conduit entities, and stepping-stone arrangements (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6, 2015).

To curb aggressive tax planning, instruments such as the General Anti-Avoidance Rule (GAAR) and specific treaty-based measures like the Limitation of Benefits (LOB) clause have been introduced. Tax planning refers to “the arrangement of a person’s business and/or private affairs to minimise tax liability” (OECD Tax Glossary, 2019). In contrast, the European Commission (2012) defines “aggressive tax planning as practices that exploit technicalities of tax systems or mismatches between two or more tax systems, intending to reduce tax liability” (European Commission on Aggressive Tax Planning, 2012).

The objective underlying these definitions is essentially the same—to reduce or minimise tax liability. However, countries often differ in their views on whether tax avoidance practices should be regarded as legitimate. Such practices do not necessarily violate the law but operate within the formal boundaries of legality. The international community generally distinguishes between acceptable tax planning and unacceptable or aggressive tax planning. While taxpayers are entitled to arrange their affairs to reduce tax liability, this entitlement is limited to the extent that such arrangements align with legislative intent. Determining the presence or absence of legislative intent, however, remains a significant challenge for taxpayers to establish. Consequently, the question of when tax planning arrangements cross the threshold and are characterised as aggressive tax planning continues to remain unresolved. The LOB clause relies on an objective assessment; the application of GAAR is subjective, which gives wider room for interpretation.

The paper is organized into four substantive parts. The first part outlines the rationale and conceptual underpinnings of the Base Erosion and Profit Shifting (BEPS) project, elucidated through relevant illustrations. The second part examines the General Anti-Avoidance Rule (GAAR) and critically analyses its implications for inward investment flows. The third part undertakes a comparative assessment of the GAAR framework as implemented in developed jurisdictions and BRICS countries. The final part concludes that the long-term efficacy of GAAR will depend on its ability to withstand practical implementation challenges, procedural complexities, and evolving judicial scrutiny.

2. BEPS: The Concept

Profit shifting and tax base erosion must be understood from a broader perspective that encompasses not only legal considerations but also political dimensions. These political dimensions include issues of sovereignty, economic consequences, and international tax competition (Zubimendi, 2019). The OECD defines BEPS practices as strategies employed by assessees that exploit gaps in legal frameworks or mismatches between different tax regimes (OECD, BEPS: Inclusive Framework on Base Erosion and Profit Shifting, 2019). The BEPS Project seeks to reduce these gaps in international taxation and to curb double non-taxation arising from practices such as tax inversions and the shifting of intangible assets to more favourable tax jurisdictions (Thomson Reuters, 2019).

Developing countries disproportionately suffer from BEPS practices, with estimated annual revenue losses ranging from approximately USD 100 to 240 billion (OECD, BEPS: Inclusive Framework on Base Erosion and Profit Shifting, 2019). Assessees employ various strategies to reduce their tax liabilities. Some of these strategies operate through the use of tax treaties, such as treaty shopping, while others exploit mismatches between different tax regimes. Some of these practices are illustrated below to demonstrate the nature and scope of the transactions used by taxpayers to avoid tax.

Scenario 1

Company R (Co. R) is a resident company under the laws of Country R. Co. R developed an item of intellectual property, namely software, which it sold to its subsidiary, Company T (Co. T), located in a tax haven. Company S (Co. S), a registered company in Country S—a high-tax jurisdiction—subsequently purchased the software. Whenever Co. S uses the software, it is required to pay royalties to Co. T at rates that do not conform to the arm’s length principle. Similarly, Co. R obtained a licence from Co. T for the use of the same software and pays substantial royalties to Co. T.

In this arrangement, both Co. R and Co. S, which are members of the same corporate group, pay inflated royalties to Co. T, thereby shifting profits from high-tax jurisdictions to a low-tax jurisdiction, namely Country H, a tax haven where royalty income is either lightly taxed or not taxed at all.

Scenario 2

Suppose Company R (Co. R) is a resident company of country R. Co. R gives a loan to Co.S resident company in country S and a subsidiary of Co.R, a high tax jurisdiction with no withholding tax on the loan interest. Co. S created an intellectual property and licensed it to Co. A. Co. A is another subsidiary of Co. R and incorporated in country A. Through the payment of royalty by Co. A to Co. R, Co. A shifts its profit from country A to country S because country A does not impose withholding tax on royalty. This amount of royalty is now used by Co. S as interest on the loan that they took from Co. R. In country R, the interest on loan are exempted from income tax preview. By this, profits are shifted from Co. A to Co. S in the form of royalty and then from Co. S to Co. R in the form of interest.

3. The GAARs

The objective of GAAR under different tax regimes is to combat tax avoidance. Economic factors cannot be disregarded, as David Weisbach relied on the basic economic model and applied the concept of marginal deterrence to determine the optimal level of judicial anti-avoidance rules (Lawsky, 2009). Jessica L. Ho (2014) contended that the presence of multiple anti-avoidance measures does not necessarily ensure deterrence for taxpayers, particularly when the enforcement of such measures is weak (Ho, 2014). To deter tax avoidance behaviour, several tax regimes have adopted GAAR in their domestic legislation. These regimes include the UK, France, Germany, the Netherlands, Belgium, Canada, China, Singapore, Italy, South Africa, Kenya, Australia, India, and Poland (Waerzeggers & Hiller, 2016).

GAAR changes the approach to dealing with certain or specified transactions. While specific anti-avoidance rules (SAARs) target only transactions relating to particular types of income, such as securities under domestic law, and therefore cannot be applied generally, another form of SAAR can also be found in tax treaties, the LOB clause (Steenkamp, 2017). GAAR, by contrast, targets transactions whose primary purpose is to obtain a tax benefit and where economic substance is merely ancillary. Such transactions frustrate, defeat, or abuse the aims and objectives of the relevant law (UN.org, The Role of a General Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries, 2017). GAAR also informs taxpayers of the boundaries between permissible and impermissible tax avoidance (Kujinga, 2014).

Countries can use the GAAR in the competitive tax market. However, there is no real evidence of it. In the contemporary world, there is high capital mobility, and by not implementing GAAR, a country can attract investment, giving birth to this controversial debate on tax competition (Zubimendi, 2019).

The OECD, in its 1998 report Harmful Tax Competition: An Emerging Global Issue, introduced the concept of a “race to the bottom” to describe the competitive lowering of tax standards by States in response to global capital mobility. The report recognised that such tax competition functions as an external constraint on State sovereignty, limiting the ability of governments to exercise independent fiscal policy choices. Against this backdrop, an important doctrinal question arises as to whether the adoption and increasing reliance on General Anti-Avoidance Rules (GAAR) have contributed to intensifying this race to the bottom by encouraging regulatory competition, or whether GAAR has remained neutral, exerting little or no influence on this phenomenon.

The presence of a General Anti-Avoidance Rule (GAAR) within domestic tax legislation has the potential to influence patterns of international tax competition. From a theoretical perspective, multinational enterprises may be inclined to direct investment towards jurisdictions that either lack a GAAR altogether or apply such a rule in a relatively liberal or predictable manner. Nevertheless, despite these theoretical concerns, there is presently no conclusive empirical evidence to demonstrate that the existence or strictness of GAAR has played a decisive role in shaping corporate investment decisions. This suggests that other factors, such as market size, regulatory stability, infrastructure, and overall tax rates, may exert a more significant influence on investment behaviour than the mere presence of GAAR.

The UNCTAD World Investment Report 2025 identified notable investment trends in South Africa. During 2023–2024, South Africa experienced a decline in investment of 29 per cent. South Africa has had a GAAR in place since 1962, which was further amended in 2006. By contrast, countries such as Mozambique recorded a 42 per cent increase in foreign direct investment (FDI) inflows, despite not having a GAAR in their domestic tax law (UNTD, World Investment Report, 2025, p.7). A similar trend can be observed in certain North African countries, including Egypt and Algeria, which witnessed increased FDI inflows (ibid). Egypt introduced a GAAR in its domestic legislation in 2014 (Oxford Business Group, 2020), whereas in the case of Algeria, it remains unclear whether a GAAR exists, although certain specific anti-avoidance rules (SAARs) are present in its domestic tax framework.

The Netherlands, often characterised as a low-tax jurisdiction, does not have a GAAR in place; however, it applies the doctrine of fraus legis (fraud on the law), under which a taxpayer circumvents the intent of the law without violating it in a literal sense. Among the BRICS countries, except for South Africa, which is already discussed, China received foreign direct investment (FDI) amounting to USD 344.07 billion in 2022, representing a decline of 44.72 per cent from 2021. This downward trend continued in 2023, when China received USD 42.73 billion, marking a further decline of 77.54 per cent from 2022 (Macrotrends, China Foreign Direct Investment). Brazil received USD 62.44 billion in FDI in 2023, reflecting a decline of 16.3 per cent from 2022. However, in 2024, Brazil recorded an increase in FDI inflows to USD 71.07 billion, representing a growth of 13.83 per cent over 2023 (Macrotrends, Brazil Foreign Direct Investment). To date, Brazil has not implemented GAAR provisions in its domestic law (Latin America: Anti-avoidance Rules Present Challenges and Opportunities, 2021). The Russian Federation, amid ongoing war-related turmoil, received USD 10.05 billion in FDI in 2023, reflecting a decline of 74.76 per cent from 2022 (Macrotrends, Russia Foreign Direct Investment). Russia adopted a GAAR in 2017. Finally, India received USD 49.94 billion in FDI in 2022, an increase of 11.66 per cent from 2021; however, in 2023, FDI inflows declined sharply to USD 28.08 billion, representing a decrease of 43.77 per cent from 2022 (Macrotrends, India Foreign Direct Investment). India introduced GAAR through the Finance Act, 2017, with effect from 2018.

This FDI inflow in BRICS members does not give any clear picture as to whether GAAR is considered while making investment decisions.

The policy framework underlying a tax system determines the drafting of GAAR and reflects the intention of the legislature. Both the OECD and the United Nations have incorporated Article 29(9) into their respective Model Tax Conventions. This provision begins with a non obstante clause and authorises the application of GAAR to override other treaty provisions where necessary.

GAAR targets transactions that are entered into, directly or indirectly, for the purpose of obtaining a tax benefit, where it is established that such a benefit is not in accordance with the object and purpose of the relevant legal provision, having regard to the specific facts and circumstances of the case. Once such a transaction is identified, the tax authorities are empowered to deny the tax benefit (OECD Model Tax Convention on Income and on Capital: Condensed Version, 2017). The wording of Article 29(9) in the OECD and UN Model Tax Conventions is substantially similar. While the OECD Model is traditionally based on the residence principle and the UN Model seeks to accommodate the interests of developing, source-based countries, the GAAR provision itself does not materially differentiate between the revenue and capital considerations of developed and developing nations. This is even though economic, social, and political conditions vary significantly across these jurisdictions.

GAAR seeks to ascertain the intention of the taxpayer by examining whether a transaction has been undertaken for genuine commercial purposes or primarily to obtain a tax benefit. The burden of establishing the commercial substance of the transaction lies with the taxpayer. From a jurisprudential perspective, a tax benefit is not an inherent right of the taxpayer, and the denial of such a benefit by the tax authorities does not amount to the deprivation of a legal right. Tax adjudicating authorities are vested with powers akin to those of civil courts, and where a taxpayer seeks to assert a claim to a tax benefit, the burden of proof rests upon them. Although tax laws in most jurisdictions are characterised as quasi-criminal in nature due to the presence of penal provisions, the burden of proof in respect of such penal consequences lies with the State. This raises an important doctrinal question as to whether GAAR should be situated within the framework of civil or criminal jurisprudence.

4. Legislative Framework of GAAR or Anti-Avoidance Rule in Developed Countries

4.1 Canadian GAAR: The Three-Step Doctrine

The Canadian three-step doctrine depends, first, on whether a tax benefit arises from the transaction; second, on whether the transaction constitutes a tax avoidance transaction; and finally, on whether the transaction is abusive (Duff, 2006). Canadian courts have upheld the Westminster doctrine, recognising that a taxpayer has the right to arrange its economic affairs in a manner that reduces tax liability. However, the courts have also held that this right is subject to statutory limitations imposed by anti-avoidance measures, such as GAAR (Section 3.3, Chapter 3, Spring Report of the Auditor General of Canada, 2014).

GAAR comprises broad, principle-based rules within a particular tax regime designed to counter tax avoidance. The Supreme Court of Canada, in the Canada Trustco case, held that GAAR draws a clear distinction between legitimate and abusive tax avoidance, often described as “acceptable” and “unacceptable” tax avoidance, through a “textual, contextual, and purposive” interpretation of the relevant provisions (Duff, 2006). GAAR empowers tax authorities to deny tax benefits claimed by a taxpayer where such benefits are attached to a transaction or arrangement that lacks commercial substance and is undertaken primarily to obtain a tax advantage (Ernst & Young, 2013).

It may be argued that, under the three-step doctrine, a transaction can result in tax avoidance that is merely incidental while still possessing genuine economic substance. The use of the term “arising” in the first step lends support to this contention, as a tax benefit may arise incidentally or as an ancillary consequence of a commercially driven transaction. While the taxpayer is required to demonstrate a bona fide commercial purpose, where such intention is not accepted by the tax authorities, the burden of proving that the transaction is abusive should rest with the authorities. From the perspective of the tax administration, however, it cannot be ruled out that there may be a tendency to characterise transactions as abusive and deny tax benefits as a precautionary measure to avoid potential departmental accountability. Such an approach is undesirable, as it exposes taxpayers to unwarranted and prolonged litigation.

The U.S., being the biggest economy, has to suffer worse from profit shifting and tax base erosion (World Bank.org, 2018). Schwarz’s (2009) empirical analysis showed that American MNCs shift their profit from the U.S. to the tax havens. The MNCs retain their profit and finance their subsidiary in the high tax regime (Schwarz, 2009). The U.S. applies common law judicial doctrine to deny tax benefits in unacceptable arrangements, which are termed ‘abusive tax planning’, opposite to ‘tax planning’. They categorise tax planning as abusive tax planning if the arrangement has a tax motive that other businesses refrain from adopting (Wetzler, 2004). Some of these doctrines are substance-over-form, the step transaction, the sham transaction, the business purpose, and economic substance (Ernst & Young, 2013). The economic substance doctrine was codified under Section 7701(o) of the Internal Revenue Code. The taxpayer should have a non-tax purpose as the basic objective of the transaction.

4.2 EU Members and GAAR

Article 6 of the EU Council Directive of 2016 prescribes guidelines for GAAR and recommends ignoring a transaction whose main purpose or one of the main purposes is to obtain a tax benefit. The genuine transactions should be those transactions that have legal commercial reasons reflecting the economic reality. It is aimed at by the directive to bring trust in tax administration and exercise tax sovereignty (EU Directive, 2016). However, the directive is silent on whether the transaction that is within the legal boundaries must have economic substance to establish its genuineness.

It is presumed in Germany that tax planning will be considered as abusive if the taxpayer opts for an inappropriate arrangement that leads to a tax benefit unintended by law, as compared to an appropriate arrangement by the taxpayer or by another taxpayer (KPMG, 2019). Before this system Germany emphasised “economic interpretation” while doing the interpretation of tax laws. The courts should look into the purpose and the economic significance of tax laws. In 1977, Germany replaced the term “economic interpretation” with the term “legal form of the transactions that are appropriate to the factual economic situation.” The legal form of the transaction is rejected when a reasonable person would not have considered it for achieving a particular economic goal (KPMG, 2019).

Having said that, the taxpayer may have multiple legal forms to achieve its business objective, which may be more or less acceptable. In such circumstances, the taxpayer is not obliged to choose a form that is acceptable to the authorities (Vanistendael, 2016). Though Germany has GAAR to counter anti-avoidance practises but still, it is still considered as one of the best holding haven jurisdictions to an extent (Kessler & Eicke, 2008). The German tax regime provides widespread tax incentives for holding companies under their “national corporation tax privilege” under the Corporation Tax Act (Körperschaftsteuergesetz, KStG). For example, 100% participation exemption on dividends (LawyersGermany.com, 2019). Hypothetically, if the taxpayer has only one option, and that leads to tax avoidance, does the tax authority accept the option, or will they consider it as an unacceptable transaction is a matter of concern.

In July 2013, the U.K. implemented GAAR in its domestic legislation (Rossmartin, 2019). The provision established the ‘double reasonableness test’ to curtail tax avoidance. It is on the judiciary to determine, keeping in mind the numerous views on the transaction, that it is reasonable to consider the transaction within a reasonable course of action (Blers, 2014).

In 2013, HMRC issued guidelines contrary to the infamous Lord Clyde statement of “every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be” in the Duke of Westminster’s case, which is now an acceptable norm. The legislators made their intention clear by using the wordings ‘beyond anything which could reasonably be regarded as a reasonable course of action’.

The guidelines made any arrangement that, when observed objectively, has the effect of obtaining a tax benefit, which is the main purpose of the transaction, and will be termed an abusive tax arrangement. These arrangements are to be examined objectively. If an arrangement on its face is for tax benefit, then why would the taxpayer execute these kinds of arrangements? The tax authorities will determine whether the arrangement is either reasonable or unreasonable; subsequently, the court has to uphold the view of the tax authorities. In these circumstances, why does the taxpayer enter into an arrangement that prima facie is a tax avoidance arrangement and get itself involved in litigation?

The Dutch developed a judicial anti-avoidance doctrine of Fraus Legis. This doctrine is invoked if the arrangement’s sole or dominant motive is to avoid tax, which is opposing the objective and purpose of the relevant law (Vanistendael, 2016) without any statutory basis.

The doctrine is grounded on substance over form (Luja, 2010). Fraus Legis has two steps, firstly the sole purpose of the arrangement is tax avoidance, and secondly, the consequence of the arrangement is overwhelming the objective and purpose of the relevant law. Both steps should be completed to attract the doctrine of Fraus Legis. The Dutch tax regime does not have GAAR, and it relies on the Fruas Legis doctrine. It feels unfair to the taxpayer in those cases where they have multiple purposes and one of the purposes is to minimize tax, but it doesn’t defeat the objective and purpose of the relevant law.

Austria, with its multilayered anti-avoidance measures like Standardized Transfer Pricing documentation, case law-driven thin capitalization (4:1 debt-to-equity ratio), and the GAAR (Bundesabgabenordnung [Federal Tax Code] Section 22 (Austria) which focuses on the substance-over-form doctrine, real economic substance prevails over its legal form, and the instrument will be ignored if it is used for the abuse of civil law (Deloitte, 2019). Some scholars expressed that the economic approach will lead to a teleological interpretation method, and the tax administration interprets GAAR as a supplementary tool for other substantive provisions. The tax avoidance arrangements are unusual and inadequate with respect to their economic outcomes and find their sole explanation in the intention to avoid tax. In 2018, Austria defined the term ‘abuse’ as a legal arrangement or arrangements that are unusual and insincere relating to a commercial objective. These unusual and inequitable arrangements are those that make sense when there are tax-saving effects because the main purpose of the arrangement is to obtain a tax benefit, and that defeats the objective and purpose of the relevant law (Grösswang, n.d)

The term ‘abuse’, as defined by Austria, is an unusual and non-genuine transaction for avoiding tax. The condition to determine the transaction as a tax avoidance transaction is that it should be unusual, and secondly, it should be non-genuine. However, the law is silent on the occasions where the transaction is unusual but a genuine one. As both conditions are to be fulfilled, and fulfilling one condition will not attract the anti-avoidance measures. There can be transactions that are legally valid but are not genuine. The taxpayer has to make the transaction legally valid as well as genuine, having economic substance.

In Finland, the tax statute allows the taxpayer to indulge in that mode of business that lowers the tax burden if the transaction has genuine economic substance (Skatt, 2014). The Finnish GAAR is applicable to domestic transactions as well as cross-border transactions. The tax authorities applied GAAR on intragroup acquisitions and on related financial arrangements. Under Finnish GAAR, it is essential to establish the genuineness of the arrangement; mere legal validity will not suffice. The arrangements should be beyond tax reasons. For corporate reconstructions, Finland has separate anti-avoidance rules (António Martins, 2016). The question that needs to be answered is whether tax reasons are more prominent than economic reasons or vice versa. This is difficult to determine unless the prima facie case rests on the tax reasons, and the intention of the taxpayer is disclosed as not having economic reasons.

5. BRICS Members and their GAAR

5.1 India

Under Indian GAAR, the transaction or any step of the transaction has the main purpose of obtaining a tax benefit (Section 96 Indian Income Tax Act, 1961), and it creates rights or obligations which are not ordinarily created between the parties dealing at arm’s length, lacks commercial substance or carried out by means which are not ordinarily employed for bona fide purpose, results directly or indirectly in misuse or abuse of the provisions of law (Section 96 Indian Income Tax Act, 1961).

Central Board of Direct Taxes (CBDT), with its circular no. 7, 2017, clarified that GAAR and SAAR can coexist. Even when the taxpayer fulfils the requirements of SAAR, that is, the Limitation of Benefits clause under tax treaties, they are not immune from the application of GAAR; however, if the SAAR is adequate to determine the nature of the transaction, then the GAAR will not apply. The burden to prove the genuineness of the transaction is no the taxpayer (CBDT, Department of Revenue, Govt. of India, Circular No. 7, 2017).

Grandfathering protection under Rule 10U(1)(d) now expressly covers income accruing or arising, or deemed to accrue or arise, or received or deemed to be received, by a person from transfer of investments made by that person before April 1, 2017. The position was clarified and expanded by CBDT Notification No. 54/2026 dated March 31, 2026, which substituted Rule 10U(1)(d) and Rule 10U(2). Under the amended Rule 10U(2), Chapter X-A applies to any arrangement, irrespective of the date on which it was entered into, in respect of a tax benefit obtained from the arrangement on or after April 1, 2017, except for income from transfer of investments made before April 1, 2017 by that person. The Explanatory Memorandum further states that Chapter X-A shall not be invoked on or after the date of publication of the rules in a case involving such income from transfer of pre-April 1, 2017 investments. The Principal Commissioner/Commissioner will examine the transaction as to whether it is permissible or impermissible, and later by an Approving Panel, headed by a High Court Judge. The transaction will be examined twice to be declared as an impermissible transaction (CBDT, Department of Revenue, Govt. of India, Circular No. 7, 2017).

The circular fails to clarify whether the approving panel is to be chaired by a sitting or a retired High Court judge. If a sitting High Court judge heads the panel, the taxpayer may invoke the High Court’s writ jurisdiction under Article 226 of the Constitution of India, 1950. This possibility is likely to exacerbate institutional conflict and procedural ambiguity, particularly given that each High Court in India operates under its own rules and procedures and may adopt divergent approaches in analogous circumstances.

Further, in light of the Basic Structure Doctrine as enunciated in Kesavananda Bharati v. State of Kerala (1973) 4 SCC 225), any tribunal or approving authority cannot curtail or dilute the constitutionally guaranteed writ jurisdiction of constitutional courts. The creation of such quasi-judicial bodies, if vested with powers that undermine judicial independence and procedural fairness, both of which constitute the sine qua non of judicial authority, raises serious constitutional concerns. A pertinent illustration is the decision in Madras Bar Association v. Union of India (AIR 2015 SC 1571), wherein a Constitution Bench of the Supreme Court declared the National Tax Tribunal unconstitutional.

Moreover, the GAAR provisions introduce a statutory presumption that an arrangement shall be deemed to be a tax-avoidance arrangement unless the assessee proves otherwise, even where the primary purpose of the arrangement is not to obtain a tax benefit (Section 96(2), Income-tax Act, 1961). This reverse burden of proof runs counter to established principles of evidence law, under which the burden of proving intent rests on the party alleging such intent, not on the party against whom the allegation is made.

5.2 China

China implemented GAAR on January 1, 2008, to stop extensive and aggressive transfer pricing and tax avoidance structures (Leung, 2019). Article 47 of the Chinese Income Tax Law sets forth the general anti-avoidance rules. The application of the GAAR is based on a reasonable business purpose that is to reduce, avoid, or defer tax liability (KPMG, 2014). In 2014, the Chinese State Administration of Taxation (SAT) defined the ambit of GAAR and provided a procedure that should be followed by tax authorities. It established the essential characteristics of a tax avoidance structure. The GAAR leans on the sole or main purpose of the transaction if it is for obtaining a tax benefit, though it may not be inconsistent with the legal framework, but it misses the underlying economic substance (Ho & Lu, 2019). After the implementation of GAAR, it is observed that there is a significant reduction in tax avoidance practices in China (Leung, Richardson, and Taylor, 2019).

On July 3, 2014, the Chinese State Administration of Taxation comprehended the process of GAAR by releasing a draft of GAAR administrative measures. There are three noteworthy bulletins issued by the Chinese State Administration of Taxation. In its Circular No. 2, it provides a range of situations where tax authorities can apply GAAR on certain investments. These situtations includes misuse of tax preferential treatments, exploitation of tax treaties, misuse of corporate organizational forms, use of tax havens, and any other situations that do not have a reasonable economic purpose (KPMG, 2014). On Feb 6, 2018, SAT issued Announcement 9 that refines the interpretation of the beneficial ownership requirement in case of dividends, interest, and royalties articles in the Chinese DTAA. The economic substance-focused approach was initially adopted by Circular No. 601 retreated again in Announcement 9. It expands the ‘safe harbour rule’ and introduces a form of ‘derivative benefits test’. Under the international tax regime, the beneficial ownership is focused on the tax treaty relief claimant’s degree of control over the income for which relief is sought. However, the Chinese approach looks towards the commercial substance in addition to control aspects (KPMG, China Tax Alert, 2018; Heidecke & Luo, 2016). And lastly, in its Circular 698, China brought the indirect transfers of Chinese entities by offshore companies within its tax ambit.

5.3 Russia

The Russian Federation introduced GAAR in 2017, grounded on the concept of ‘unjustified tax benefit’. The newly introduced Article 54.1 under the Russian tax code explains that unjustified tax benefits are those benefits obtained by understatement of the taxpayer’s tax base and/or any tax liability because of misrepresented business operations and/or taxable assets by the taxpayer.

Russia in 2017 introduced GAAR based on the underlying concept of ‘unjustified tax benefit’. As per the newly incorporated article 54.1 in the Russian tax code, the unjustified tax benefits are those tax benefits that are obtained by the taxpayer by understatement of its tax base and/or tax liability because the taxpayer misrepresented its business operations and/or taxable assets. It is on the tax authorities to prove that the taxpayer has procured tax benefits in an unjustified manner (Deloitte, 2019).

The taxpayer is allowed to reduce its tax base or tax liability according to tax law only when the main purpose of the transaction is not to reduce tax payment or a tax offset, and the obligations of the transaction are performed by the other party along with the taxpayer regarding the contract (Orbitax, 2019). GAAR restricts the minimization of the tax base when there is misrepresentation of entries in books of account, or the principal purpose of the transaction is to underpay tax, and the counterpart does not fulfill its obligations. Under GAAR, the tax authorities enjoy wide discretionary powers because of terms such as ‘misrepresentation’ is undefined. There is a concern of uncertainty, which goes against the basic Canons of Certainty introduced by Adam Smith for a good tax regime. However, if there is uncertainty, the interpretation should be in favour of the taxpayer. Principally, GAAR curtails cases of abuse of law, where the intention and objective of the statute is defeated. According to Article 54.1, the burden of proof lies on the tax authority (Youngifanetwork, 2019), which is correct as the tax authorities are the executive part of the governance and implement the law in its word and spirit.

The Principal Purpose Test (PPT) applies when obtaining a tax benefit is one of the main purposes; it does not require proof of the taxpayer’s intent conclusively because the wording used in PPT is ‘if it is reasonable to conclude’. The Russian GAAR can be applied in cases of underpayment or offset of tax. In Russia, higher standards are required for the application of GAAR as compared to the PPT rule (Youngifanetwork, 2019).

It is the intention of the taxpayer through understatement of the tax base and/or tax liability to misrepresent its business operations and/or taxable assets. These instances are more inclined towards tax fraud or evasion rather than tax avoidance.

5.4 South Africa

The South African GAAR is codified under Sections 80A-80L of the 2006 Act. In South Africa, GAAR dates back to 1962, when Section 103(1) was incorporated into the Income Tax Act 58 of 1962. Section 103(1) was replaced by Section 36(1)(a) in 2006 (Steenkamp, 2012). The GAAR protects the country’s tax base by categorizing permissible and impermissible tax avoidance (South Africa Institute of Tax Professionals, Tax Theory –Searching for certainty, 2017). Those arrangements that are entered having sole purpose of tax avoidance are categorized as impermissible arrangements. To categorize an arrangement as an impermissible arrangement, two conditions must be fulfilled: the sole purpose of the arrangement is to obtain a tax benefit, and secondly, a tainted element must be present that includes an abnormality, a lack of commercial purpose, and abuse of tax law (South Africa Tax Guide, General Anti-Avoidance Rule, n.d). The impermissible arrangements are those arrangements that are entered into or carried out by means or in a manner that, in common parlance, having business purposes are not adopted and it is only for having a tax benefit. It is those arrangements that are entered into or carried out by means that are not employed in bona fide purpose cases (UN.org, The Role of a General Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries, 2017).

The previous GAAR under Section 103 of the South African Income Tax Act, 1962, requires one or more of the four conditions to be fulfilled, first there must be a transaction, operation or scheme, second, it should result into the avoidance, reduction or postponement of tax, third, the transaction must be carried out in such a manner that normally does not employ, and last, the transaction must be employed solely or mainly for obtaining a tax benefit (Rajgopalan, 2017). The question that arises is whether the taxpayer has to always follow the common parlance practices, or they can opt for transactions that are not conventional but beneficial for the business.

5.5 Brazil

Brazil possesses a complex tax regime, which imposes 80 different types of taxes at federal, state, and municipal levels, constituting more than 32% of GDP, as tax revenue, with moderate tax rates (Brazil: Options for Tax Reform, 2018).

The Brazilian tax regime is full of challenges. For example, higher-income individuals are shifting their personal tax liability to the corporate tax base, since Brazil imposes a higher tax rate on individuals than on corporations, and there is no dividend taxation (Brazil: Options for Tax Reform, 2018). Brazil imposes 15% tax with 10% of surcharge on legal entities if the income of the entity exceeds R$240,000 per year (Deloitte, 2017). Brazil has a higher rate of tax evasion, and to combat it the Federal Tax Authority exercises its power under Law 9430/96, which provides sanctions and penalties (Clemente & Lirio, 2017).

Brazil introduced a supplementary law 104 in 2001, adding a paragraph to Article 116 of the Brazilian National Tax Code (Deloitte, 2017). From 2001 onwards, under Article 116, the Brazilian Tax Authorities are authorised to disregard transactions that are within legal boundaries, but the taxpayer has entered into such a transaction to disguise or transform the character of the taxable event. Brazil doesn’t consist of GAAR or SAAR. Brazil, though a civil law country, allowed the tax authorities to target tax planning transactions using the substance over form doctrine (Zilveti, 2018). This judicial anti-avoidance doctrine empowers the tax authorities to disregard the legal nature of the transaction and look into the economic substance for tax purposes (Deloitte, 2017).

Under the economic substance rule, any amount paid, applied, or remitted—directly or indirectly—to an entity or individual incorporated in or resident of a tax haven jurisdiction or a preferential tax regime is deductible only where the taxpayer can identify the beneficial recipient and demonstrate that such recipient possesses the operational capacity to carry out the transaction for which the payment is made (Deloitte, 2019). The tax authorities primarily target payments made to persons resident in tax havens or preferential tax regimes. However, Brazil itself may be characterised as a preferential tax regime, as it does not levy withholding tax on dividends distributed to either resident or non-resident shareholders, nor on premiums received upon the issuance of new shares by Brazilian companies. Moreover, the construction of Article 116 appears to align more closely with the doctrine of beneficial ownership than with the substance-over-form principle.

6. Conclusion

Except for China, there is no clear evidence that GAAR has curtailed aggressive tax planning, but now the businesses are cautious since new provisions have been added in tax laws that will help the authorities to curb the tax avoidance practices. From the examination of GAAR provisions, it is pertinent that the taxpayer will face procedural difficulties, and in the long run, this may create an unfriendly business environment. International Tax Avoidance is not defined anywhere, and scholars have understood tax avoidance only in the domestic context. It can be said that international tax avoidance are those tax avoidance practice that is placed with the help of tax treaties; however, this understanding does not fall entirely on international instruments.

In many tax regimes, GAAR is a kind of unrule horse, as time passess it has to pass many obstacles. Neither can it be said that GAAR reduces the opportunity to invest in a favourable tax regime. Slowly but gradually, the jurisprudence will develop, and more interesting interpretations will come out regarding GAAR. Time will test GAAR on different fronts. It would be interesting to cross-examine the relationship between GAAR and the amount of investment inflows. This is subject to further investigation and research.

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By – Gaurav Shukla— First Author | Rajagopal P.— Co-author | Vinayaka Mission’s Law School, Vinayaka Mission’s Research Foundation (Deemed to be University), Chennai