In order to combat what is seen as unacceptable tax avoidance, legislatures are increasingly relying on broad statements in legislation that if the application of its strict terms leads to an outcome which may be thought to be contrary to its general policy, the fact that a taxpayer has deliberately entered into the transaction in order to obtain that outcome enables it to be disregarded – so-called general anti-avoidance rules.
It needs to be said that at the outset that reliance on such rules is not a success of legislative endeavour, but a failure – a recognition that the legislature has not done its job properly by defining with precision what it has in mind when it enacts legislation. One real risk associated with such rules is that it will encourage further sloppiness and imprecision on the basis that it does not really matter if a particular provision has unintended consequences – the matter will be dealt with by application of the general anti-avoidance rule.
Of potentially more concern, particularly where the circumstances in which the rule can be applied are not adequately defined and penalties are applicable if the rule does apply, is that this uncertainty can be exploited upon by the tax authority to exact tax not properly payable. If the potential scope for operation of such provisions is not confined, the scope for taxation by administrative discretion rather than under the rule of law is a very real one.
For that reason, we have argued in the Charter that the scope of such provisions needs to be clearly identified and their operation strictly confined to the circumstances in which they are appropriate.