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 GAARs are becoming increasingly common, the presence of a GAAR is generally overlooked by researchers and thus has been left unstudied. In this paper, we provide an initial investigation by studying the effect of GAARs on firm-level corporate tax avoidance behaviors. Using an indicator for the enactment or strengthening of a GAAR within a country in a stacked difference-in-differences design, we find GAAR enactment is associated with a statistically and economically significant decrease in firm-level tax avoidance. Additional cross-sectional analyses show that the decline in tax avoidance occurs for conventional GAARs and economic substance-type rules, original and strengthened GAARs, and domestic and multinational firms. Results also show that the effect is strongest for firms with higher levels of pre-GAAR-enactment tax avoidance and for firms incorporated in countries where the burden of proof lies with the taxpayer.