GAARs

GAARs, or Global Anti-Avoidance Rules, are international tax rules designed to prevent multinational corporations from using tax strategies to reduce their tax liabilities. These rules were established by the OECD (Organisation for Economic Co-operation and Development) in 2017 and have been adopted by many countries, including the United States, the United Kingdom, and the European Union.

The primary goal of GAARs is to ensure that multinational corporations pay taxes on their worldwide income, rather than shifting profits to low-tax jurisdictions. This is achieved through a series of rules that apply to controlled foreign corporations (CFCs), which are foreign subsidiaries that are under the control of a parent company.

One of the key provisions of GAARs is the Substance Rule, which requires CFCs to have a permanent establishment (PE) in the country where they are incorporated. A PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. If a CFC does not have a PE, it is considered to be a "disregarded entity" and its income is taxed in the hands of the parent company.

Another important provision is the Arm's Length Principle, which requires that the transactions between a parent company and its CFCs be conducted at arm's length, meaning they should be at commercial terms. If the transactions are not at arm's length, the excess income is taxed in the hands of the parent company.

GAARs also include rules for determining the tax residence of a CFC and the allocation of income between the parent company and the CFC. These rules aim to ensure that the tax burden is fair and equitable, and that multinational corporations do not use tax strategies to avoid their tax obligations.

In summary, GAARs are a set of international tax rules designed to prevent multinational corporations from using tax strategies to reduce their tax liabilities. These rules aim to ensure that multinational corporations pay taxes on their worldwide income and that the tax burden is fair and equitable.