The general anti-avoidance rule

Abstract

Although a general anti-avoidance rule (GAAR) being enacted within a country is becoming increasingly more common, the presence of a GAAR is generally overlooked and thus its effect left unstudied. In this paper we provide an initial investigation by studying the effect that the presence of a GAAR within a country has on corporate tax avoidance behaviors. Using an indicator for the enactment of a GAAR within a specific country, we find a statistically and economically significant increase in aggregate tax collections and a statistically and economically significant decrease in firm-level tax avoidance. Additional analyses show that the firm-level results are strongest for firms with higher levels of tax avoidance, for countries with lower levels of tax enforcement prior to the implementation of a GAAR, and for countries where the burden of proof lies, at least partially, with the taxpayer. In final analyses, we find that the GAAR is associated with a decrease in the volatility of reported ETRs.