General anti-avoidance rule (“GAAR”)
Although the Bill maintains the general structure of the general anti-avoidance rule (“GAAR”), relevant changes are introduced (without retroactive effect), among which the following stand out:
Free exercise of options
The principle of free exercise of options is reinforced, by eliminating the requirement of “reasonable” exercise of choices and by expanding the range of options to all those contemplated by the law and not only in the tax law.
GAAR as the principal substance over form rule
The Bill makes explicit that the GAAR is the appropriate way for challenges based on the substance on form principle, unless special rules apply (e.g., IRS appraisal authority, deductibility of expenses, presumptive income or norms that typify crimes).
Existence of “abuse” or “simulation”
While the GAAR would continue to apply to cases of “abuse” and “simulation”, the Bill proposes to increase the standard for the existence of “abuse”.
- Under the current standard, “abuse” is configured if the transactions do not produce “relevant” legal or economic results or effects (other than tax) for the taxpayer or third parties.
- The Bill would require (a) that the acts or contracts are notoriously artificial for the attainment of the obtained result, i.e., that they lack cause or legal cause and that they contravene the purpose of the law; and (b) that they do not produce legal or economic results or effects (eliminating the reference to “relevance”).
The standard for simulation is maintained, and it is specified that simulation can be absolute or relative.
Regarding the existing binding ruling procedure, the Bill (a) broadens the consultation procedure not only to the GAAR but to other special anti-avoidance norms, (b) reduces response times (with positive silence norms); and (c) gives the IRS the possibility to request additional background information in the process.