CMA Final · Direct Tax Laws and International Taxation · GAAR
Which of the following, if present in an arrangement, is one of the tests under GAAR that makes an arrangement with the main purpose of obtaining a tax benefit an impermissible avoidance arrangement?
Lack of commercial substance, actual or deemed, is one of the statutory tests. If the main purpose is a tax benefit and the arrangement fails commercial substance, it can be an impermissible avoidance arrangement. Related-party status, non-resident payments or book losses are not tests by themselves.
- AIt lacks commercial substance or is deemed to lack commercial substanceCorrect
- BIt involves a payment to a non-resident
- CIt was entered into with a related party
- DIt results in a loss in the books for the year
Explanation
An arrangement whose main purpose is a tax benefit becomes impermissible if it satisfies at least one test: creates rights or obligations not ordinarily created between arm's length parties, results in misuse or abuse of provisions, lacks commercial substance, or is carried out in a manner not normally employed for bona fide purposes. Related-party dealing, non-resident payment or book loss alone are not tests.
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