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The People’s Republic of China

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A Comparative Look at Regulation of Corporate Tax Avoidance

Part of the book series: Ius Gentium: Comparative Perspectives on Law and Justice ((IUSGENT,volume 12))

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Abstract

Because the role of Chinese courts is limited, in general, to procedural matters, it is the tax administration that determines whether a transaction involves tax avoidance. This organ of the government places special emphasis on international tax avoidance arrangements. In particular, it has been concerned about the inappropriate use by multinational enterprises of double taxation treaties with third parties offering low tax rates on Chinese source income. This practice provided the impetus for enactment of a GAAR as part of reform of the Corporate Income Tax Law, effective in 2008. The GAAR provides authority to investigate certain anti-avoidance activities and authorizes the tax administration to employ a substance over form approach by reference to five factors. These factors permit the tax administration to consider the form and substance of an arrangement, timing, reference to steps taken to put the arrangement into place, financial effects, and tax consequences. If tax avoidance is uncovered, the tax administration is given authority to re-characterize the transaction according to economic reality. The adoption of a GAAR has had considerable impact on the activities of multinationals that may use conduit Chinese companies for investment only if there is economic substance to the arrangement.

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Notes

  1. 1.

    See, in particular, the Preamble to the Constitution and Chapter 1 – General Principles: http://english.people.com.cn/constitution/constitution.html (accessed 6 June 2010).

  2. 2.

    See Tamanaha, Brian Z. (2004) On the Rule of Law – History, Politics, Theory, Cambridge University Press, 3.

  3. 3.

    See, for example, Li, Jinyan, “Development and Tax Policy: Case Study of China”, (2007) 3(4) Comparative Research in Law and Political Economy, CLPE Research Paper 27/2007, 32.

  4. 4.

    Tamanaha, Brian Z. (2004) On the Rule of Law – History, Politics, Theory, Cambridge University Press, 3.

  5. 5.

    Daniels, Ronald J. and Michael Trebilcock, “The Political Economy of Rule of Law Reform in Developing Countries”, (2004) 26 Michigan Journal of International Law, 99, 104.

  6. 6.

    Li, Jinyan, “Development and Tax Policy: Case Study of China”, (2007) 3(4) Comparative Research in Law and Political Economy, CLPE Research Paper 27/2007, 40.

  7. 7.

    Li, Jinyan, “Development and Tax Policy: Case Study of China”, (2007) 3(4) Comparative Research in Law and Political Economy, CLPE Research Paper 27/2007, 34. Just quite how this approach reconciles with Article 126 of the Constitution of the PRC is not at all obvious. Article 126 stipulates that “[t]he people’s courts shall, in accordance with the law, exercise judicial power independently and are not subject to interference by administrative organs, public organizations or individuals.” For an instructive account of the subservient status of the judiciary, see Yardley, Jim, “A Judge Tests China’s Courts, Making History”, New York Times, 28 November 2005, http://www.ruanyifeng.com/blog/2006/04/rule_by_law_3.html (accessed 19 October 2009).

  8. 8.

    Article 59 provides that “[t]he State Council shall formulate implementation rules on the basis of this Law.” The CITL is also often referred to as the Enterprise Income Tax Law.

  9. 9.

    Article 85 of the Constitution of the PRC. See http://english.people.com.cn/constitution/constitution.html (accessed 6 June 2010).

  10. 10.

    Article 89, paragraph 1 of the Constitution of the PRC. http://english.people.com.cn/constitution/constitution.html (accessed 6 June 2010).

  11. 11.

    Article 89, paragraph 3 of the Constitution of the PRC. http://english.people.com.cn/constitution/constitution.html (accessed 6 June 2010).

  12. 12.

    Article 89, paragraph 8 of the Constitution of the PRC. See http://english.people.com.cn/constitution/constitution.html (accessed 6 June 2010).

  13. 13.

    State Administration of Taxation Decree No. 1, Implementation Measures Concerning Formulation of Regulations and Rules of Tax Administrations, 27 October 2007: http://www.chinatax.gov.cn/n6669073/n6669088/6887607.html (accessed 6 June 2010).

  14. 14.

    Law of the People’s Republic of China on Tax Administration, 27 October 2007, promulgated by Order of the Chairman of the NPC [2001] No. 60 on April 28, 2001: http://www.chinatax.gov.cn/n6669073/n6669088/6887981.html (accessed 6 June 2010).

  15. 15.

    Article 67, paragraph 4 of the Constitution of the PRC.

  16. 16.

    Article 67, paragraph 6 of the Constitution of the PRC.

  17. 17.

    http://english.people.com.cn/constitution/constitution.html (accessed 18 October 2009).

  18. 18.

    The State Council puts it this way: “[d]emocratic centralism is the fundamental principle of organization and leadership of state power in China. When democratic centralism is practiced, it requires that we give full play to democracy and discuss matters of concern collectively, so that people’s wishes and demands are fully expressed and reflected. Then, all the correct opinions are pooled, and decisions are made collectively so that the people’s wishes and demands are realized and met. The practice of democratic centralism also requires that ‘the majority be respected while the minority is protected.’ ” Information Office of the State Council of the People’s Republic of China (2005) Building of Political Democracy in China, New Star Publishers, Beijing, October, Chp. 1: see http://english.peopledaily.com.cn/whitepaper/democracy/democracy(1).html (accessed 26 May 2010).

  19. 19.

    Li, Jin, “Teaching Taxation Law in China”, (2007) 61 (12) Bulletin for International Taxation, 183,186.

  20. 20.

    Li, Jinyan, “Development and Tax Policy: Case Study of China”, (2007) 3(4) Comparative Research in Law and Political Economy, CLPE Research Paper 27/2007, 40.

  21. 21.

    See under Section 4.6 below.

  22. 22.

    Guo Shui Han [2008] “Notice on Correctly Dealing with Treaty Abuse Case”, No. 1076 (30 December 2008).

  23. 23.

    Law on Tax Administration, 27 October 2007, promulgated by Order of the Chairman of the NPC [2001] No. 60 on April 28, 2001: http://www.chinatax.gov.cn/n6669073/n6669088/6887981.html (accessed 5 June 2010).

  24. 24.

    See Jin, Renqing (Minister of Finance), “Explanation on Draft Enterprise Income Tax Law” at http://www.china-embassy.org/eng/gyzg/t302221.htm (accessed 2 June 2010).

  25. 25.

    “Other business arrangements” refers to arrangements other than transfer pricing, controlled foreign enterprise and thin capitalization arrangements, which are specifically addressed earlier in Chapter VI of the CITL.

  26. 26.

    There is no official English translation of the CITL. This translation of Article 47 is from KPMG, (2008) PRC Corporate Income Tax Law, 10 (see http://www.kpmg.com.hk/en/virtual_library/Tax/PRCtaxLawBook.pdf (accessed 16 October 2009)).

  27. 27.

    The Implementation Rules for the Corporate Income Tax Law of the People’s Republic of China, Decree of the State Council of the People’s Republic of China, No. 512, 6 December 2007; translated in KPMG, (2008) PRC Corporate Income Tax Law, KPMG Huazhen, 37.

  28. 28.

    Guo Shui Fa [2009] No. 2 (9 January 2009). The rules apply retroactively from 1 January 2008, the date on which the CITL came into effect.

  29. 29.

    Article 97 of Notice No. 2.

  30. 30.

    The Implementation Rules for the Enterprise Income Tax Law of the People’s Republic of China, Decree of the State Council of the People’s Republic of China, No. 512, 6 December 2007; translated in KPMG, (2008) PRC Corporate Income Tax Law, KPMG Huazhen, 38.

  31. 31.

    See, for example, the conflicting judicial approaches in Commissioner of Inland Revenue v. Wattie (1997) 17 NZTC 13,297 (CA) and (1998) 18 NZTC 13,991 (PC).

  32. 32.

    PricewaterhouseCoopers, “New Challenges to China Tax Avoidance by way of Special Purpose Vehicles”, (2009) News Flash – China Tax and Business Advisory, Issue 08, March, 5.

  33. 33.

    Eichelberger, Jon and Brendan T. Kelly, New Challenges to Special Purpose Vehicles for Investing in China, Baker & McKenzie, http://www.bakermckenzie.com/RRFinancingSPVinChinaJun09/ (accessed 6 June 2010).

  34. 34.

    KPMG, (2009) Private Equity Tax alert : China strengthening enforcement of anti-avoidance provisions, Hong Kong, March, 1.

  35. 35.

    Deloitte, “PRC Tax China Tightening Up on Tax Treaty Abuse”, (2009) Tax Analysis, Issue P52, 16 January, 3.

  36. 36.

    PricewaterhouseCoopers, “New Challenges to China Tax Avoidance by way of Special Purpose Vehicles”, (2009) News Flash – China Tax and Business Advisory, Issue 08, March, 6.

  37. 37.

    Wagner, Robert J. and Thao Griepp, “Investing in China – New Tax Developments Strengthen Enforcement on Treaty Applications”, (2009) BKD Tax Feature, February, 2.

  38. 38.

    See, for example, the Fujian case (Fuzhou Tax Bureau, October 2009), the Tianjin case (Tianjin Tax Bureau, March 2010), the Xuzhou case (Xuzhou Tax Bureau, March 2010), the Yangzhou case (Jiangdu Tax Bureau, May 2010) and the Anhui case (Anhui Tax Bureau, March 2011). See also the Goldman Sachs Henan case (Luohe City Tax Bureau), the outcome of which was still to be determined at the time of writing.

  39. 39.

    Guo Shui Fa [2009] No. 2 (9 January 2009).

  40. 40.

    Guo Shui Han [2009] No. 81 (20 February 2009).

  41. 41.

    Article 4.

  42. 42.

    Cai Shui Han [2009] No. 601 (27 October 2009).

  43. 43.

    Guo Shui Fa [2009] No. 124 (24 August 2009).

  44. 44.

    Cai Shui [2009] No. 59 (30 April 2009).

  45. 45.

    Announcement No. 4 (2010).

  46. 46.

    Guo Shui Han [2009] No. 363 (6 July 2009).

  47. 47.

    As an aside, because Hong Kong is a Special Administrative Region of China, and operates a tax system separate from Mainland China, the double tax “treaty” between China and Hong Kong is referred to as an “arrangement” and the parties to the arrangement are referred to as “sides.” China reserves the terms double tax “agreement” and “contracting states” (being parties to the agreement) for treaties with other states.

  48. 48.

    Guo Shui Han [2007] No. 1212.

  49. 49.

    See Guo Shui Han [2007] No. 403 (4 April 2007).

  50. 50.

    The Protocol was concluded on 10 February 2010, but is not yet in force.

  51. 51.

    Not yet in force.

  52. 52.

    Article 122 of the Implementation Rules (2007).

  53. 53.

    Article 122 of the Implementation Rules (2007).

  54. 54.

    Law on Tax Administration, 27 October 2007, promulgated by Order of the Chairman of the NPC [2001] No. 60 on April 28, 2001: http://www.chinatax.gov.cn/n6669073/n6669088/6887981.html (accessed 6 June 2010).

  55. 55.

    Guo Shui Fa [2009] No. 2 (9 January 2009).

  56. 56.

    Law of the People’s Republic of China on Tax Administration and Collection and Detailed Rules for Its Implementation (4 September 1992, revised and re-promulgated 4 August 1993 and 28 February 1995): http://www.china.org.cn/business/laws_regulations/2007-06/22/content_1214782.htm (accessed 6 June 2010).

  57. 57.

    Article 95 of Notice No. 2.

  58. 58.

    Guo Shui Han [2009] No. 698 (December 2009, with retroactive effect from 1 January 2008).

  59. 59.

    Law of the People’s Republic of China on Tax Administration, 27 October 2007, promulgated by Order of the Chairman of the NPC [2001] No. 60 on April 28, 2001: http://www.chinatax.gov.cn/n6669073/n6669088/6887981.html (accessed 6 June 2010).

  60. 60.

    Article 5.

  61. 61.

    “Withholding agents” are defined as institutions and individuals obliged to withhold and pay tax in accordance with the law or administrative regulations: Article 4.

  62. 62.

    Article 6.

  63. 63.

    Article 24.

  64. 64.

    Article 35.

  65. 65.

    Article 54.

  66. 66.

    Article 56.

  67. 67.

    Article 57.

  68. 68.

    Articles 62 and 70.

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  1. School of Accounting and Commercial Law, Victoria University of Wellington, Wellington, New Zealand

    Kevin Holmes (Professor)

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Correspondence to Kevin Holmes .

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Editors and Affiliations

  1. Law School, George Washington University, H Street 2000, WASHINGTON, 20052, District of Columbia, USA

    Karen B. Brown

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Holmes, K. (2012). The People’s Republic of China. In: Brown, K. (eds) A Comparative Look at Regulation of Corporate Tax Avoidance. Ius Gentium: Comparative Perspectives on Law and Justice, vol 12. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-2342-9_4

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