An Research On Tax Anti-Avoidance In China

Ever since its born, international taxation has had two crucial tasks, double taxation and international tax avoidance. The common practice of preventing double taxation is usually achieved by negotiations between different tax jurisdictions, resulting in the sign of tax treaties. But when it comes to handling tax avoidance, the perceptions and approaches vary due to the disparities of history background, political and economical system, tax regime and legal system of countries around the world. In China, research on how to deal with international tax avoidance started in the early 1980's. Admittedly the Chinese tax authorities have undergone an arduous journey for the past two decades. Acting as a field examiner of transfer pricing, the author points out that the ultimate aim of tax anti-avoidance is to perfect tax law regime as well as protect tax bases in China. The thesis falls into four parts.Part 1. There are no direct definitions of tax avoidance specified in any of the tax laws in the world because tax authorities have not had adequate experience in that aspect. It should be noted that three kinds of views do exist when tax professionals deal with tax avoidance. One holds that tax avoidance means playing upon the loopholes or defects of tax law so as to minimize tax liability. The other thinks that tax avoidance is analogous to tax evasion, though it shall not be imposed with any penalties. Still another simply views tax avoidance as a legal activity.Part 2. Generally speaking, there are six main approaches for avoiding taxes which are respectively migration of taxpayer, thin capitalization, tax haven & controlled foreign company, cost contribution arrangement, transfer pricing and abuse of tax treaty. Up to now China has already enacted specific laws defying transfer pricing between related corporations, but laws concerning thin capitalization and abuse of tax treaty have been quite unsystematic. No legal restrictions have been made on tax haven, CFCs and cost contribution arrangement.Part 3. It is only recently that China began its legislation on tax anti-avoidance, it should be noted that laws on tax anit-avoidance are insufficient in the following aspects: no general provision for governing anti-avoidance; legally uncertainty of the qualification of tax avoidance auditors; no strict requirement for disclosing related transactions on the part of taxpayers; no criteria for determining what is the fair interest rate; no practical way to assess value of the intangibles; illegal tax documents; insufficient methodologies for transfer pricing; no specific regulations on thin capitalization, tax haven, abuse of tax treaty, etc.Part 4. In the future Chinese tax authorities should focus on the following aspects in drafting or perfecting tax laws on anti-avoidance: a general anti-avoidance provision must be established in the coming Income Tax Act; tax organization for anti-avoidance and its staff should be acknowledged by the law; the system of industry analysis must be established; taxpayer must have the obligation of proof-bearing; an mechanism of smooth information should be available; specific rule restricting thin capitalization must be set up; specific rule restricting tax haven must be established; measures should be taken to deter the abuse of tax treaty; tax compromise should be allowed in adjusting the transferred price; penalty must be imposed on tax avoidance; tax authorities should encourage the application of APAs.In a time when multinationals begin setting foot on the market of China, many new approaches of avoiding taxes have appeared on the horizon, it is imperative for Chinese tax authorities to enact new tax laws and regulations governing tax avoidance activities in order that taxation rights shall be guaranteed and the proportion of income tax should be withheld in China.