On The Anti-Tax-Deferral

The tax deferral exists generally in the multinational corporation. In simple terms, "deferral" is the postponement of current taxation on the net income or gain economically accrued by taxpayer. Taxpayers divert its tax revenue to abroad by establishing a foreign subsidiary, if absent special rules, defer homeland taxation on foreign income until it is repatriated. Taxpayers are able to benefit from deferral, for an alternative, that is better analyzed as a "forced equity investment" by the Treasury. But this act has actually eroded a country's tax base, and allows the foreign income to be taxed at a lower effective rate than domestic income. It is unfair. From 1962, the first anti-deferral's legislation-subpart F of《Internal Revenue Code》, many countries have established the anti-deferral system, has formed the strict measure. These already include the basic measure, and also other international tax systems. As a result of each country's special circs, their measures exist great different. But these measures include both general tax policy, such as preventing tax haven abusiveness, taxing passive income currently, promoting equity among taxpayers and promoting economic efficiency. This article is divided into four parts to carry on the origin backward, the reality appraisal, the theory analysis and the future on the modern tax deferral phenomenon.The first part intends to introduce: what is deferral, why it happens and how it happens. Tax deferral comes from the structural tension of the international tax system and great benefit to the taxpayer. The structural tension means the tension between the worldwide taxation and taxing a corporation as a separate entity. Under the worldwide taxation, a jurisdiction imposes tax on its residents' foreign income when earned. But according to taxing a corporation as a separate entity, it establishes separate regimes for individuals and corporations, and generally recognizes a corporation to be a separate taxable entity from its shareholders. So a corporation that directly conducts a business overseas is taxable on that business income. If the corporation, separately incorporate its foreign operations, the foreign subsidiary will not be subject to tax in the homeland on this foreign source income. Further, the parent generally will not be subject to tax on the income of its foreign subsidiary until that income is repatriated through dividend distribution. Next, tax deferral can be achieved by many ways, but almost by a number of artificial or paper transactions through which profits could be diverted to a subsidiary organized in a tax haven, most of which required the tax haven subsidiary to act as a middleman.The second part explores basic idea and measures for various countries to establish anti-deferral provisions. This part introduces American, Japanese and China's anti-deferral measures. Current taxation of worldwide income is an effective instrument to the tax deferral. It means tax the worldwide income which is earned by domestic persons directly, including the income of controlled foreign corporation and other gains. No matter income whether already is distributional, it will be taxed currently. Law rules which category of income should be counted currently.The third part introduces the anti-deferral exists in other international tax systems, including the regulation of controlled foreign corporation (CFC) and offshore investment funds. CFC becomes the multinationals' tool of deferring tax, so a lot of countries want to regulate it. The CFC has regulated from three key factors: the definition of controlled foreign corporation, identifying tax haven and definition and computation of attributable income. Moreover, the CFC rules of several countries apply only to resident shareholders that own a minimum percentage (usually 10 percent) of the shares of the foreign corporation. As a result, it is relatively easy for foreign investment companies, mutual funds, or units trusts to be established in tax havens without being subject to the CFC rules. Several countries have enacted detailed legislation to prevent the deferral of domestic tax through the use of offshore investment funds. Offshore investment fund rules are refers to a country securities investment fund organization to sell the fund share in other country, and gains from the third country market. For offshore investment funds can converted into capital gains, at least four different methods of taxation are used by various countries to mitigate or eliminate the tax benefits. They are mark-to-market approach, imputed income approach, deemed distribution approach and deferral charge approach.The last part describes how anti-deferral measures may now be avoided; it contains entity classification, services, foreign base company and electronic commerce. First, in quite long period of time, anti-deferral measures apply almost two categories: the company form and partnership. However, the creation of hybrid entities are facilitated by changes in the traditional rules, it is relatively easy for taxpayers to avoid current tax. Second, service has a feature of mobility of enterprise and income, which make the tax more complexity. The treatment of service is already posing a number of these challenges. Third, the base company is the combination of the typical and the non-typical of tax havens by the taxpayer's avoiding tax act. In this process, the subsidiary of tax haven can display one kind of "the separation" and "the isolation" functions. It separates the income from the high tax rate residence country, and isolates the high tax residence country (nationality country) to exercise the resident tax jurisdiction. Last, the ability of taxpayers to provide services over the internet and through other electronic media will present further challenges to the current anti-deferral rules. The increased commercial use of the telephone, radio, television and facsimile has contributed to a trend in which the physical location of the provider of goods and services is less significant and more difficult to determine. The anti-deferral rules must be evaluated by considering where this trend might lead and what challenges it poses.The fundamental goals of international tax policy provide the appropriate criteria for analyzing these options. These fundamental goals of international tax policy are equity, efficiency, simplicity and administrability, international norms and competitiveness.