Thin Capitalization And Tax Supervision

As a less evident way of tax avoidance, thin capitalization severely risks the tax benefits of the sovereign state and the international taxation coordination, destroys the principle of the equality and substantial justice of the tax law and weakens the state's function to control economy. Because of the harmful effects of thin capitalization, all states are taking precautions against and impose sanctions on it as a behavior of tax avoidance. However the tax supervision towards it is comparatively difficult, which is a huge challenge confronting the taxing authorities. China is still lacking in the empirical researches on thin capitalization, and has not established efficient and systematic tax supervision. So, to conduct and enhance empirical researches and to accelerate the legislation are badly needed for precautions against the tax avoidance and the perfection of national taxation system. Meanwhile, they are also required to further, enlarge and make breakthrough on the theory and practice of thin capitalization. More importantly, they are also needed to secure the taxation rights and benefits of the state and promote a harmonious developing economy.This essay offers a illustration of thin capitalization, including the achievement of recent researches, significance, phenomenon, causes, influences and measures of adjustment and the international experiences about thin capitalization rules, emphasizing the two types of thin capitalization rules proposed by OECD and the thin capitalization rules of some countries, and making comparative analysis on the present national tax system of China. The essay is relatively innovative. Combined with the practical works on the tax collection and management, the essay, from the angle of tax supervision, focuses on the empirical researches and comprehensively applies the means of comparison, induction and assessment. It not only introduces relative researches, but also learns from the international experiences on regulating thin capitalization. Moreover, the essay analyzes and concludes the phenomenon and conducting behaviors of thin capitalization of enterprises, providing the first-hand statistics and data against thin capitalization, and giving specific suggestions on the tax supervision, which to some degree fills up the blank of the empirical researches of thin capitalization on the tax supervision and practical manipulation.In this essay, some relative financial statistics and data from some enterprises are analyzed, assessed and compared. After omitting some incomparable factors, this essay has concluded some characteristics and common features of thin capitalization. Combined with present available theories, laws and experiences, this essay has also discussed how to supervise and control capital efficiently and researched on how to improve the supervision and management. The essay believes that in order to solve the problem caused by thin capitalization effectively, the situation of enterprises' tax payment should be regularly assessed; the targets of caution and supervision should be reasonably confirmed; a system of caution and supervision should be established and perfected; the national tax system should be further improved; and the benefits brought by the taxation to the FDI should be enhanced. It has also proposed that these enterprises should be supervised: the enterprises whose ratio of debts and profits have exceeded 2:1 for two successive years, the enterprises whose debt to asset ratio exceeded 60%, the enterprises whose prime operating revenue and operating costs have reversed for six successive months or whose annual sale income reverse has lasted for successive two years, and the enterprises who has a huge sum of current account and has suffered a long-term income reverse and loss.