On A Better Resolution To Tax Special Purpose Trust In China

The Securitization is the very mode in which there exists multi-party to participate, multi-function to prevent risks in the domain of financing. The Special Purpose Trust(SPT) is playing an equivalent role as a vehicle in the framework of securitization, besides providing cash flows in a diverse way and combining the direct finance and indirect finance. The SPT is one kind of Commercial Trust for the reason that it is well organized for the private purpose and asks for consideration. To define SPT, we should also consider its function in bankrupt isolation.It is better to think about the roles of the settler, the trustee and the beneficiary correspondingly, when we discuss the SPT taxation since these three parties shall be also taxed. The related official documents of taxation focus on the income tax, turnover tax and stamp duty when to tax on SPT. After examining these documents, I find that the very problem is that further explanation is necessary to the precondition of corresponding taxation.The three main issues are as follows:A. There should be a more persuasive analysis in defining the True Sale;B. It should be further discussed whether the SPT can be directly taxed; andC. It should be classified that the notion of tax neutrality is different from tax preferences.To the first issue, the official document The Notion of Tax Policy on Credit-asset Securitization provides that the True Sale should be taxed on income. Generally, True Sale means that the property is transferred. But Trust Law uses the term “entrust” to define the nature of a trust, which makes us confused whether the settler has transferred the property. Besides, there also exists confusions in accounting because the securitization is namely for sale and substantially for finance. Thirdly, the criteria to judge whether the property is transferred in securitization is difficult. Fourthly, the all-or-nothing mindset of taxation on the True Sale will deeply hurt the flexibility of SPT.In order to solve the troubles above-mentioned, we canA. modify the Trust Law correspondingly;B. classify the dimension to tax in the process of True Sale; andC. give categorized resolutions to the flexible transactions of securitization in the legal and accounting domain.To the second issue, there is no definite provision in PRC Basic Law to judge whether the SPT is the Foundation or Corporation. But the official document provides that SPT shall be taxed as an enterprise. So the problems are askedA. whether the SPT has enjoyed the legal personality in practical conditions;B. whether the provision of the official document is reasonable or legal; andC. whether the Trustee should be taxed on the interests of trust funds in place of the SPT itself even if the SPT can be regarded as a Foundation or Corporation.In order to solve the problems above-mentioned, we canA. tell the SPT from the trustee;B. give the SPT legal personality; andC. ensure that the SPT is like a vehicle.To the third issue, there shall be further discuss on the tax neutrality for it is controversial in PRC. Some experts of PRC maintain that the notion of tax neutrality is only suitable for the countries in which the market-oriented economy system is mature. But others argue that PRC shall accept this notion for the financial innovation though it might be a very slow process. In the application of this notion to the securitization, the government shall prevent using unreasonable tax preferences.My conclusion to this issue is thatA. this notion itself is a relative concept;B. we shall focus more on the need of tax neutrality in the financial industry; andC. this notion can be used in the taxation of SPT.