Case Study On Tax Avoidance By Using Thin-capitalization In Companies

Thin capitalization is a usually used by entities to avoid taxes. It means thatentities increase dept capital to increase expense, which can be deducted beforecalculating taxes. This method can reduce tax liability.Thin capitalization has many foundations: economically, it is a reflection of theessence of MM theory, reflection the fact that companies are pursuing profits;theoretically, that the interest expense which incurs because of debts can be deductedbefore calculating tax payable is the reason why entities want to use thincapitalization. At the same time, thin capitalization can enhance the liquidity of acompany and help this company solve financial dilemmas sometimes.With capital and technology moving across nations freely, thin capitalization ismore often used to avoid taxes. Countries have different anti-tax-avoidance policiesbased on their own characters. China’s policy has changed step by step and by now,it’s quite reasonable.Two main methods are used to solve this problem: safe port rules and equaltransaction principal. China has chosen the former one, which sets a limit ondebt/equity and interests deductions.This article consists of four parts. The first part is introduction, which introducesthe background, meaning, structure, research methods and literature review. Thesecond part is to identify thin capitalization, analyze the principle of thincapitalization, then introduce the current status of anti-thin capitalization system inmany countries. The third part analyzes the factors of thin capitalization and uses twodifferent ways to classify these factors. The final part is a detailed case, introducingthe application of thin capitalization and quantitatively analyzing the benefits of thincapitalization, while at the mean time, giving the author’s understanding of moreshady ways of avoiding taxes.