Research On The Exemption Provisions Of The CFC Rules Under The Background Of BEPS

The cross-border tax avoidance of multinationals in pursuit of profit maximization brings serious tax base erosion and profit shifting risks to countries,and the use of controlled foreign corporations to avoid or defer tax liabilities is one of the most common choices used by multinationals.To this end,countries have formulated controlled foreign company rules(hereinafter referred to as CFC rules)to address this issue.The CFC exemption rules,as an important part of the CFC rules,aim to exclude particular entities and incomes from the scope of CFC rules,the mechanism of which not only emphasizes that the CFC rules aims at dealing with international tax avoidance,but also the ways and means for countries to achieve their policy goals.China introduced the CFC rules in the Enterprise Income Tax(hereinafter referred to as EIT)Law in 2008,but its CFC exemption rules are not perfect,which will hinder the promotion of China’s anti-avoidance work and the improvement of international competitiveness.Starting from the reasons for introducing exemption rules into the CFC rules,this article will examine the legislation and threshold tests of the basic CFC exemption rules,finds differences and rationale,and makes reference to these legislations.With this in mind,this article discusses the CFC exemption rules in the following sections:The first chapter is about the legislative background of Subpart F rules and the coordination of CFC rules in BEPS Action 3 Final Report,and analyzes the theoretical basis of the CFC rules.The theoretical discussion of the CFC rules and its exemption rules mainly revolves around how tax neutrality should be implemented and reflected.At the same time,the CFC rules is a typical embodiment of substance over form in the anti-avoidance rules.This chapter then discusses the reasons for introducing exemption rules into the CFC rules.The most critical reason is to highlight the anti-avoidance nature of CFC rules as well as the criteria of identifying tax avoidance.In addition,it is also to avoid putting domestic multinationals at a competitive disadvantage.The second chapter deconstructs CFC exemption rules.This chapter first discusses the scope and approaches of the CFC exemption rules,which vary from country to country.As a country in certain stage needs to integrate various considerations to strike a balance between various policy objectives,including tax base protection and maintaining international competitiveness.And the legislative experience and level of countries are uneven.This chapter then discusses common types of CFC exemptions from the aspects of typical countries’ legislations and threshold tests,which including active income exemption,high-tax exemption,motive exemption,etc.After comprehensive comparison and analysis of these exemption rules,this chapter points out which present a certain commonality in the CFC exemption rules and the threshold tests also show a trend of being stricter.The third chapter points out that there are improper approaches of threshold tests and unreasonable application results remained.The first section analyzes the shortcomings of the "listed countries approach" and the "entity approach",and discusses different ways to improve,which include introducing the "effective tax rates approach" and the "transactional approach" as the criteria;The second section focuses on the dilemma of applying subjective tests,such as the inherent vagueness,inconsistent terms,and different focus of jurisdictions.However,subjective tests are still valuable for reasonable business behaviors that cannot meet the objective threshold tests,countries introduce objective elements or clarifying subjective elements to settle it.Based on the content of the first three chapters,the fourth chapter analyzes the existing CFC exemption rules in EIT Law and the relevant rules in the Implementing Measures for Special Tax Adjustment(Discussion Draft)(hereinafter referred to as Discussion Draft),and points out that China’s existing rules have some deficiencies,which include that some terms have not been defined clearly,such as “reasonable business needs”,the rules have not kept pace with the times as well.Discussion Draft following the recommendations of BEPS Action 3 report provides a more detailed mode,but still need further refinement.On this basis,the second section of this chapter gives opinions and suggestions for the improvement of China’s current CFC exemption rules.First of all,the improvement of China’s exemption rules should focus on clarifying the terms in existing rules,“reasonable business needs” especially,introduce new exemption types on the basis of Discussion Draft,and at the same time add the CFC exemption rules to China’s Individual Income Tax Law,which can enhance the pertinence and efficiency of China’s CFC rules,is also a necessary move to further promote China’s anti-tax avoidance measures.