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ACT6161 CHINA TAX FRAMEWORK LECTURE 6 TAX DISPUTES RESOLUTION AND ANTI- AVOIDANCE RULES (OCTOBER 28, 2019) ROADMAP Tax Avoidance Schemes Anti-avoidance Rules - Treaty Approach - Anti-avoidance Rules under Chinas Domestic Law Tax Disputes Resolution in China 2 RART I TAX PLANNING Tax Planning tax minimisation; tax avoidance; tax evasion Domestic Tax Planning tax exemptions; tax incentives International Tax Planning tax benefits provided by a DTA 3 RART I TAX AVOIDANCE TECHNIQUES Tax Avoidance aggressive tax planning strategies often involve a number of different mechanisms which need to work together to achieve the required result; Tax Planning Techniques by MNEs -exploitation of transfer pricing rules -hybrid mismatch arrangements -artificial avoidance of PE status -earnings stripping -tax treaty abuse -double Irish Dutch sandwich 4 The Techniques Transfer pricing: a price set between related persons and usually contrasted with a market price; moving profits to a low tax jurisdiction through charging a high price to the subsidiary in a high tax jurisdiction; Hybrid mismatch arrangements: hybrid entity and hybrid financial instruments; Artificial avoidance of PE status: no source taxation without PE; Earnings stripping Tax treaty abuse Double Irish Dutch sandwich 5 RART I TAX AVOIDANCE TECHNIQUES Earnings Stripping PART I TAX AVOIDANCE TECHNIQUES 6 Tax Treaty Abuse 7 PART I TAX AVOIDANCE TECHNIQUES Double Irish Dutch Sandwich 8 PART I TAX AVOIDANCE TECHNIQUES PART II ANTI-AVOIDANCE RULES Anti-avoidance Approaches Treaty approach Anti-avoidance rules and principles under domestic law Adoption of both approaches in many countries - explicit provision in a treaty acknowledging each partys right to apply its domestic anti-avoidance rules 9 Treaty Approach Include a provision in the treaty that denies benefits in stated circumstances Anti-treaty shopping -include a limitation-on-benefits (LOB) provision in the treaty -requires beneficial ownership (BO) by the recipient 10 PART II ANTI-AVOIDANCE RULES Beneficial Ownership Rules relevant to dividend, interest, and royalty provisions under a DTA (e.g. HK-Mainland China DTA, arts 10-12) reduced WHT rates available only where the nonresident recipient is the beneficial owner (BO) of the dividend, interest or royalty BO test rules in China: SAT Public Notice 2018 9 11 PART II ANTI-AVOIDANCE RULES TREATY SHOPPING but note: many provisions have been repealed or replaced by new provisions) 14 PART II ANTI-AVOIDANCE RULES SAARs Mainland China CFC rules (EITL, Art. 45) -prevent tax deferral or avoidance of foreign income of residents -impose tax on the profits of a CFC in the hands of resident shareholders of the CFC -define the term “control” -determine the scope of profits of a CFC attributed to the resident shareholders 15 PART II ANTI-AVOIDANCE RULES SAARs Mainland China (contd) Thin capitalization rules (EITL, Art. 45) -prevent excessive debt financing -determine whether the amount of debt finance is excessive o debt-equity ratio (5:1, FIs; 2:1, others) (Caishui 2008 121) o earnings stripping (e.g. the US) 16 PART II ANTI-AVOIDANCE RULES GAARs in General The need to combat abusive tax avoidance Approaches -judicial doctrines -legislation of statutory provisions that override other tax rules PART II ANTI-AVOIDANCE RULES 17 Judicial Doctrines IRC v Duke of Westminster 1936: literal interpretation of tax statutes; the primacy of form over substance W.T. Ramsay Ltd. v IRC 1982: normal rules of statutory interpretation; disregard steps in transactions without commercial motive Barclays Mercantile Finance Ltd. v Mawson 2004: “purposive” interpretation required; not always disregard steps in transactions without commercial purpose PART II ANTI-AVOIDANCE RULES 18 Judicial Doctrines (contd) Collector of Stamp Revenue v Arrowtown Assets Ltd. 2004 “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.” a very special rule of interpretation? stretched or strained interpretation? or a judicial doctrine? PART II ANTI-AVOIDANCE RULES 19 US Economic Substance Doctrine (IRC Sec. 7701(o) “the Governments trump card” “a judicial effort to enforce the statutory purpose of the tax code” (Coltec, Fed. Cir., 2006) Gregory v. Helvering 1935: upheld a non-literal interpretation of tax law and allowed for the examination of the substance in addition to the legal form of transactions defined as the common law doctrine: certain tax benefits are not allowable if the transaction has no economic substance PART II ANTI-AVOIDANCE RULES 20 GAARs in Mainland China statutory provision: EITL 47; IR120 EITL, Art. 47 “Where an Enterprise enters into other arrangements without reasonable commercial purpose and this results in a reduction of taxable gross income or taxable income, the tax authorities shall have the authority to make adjustment using appropriate methods.” IR, Art. 120 “Without reasonable commercial purpose stated in Article 47 of the EITL shall refer to where the main purpose is reduction, exemption, or deferral of tax payments.” PART II ANTI-AVOIDANCE RULES 21 GAARs in Mainland China (contd) SAT Circular 2009 2: a “substance over form” analysis SAT GAAR Measures 2014 32 -the sole or main purpose of the arrangement is to obtain a tax benefit; and -the arrangement, in pursuing tax benefits, takes a form permissible under tax rules, but which is not consistent with its underlying economic substance - tax authority empowered to make reasonable adjustments PART II ANTI-AVOIDANCE RULES 22 GAARs and Taxation of Indirect Transfers in China target on the use of offshore holding company by nonresident companies tax benefits of the offshore holding structure? PART II ANTI-AVOIDANCE RULES 23 Chongqing case (2008) PART II ANTI-AVOIDANCE RULES 24 Chongqing case (2008) (contd) PART II ANTI-AVOIDANCE RULES 25 Nanjing case (2012) Co. A (BVI) Co. C (BVI) Co. D (Hong Kong) Co. E (China) Co. B (Singapore) Overseas China 100 % 100 % 100 % PART II ANTI-AVOIDANCE RULES 26 SAT Circular 2009 698 oonly indirect share transfers o“reasonable commercial purposes” odisregard the offshore holding Co. amended 2010, 2015) scope of appeal procedure of appeal PART III TAX DISPUTES RESOLUTION 31 Scope of Appeal specific (concrete) admin acts appealable (LAR 2; PRTAR 2) what is a “specific admin act”? -SPC Opinion 1991: concrete; specific rights specific person -SPC Explanations 2000: no any definition -SPC Explanation 2015 (Art .2(7) two requirements (LAR 2; PRTAR 2) -regard lawful rights PRTAR 15) 1)orders of the SAT and other Depts of the SC 2)orders of the other tax agencies at all levels 3)orders of local govns at all levels 4)orders of depts of local govns at all levels Non-reviewable (LAR 7; PRTAR15) 1)admin rules of SC Departments 2)local rules by local governments PART III TAX DISPUTES RESOLUTION 34 Procedure of Appeal litigations with no compulsory requirement of exhaustion of admin remedies (PRTAR 34): e.g. objections to an admin penalty decision litigations with compulsory requirements of first pay PRTAR 32) mainly wr