中文|EN
Home >Publications
How To Respond To Anti-Tax Avoidance Policies And Tax Audit Risks With Corporate Tax Planning
2008/10/01 | 分享文章

Author: Li Jixian

 

Effective tax planning may help enterprises to legally reduce their tax liability and avoid breaching tax evasion rules. In reality, hardly any enterprises achieve these two objectives in their tax planning. Li Jixian of V&T Law Firm discusses the anti-tax evasion rules and tax inspection in relation to tax planning.

 

【Abstract】 
 
There will always be tax planning against "anti-tax avoidance policies". Ideally, tax planning can help reduce or relieve tax burden while bearing no tax risk. The key is to avoid tax reasonably and legitimately. Based on the newly promulgated Corporate Income Tax Law, typical tax avoidance cases and China’s taxation practice, this article is going to prove that in order to achieve legitimate and valid tax avoidance and effectively avoid tax audit risks, Chinese enterprises should conform to relevant laws and provisions related to anti-tax avoidance, and at the same time work out various financial or business arrangements such as pre-tax operation, organization, investment and financing.
 
The two purposes of corporate tax planning are to reduce tax burden and create no tax risk. A tax planning exercise will be successful only if it can achieve these two purposes. If the tax burden of an enterprise is not reduced after the implementation of tax planning; or its tax burden is reduced after the implementation of tax planning but the tax risk of being subject to tax audit has been greatly increased due to unlawful tax avoidance, the tax planning exercise is a failure despite how well it is designed.  
 
ⅠTax Avoidance Difficulties in Tax Planning 
 
It is a pity that many enterprises, including large multinationals such as Procter & Gamble, can not often achieve the above two purposes in tax planning. The reasons are that these enterprises fail to pay enough attention to tax risk, believe tax risk can be avoided or they pay close attention to the State's anti-tax avoidance policies and tax audit risk, and as a result their so-called tax planning fails to reduce their tax burden and often increases their tax burden due to possible anti-tax avoidance audit by tax authorities as a result of suspected illegal tax avoidance.
 
From actively planning to avoiding tax and reducing tax burden to increasing corporate costs due to illegal tax avoidance, emerges a very interesting issue: on the one hand, enterprises seek every possible measure to minimize their corporate tax burden, on the other, the State constantly improves its anti-tax avoidance policies to protect its taxation and secure tax equity, making tax avoidance, especially illegal tax avoidance, into a “shoot himself in the foot” farce.
 
To take an inappropriate analogy, tax planning and anti-avoidance policies appear to be in a relation of the “decline of one means the growth of the other” and uneasily live in harmony. However, it does not mean they can not exist side by side or that they negate one another. In fact, “anti-tax avoidance policies” have always been accompanied by tax planning aimed against them. From international practice and China’s taxation practice, on the condition that it is not in line with the target of tax policies (including anti-tax avoidance policies) nor against tax laws and regulations, enterprises may work out a reasonable plan and arrangement based on their operation, investment, organization and transaction, which can achieve the ideal status of tax planning in reducing or relieving the tax burden while bearing no tax risk. 
 
ⅡReasonable and Legitimate Tax Avoidance is Key to Breaking Through Difficulties  
 
In order to achieve the ideal of reducing or relieving the tax burden while bearing no tax risk, corporate tax planners should firstly be aware of all the national laws and regulations related to taxation and tax policies, as well as all the valid anti-tax avoidance policies issued by the State so far. Apart from noting the newly amended “Law of the People’s Republic of China on Corporate Income Tax (CIT)” and its Implementing Regulations and the “Opinions of the General Office of the Ministry of Commerce on the Notice Concerning Taxation Laws Applying to Enterprises After the Issuance of the ‘Law of the People’s Republic of China on Corporate Income Tax’”, they should pay enough attention to anti-tax avoidance policies released by the State Administration of Taxation a few years ago such as the “Notice on Further Strengthening Anti-tax Avoidance Work”, the “Regulations on the Taxation Administration of Business Transactions between Affiliated Enterprises” and the “Implementing Rules on the Advance Pricing of Business Transactions between Affiliated Enterprises”.
 
It is worth mentioning that since the new CIT Law has referred to the international anti-tax avoidance experience, it has definite provisions with respect to general anti-tax avoidance, transfer pricing by related parties, adjustment methods for related businesses, arm’s length principle, provision of documentation, tax collection approved by the tax authority, prevention of tax avoidance by controlled foreign companies, prevention of thin capitalization, application of different interest rate for supplemented tax payment and special tax adjustment. This has provided a good system of standards for domestic enterprises to work out a targeted tax planning in accordance with the laws and regulations. Enterprises should proactively conform to these standards in drafting their tax planning in order to avoid violating the compulsory provisions of the tax laws and follow in the footsteps of Procter & Gamble, whose tax avoidance case failed a few years ago in China. 
 
Ⅲ Several Specific Tax Planning Suggestions
 
In fact, wise tax planning must be legitimate. It involves advanced planning and arrangement of an enterprise's various activities as operation, investment, financing, organization and transaction that are not expressly prohibited by the anti-tax avoidance policy or are likely to be subject to the tax audit risk. Whether to use related transactions, list interests as costs before tax or to register a shell company in a tax haven, in order to achieve legitimate and valid tax avoidance and effectively avoid tax audit risks, enterprises should conform to relevant laws and provisions expressly related to anti-tax avoidance, and at the same time work out various financial or business arrangements such as pre-tax operation, organization, investment and financing.
 
Firstly, enterprises should take full advantage of various tax preferences provided in the new CIT Law and its Implementing Regulations and find a way to apply these preferential policies. Whether domestic enterprises or foreign-invested enterprises, or whether the enterprise was entitled to any tax preference, it is an important point if enterprises have reasonable tax avoidance needs. Enterprises fulfilling the conditions or being qualified for preferential conditions should enjoy tax preferences to the utmost extent such as to generate more profits or expend investment by fully using the transitive tax preferences. If enterprises do not fulfill the conditions at present or temporarily but have a need for tax avoidance, they may create conditions to transfer to industries, locations or into organizational forms with a low tax burden. For instance, enterprises may transfer to such industries as agriculture, forestry, animal husbandry, fishery, environmental protection, energy conservation, comprehensive utilization of resources, high-tech, infrastructure, security and so on, or relocate to special economic zones and Shanghai Pudong New Area in order to enjoy such tax preferences as CIT exemption or half CIT reduction while reducing the tax audit risk.
 
It is worth noting that under the new CIT Law, enterprises engaged in welfare and comprehensive utilization of resources can adopt the alternative preferential policy of increasing the wages to be reduced before tax and reducing the revenue. Thus enterprises investing in the above industries should maintain professional due care and handle the accounts strictly in accordance with the law, otherwise it is easy for them to be subject to tax audit by the tax authority. In addition, when enterprises have idle assets for investment, it is suggested that they purchase stocks, bonds or other kinds of direct investment instruments that entitle them to tax reduction or exemption as provided by the law.   
 
Secondly, enterprises should adapt to the legal reality that the new CIT Law has broadened the pre-tax deduction scope. As a proactive measure to respond to the anti-tax avoidance policies, enterprises will generally minimize all their expenditure than can not be deducted before tax or expand the expenditure that can be deducted before tax. For instance, enterprises may change one charitable donation into two-time donation in two years to increase the deduction amount of charitable donations and realize positive tax avoidance. However, since the pre-tax deduction standard for business publicity fees is much lower than that for advertising fees and it is easy to mix up these two. Thus enterprises should, when using this tax avoidance measure, strictly separate their business publicity fees from advertising fees to reduce the risk of anti-tax avoidance audit, and it is suggested that they set up detailed accounting items under the “Business Expenses” column and keep relevant accounting books and vouchers.
 
Thirdly, since the CIT Law has reinforced the anti-tax avoidance, the taxable income of an enterprise being increased in the anti-tax avoidance investigation is subject to an interest rate higher than the loan interest rate of banks. This actually will increase the opportunity cost of non-compliance for enterprises, especially multinational enterprises, making it uneconomical to reduce their tax burden though transfer pricing and other tax avoidance measures. In order to minimize the risk of anti-tax avoidance audit, enterprises should, in accordance with the new CIT Law and based on the self-review of all related parties and the arm’s length principle, communicate with the tax authority with respect to the conclusion of an advanced pricing agreement and provide the tax authority with as much comparable enterprise pricing information as possible to avoid any unnecessary loss due to the anti-tax avoidance investigation triggered by their self-determined tax planning.
 
It is a common for multinational corporations to avoid tax by using different tax burdens for resident enterprises and foreign enterprises in China. However, whether this measure can successfully avoid tax mainly depends on how the concepts of “actual contact” and “actual management body” are defined. The definition of these two concepts is based on such criteria as the ownership, management and control of equity, creditor’s right and property on which the income is generated. Therefore, when multinational enterprises establishing offices in China implement their tax planning, they should particularly pay attention to the equity, creditor’s right and the relevant controlling rights of the offices, and if needed, they should, according to the needs of tax avoidance, establish or reform and re-build the actual contact map in accordance with the law.
 
Finally, tax planning is a painstaking systematic exercise, not simple tax avoidance work. Whether it is successful or not is subject to the impact and restriction of various factors. For successful tax planning, reasonable and legitimate, two factors to consider are: the planning interest and planning cost. Enterprises in need of tax planning should pay attention to the analysis of the explicit cost and implicit cost of their tax planning that have significant impact on the financial interest. They should conduct a thorough cost-benefit analysis and risk analysis to determine whether it is economically feasible and necessary and whether it can increase the comprehensive income of the enterprises. Only when the cost of tax planning is lower than its benefit, can it be a feasible plan. Otherwise they should abandon tax planning. 
 
 

Contact Us
Contact Us
*Name:
*Company Name:
*Province:
*City:
*Phone Number:
*E-mail:
*Summary of the Case:
*Captcha: