The People’s Republic of China

Abstract

Because the role of Chinese courts is limited, in general, to procedural matters, it is the tax administration that determines whether a transaction involves tax avoidance. This organ of the government places special emphasis on international tax avoidance arrangements. In particular, it has been concerned about the inappropriate use by multinational enterprises of double taxation treaties with third parties offering low tax rates on Chinese source income. This practice provided the impetus for enactment of a GAAR as part of reform of the Corporate Income Tax Law, effective in 2008. The GAAR provides authority to investigate certain anti-avoidance activities and authorizes the tax administration to employ a substance over form approach by reference to five factors. These factors permit the tax administration to consider the form and substance of an arrangement, timing, reference to steps taken to put the arrangement into place, financial effects, and tax consequences. If tax avoidance is uncovered, the tax administration is given authority to re-characterize the transaction according to economic reality. The adoption of a GAAR has had considerable impact on the activities of multinationals that may use conduit Chinese companies for investment only if there is economic substance to the arrangement.