On 3 July 2014, the State Administration of Taxation (SAT) published its discussion draft of Administrative Measures on the General Anti-Avoidance Rules (GAAR) for public comment. The brief comment period closed on 1 August 2014.
Generally speaking, anti-avoidance is still a new trend in China. The GAAR have only been in place under the Enterprise Income Tax Law since 2008. And the GAAR have yet to be fully implemented in the existing tax law framework. A few special anti-avoidance rules have been issued, such as Guoshuihan [2009] No. 698, but not enough detailed principles and procedures exist to help guide the tax authorities in implementing the GAAR.
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The SAT intends to fill this void with the draft measures. The draft measures aim to standardise the implementation and application of the GAAR to tax avoidance schemes. The authors believe the SAT has taken an important first step with the draft measures toward more consistent and centralised enforcement in GAAR cases.
To enhance consistency, the draft measures set comprehensive procedural guidelines for: (i) opening GAAR investigations; (ii) conducting investigations; (iii) closing GAAR investigations; and (iv) resolving disputes. To centralise anti-avoidance power under the SAT, the draft measures require investigators to seek approval from the provincial tax authority before opening an investigation or issuing a decision in the investigation.
The provincial tax authority must in turn report to, and receive approval from, the SAT. While the provisions to enhance consistency and centralisation have been welcomed, the draft measures also contain provisions that have sparked controversy and have been met with criticism.
The draft measures require an enterprise under investigation to hand over documents to the tax authorities upon request to prove the enterprise’s arrangement is not a tax avoidance scheme. The documents that must be handed over include communications between the enterprise and its tax advisers.
This requirement deviates significantly from international practice and threatens attorney-client privilege and confidentiality.
Also, the draft measures would widen the reach of the GAAR. The Implementing Regulations of the Enterprise Income Tax Law define a tax avoidance scheme that lacks a reasonable commercial purpose as an arrangement where the main purpose is to avoid, reduce or deter tax payments.
Article 4(1) of the draft measures broadens the definition by changing “the main purpose” to “one of the main purposes”.
If the SAT keeps the definition in the draft measures, it would immediately make it more difficult for taxpayers to argue that an indirect transfer has a reasonable commercial purpose.
Overall, the draft measures provide more consistent and centralised procedural rules for GAAR investigations, which will help to protect taxpayers’ interests. However, if the controversial components of the draft measures are not properly addressed, it may give the tax authorities too much power during the enforcement process, and therefore may create more uncertainties for taxpayers.
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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com
