TEI comments on administrative measures on the general anti-avoidance rule (trial) discussion draft.

• Position: Tax Executives Institute

On August 1, 2014, TEI completed its first project of direct tax advocacy with China's State Administration of Taxation (SAT), when it filed comments regarding draft administrative measures on the Chinese domestic law General Anti-Avoidance Rule (GAAR). The comments focused on how the draft measures inappropriately expand the scope of the GAAR, unfairly subject taxpayers to two independent substance-based inquiries when special tax adjustment rules also apply, and contain overly expansive document production reguirements. The comments were prepared by TEI-Asia Chapter board members and the TEI Asia Tax Committee, whose Chair is Lisa Zheng, Patrick Evans, TEI Chief Tax Counsel, coordinated the preparation of the comments.

On 3 July 2014, the State Administration of Taxation (SAT) released for public comment draft administrative measures on the General Anti-Avoidance Rule (GAAR) set out in Article 47 of the Corporate Income Tax Law of the Peoples Republic of China and its Detailed Implementation Regulations (DIR). The draft measures provide guidance on, among other things, when a tax avoidance case is present, policies and procedures on selection of GAAR cases by in-charge authorities, documents that may be requested from the taxpayer in connection with a GAAR examination, and the types of tax adjustments that may be made to deny tax benefits for transactions without reasonable business purpose. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the SAT's request for comments.

The draft measures are a welcome addition to the Chinese domestic law GAAR as they provide guidance to in-charge authorities that is absent in the existing law. We are concerned, however, that the draft measures expand the GAAR to reach transactions outside the scope established in the DIR, unfairly subject taxpayers to two independent substance-based inquiries when special tax adjustment rules also apply to a transaction, and contain overly expansive document production requirements. Our comments focus on these and other aspects of the draft administrative measures that are important to our membership.

TEI Background

Tax Executives Institute was founded in 1944 by a group of fifteen corporate tax executives intent on creating an organization to exclusively serve the networking, educational and advocacy needs of in-house tax professionals, i.e., professionals who perform the tax work for their business employers. A non-profit organization, which has tax-exempt status under the United States Internal Revenue Code, TEI has grown from its founding to become the preeminent organization of in-house professionals worldwide, comprising 55 chapters and over 7,000 members who work for over 3,000 of the largest corporations in Asia, Europe and North America. TEI is dedicated to promoting sound tax policy, as well as the fair and efficient administration of tax laws, at all levels of government around the world. In 2005, TEI established a chapter in Asia, which currently has over 120 members employed by 51 different companies with significant operations in China and throughout Asia.

TEI Comments

Article 4

Article 4 of the draft measures provides that the main characteristics of a "tax avoidance scheme" are:

1) the sole or main purpose, or one of the main purposes is to obtain a tax benefit;

2) the form of scheme is permitted in accordance with the tax rules, but the form is not consistent with its commercial substance.

By describing a tax avoidance scheme as an arrangement where "one of the main purposes" is to obtain a tax benefit, the draft measures materially widen the reach of the GAAR from the scope set out in Article 120 of the DIR and, in doing so, create an added layer of uncertainty and cost for taxpayers and the SAT. Article 120 of the DIR extends the GAAR to arrangements in which the "main purpose is reduction, exemption or deferral of tax payments [emphasis added]." The "one of the main purposes" standard introduced in the draft measures is not defined, but...