Global Tax 50 2014: Tizhong Liao
Director general of International Taxation, People's Republic of China
Tizhong Liao was also in the Global Tax 50 2013
Tizhong Liao has emerged as the voice and face of Beijing's fight against tax evasion. This is only Liao's second year in his role as deputy general of the International Taxation Department at China's State Administration of Taxation (SAT), and his second appearance in ITR's Global Tax 50. Liao was promoted to his current role as deputy general in 2013, having served in the international tax department since 2006. He has wasted no time in introducing reforms and acting as an international representative in the development of trade treaties and BEPS best practices, travelling around the world to represent China.
In a meeting in Beijing in September, he condemned profit-shifters and highlighted 15 areas of unacceptable tax practices. In an article in the People's Daily newspaper, he said that profit-shifters robbed the Chinese people of money that could be re-apportioned for social spending or investing in ending China's air pollution problem. He re-pledged Beijing's commitment to making the system more sophisticated so that funds from tax collection will be appropriately allocated. In November, Liao finalised negotiations for a double tax treaty with Taiwan.
For Liao, it appears to be only the beginning of a promising career at an exciting time in China's development.
International Tax Review: How has China's SAT changed since you joined in 1996?
Tizhong Liao: There has been a great change and evolution in the past decade. When I joined the State Administration there was no international tax department. At that time it was called the foreign tax affairs department. China had a separate law for foreign direct investment (FDI) into China which was called 'Enterprise Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises'. Before 2008, China had two laws in juxtaposition, one for FDI and the other for domestic investment which actually discriminated against domestic enterprises because they were subject to higher income tax than foreign investment.
In 2008, the two laws were unified as one which we now call 'The Enterprise Income Tax Law of the People's Republic of China'. In that year, throughout China, international tax divisions were established across different provinces. This was a watershed year for China's international taxation – laws for FDI into China and investment outbound were no longer in juxtaposition, because the laws were unified. A fair playing field called for unified, coherent principles and rules for tax administration. For international taxation, we focused on the transactions that go across borders instead of focusing on specific enterprises as we did before 2008.
This year was another milestone year for China's international taxation for two reasons: first, for the first time in Chinese history, the chairman of the country talked about international taxation in the most important political arena, the G20. Secondly, from this year, China will be a net capital-exporting country. Also in this year for the first time, direct investment from China to the US exceeds investment from the US to China. This drives us to reconsider international tax policy so that we can formulate a policy that strikes the balance for both inbound and outbound investment. This puts me in a very challenging situation and in a very important period of time.
My work is not only important for tax matters, but also very important for international economic cooperation. The tax policy formulation by my team has an impact on China's economy and at the same time influences the landscape of international economic cooperation with other countries. I have to work day-and-night to stand up to the challenges and to meet the needs of fast social and economic development.
ITR: How is China's tax policy dealing with the shift in focus from primarily multinationals entering into China to Chinese businesses expanding abroad?
TL: I believe that both domestic enterprises and multinationals doing business in China are aware of the quick development of international tax rules because we do frequent training for them and we also publish what we're doing on our website. We also publish articles in the newspaper so they are aware of the evolution. But I should say, and you can help me convey this message that, whatever happens in these turbulent years, China still wants to maintain a tax-friendly environment for international economic cooperation.
China is still a transitional economy and we definitely don't want to smother economic cooperation with the world just because of tax reasons. We improve our international tax rules to raise certainty. We bring risk down by signing tax treaties with other countries. Minister Wang Juninstructed us to reform and to improve taxpayer services so as to make it easier for international investors to comply. We try to alleviate the pains brought about by international efforts to combat tax avoidance.
ITR: Beijing has made it clear that multinationals will no longer get away with tax evasion – how is the SAT developing its own internal strength to combat tax evasion?
TL: First we are introducing information technology to monitor the profit range development of companies which have cross-border transactions. There is an information system that is being developed that will be deployed probably in the beginning of next year. Of course it will have to go through a period of trial running to be improved. That system, for the first time in history, will serve as a tool to monitor or supervise the development of the profit range of MNCs so they will not shift profit away. The second thing is to deploy more resources to international taxation. Our leaders agreed to hire more employees for international taxation. I don't know how many, but there is hope in having more human resources.
ITR: China's goal is modernisation of the tax system – how will this be accomplished?
TL: There are many jobs to be done. There was a speech delivered by Mr. Wang Jun, Minister of Taxation, at the beginning of this year on the modernisation drive. He mentioned that we need a sophisticated policy system, the tax administration itself should be modern, the information and tech systems supporting this should be modern and sophisticated, the organisational structure needs to be developed, and so on. These have to be achieved.
Also according to our tax reform agenda, we have eight missions to be accomplished: 1) business tax to VAT transformation; 2) environment related taxes; 3) natural resource related taxes; 4) excise tax; 5) property tax; 6) individual income tax; 7) tax incentives streamlining; and 8) redrafting of the law on tax collection and administration.
ITR: China has played a crucial role in representing developing countries on tax reforms in major meetings of the OECD and G20 – why is it important that China speaks up in this regard?
TL: This has to do with the core value of traditional Chinese culture. The Chinese people value fairness. Without fairness any system is not sustainable. We believe that whether it's a developed, developing or even underdeveloped country, opportunities should be equal. Rules should facilitate fairness. The international tax system should support three paradigms: revenue, sovereignty, and fairness. Of course revenue is important, cooperation across states is important. Most importantly, rules should be fair, at least relatively fair.
ITR: Which specific area of international tax legislation is unfair to developing countries?
TL: The current international tax system was established after the First World War in the 1920s. According to the existing rule, if a capital exporting country has business in a host country, the host country cannot tax the business company unless it constitutes a PE in the host country. The source country, while welcoming in capital to boost economic development, doesn't have enough financing abilities for its domestic development, because the international tax system doesn't keep up. This is made worse by globalisation and also digitalisation.
We hope to see that residence and source countries interact in a more balanced manner so each country has its bite of the cake. For the hosting countries, their policies may differ from one country to another. China used to treat its domestic enterprises unfairly to usher in foreign capital, which may be happening nowadays in some jurisdictions. However, if that country wants a more balanced international tax system, it should be able to do so. The world's international tax system should allow some flexibility so that independent jurisdictions have choices to opt for public policy options that facilitate economic development. Of course policy options in one state should hot harm another state.
ITR: The SAT has been more open to both domestic and international media – how does the media help the SAT perform better?
TL: We use the media to inform people and inform the world of our mentality and of our values. We also educate taxpayers so that they can understand the mentality behind the policy, which is good and helping a lot to improve cooperation between taxpayer and tax administration.
We want to convey the correct message to the world that China is still a comparatively tax-friendly country and is a transparent country on tax matters. We think we are doing the correct things for economic development. If the economy in China goes well, it is going to have a positive impact on the world. Policy on international transactions is very sensitive to cross-border deployment of production factors. As an international tax policy formulator I think it's important to be open and inclusive.
ITR: What is the most important initiative on your agenda in 2015?
TL: Of course it's the G20 tax reform. We should still be active in the G20 tax reform. Number two is to apply the seven outcomes of the BEPS action plan, which were translated into Chinese and published on SAT's official website, many of which will be translated into our domestic legislation and regulations. Number three is the auditing of international transactions. Number four is the development of IT systems to support what we're doing. Number five is to set up organisations to discharge the functions of tax administration on outbound investment and offshore income. Through all these efforts, we hope to be in line with what is happening in the world and to establish a system that can stand up to the challenges of the reforming of international tax rules.
The Global Tax 50 2014
Gold tier (ranked in order of influence)
Silver tier (in alphabetic order)
Joaquín Almunia • Apple • Justice Patrick Boyle • CTPA • Joe Hockey • IMF • Arun Jaitley • Marius Kohl • Tizhong Liao • Kosie Louw • Pierre Moscovici • Michael Noonan • Wolfgang Schäuble • Algirdas Šemeta • Robert Stack
Bronze tier (in alphabetic order)
Shinzo Abe • Alberto Arenas • Piet Battiau • Monica Bhatia • Bitcoin • Bono • Warren Buffett • ECJ Translators • Eurodad • Hungarian protestors • Indian Special Investigation Team (SIT) • Chris Jordan • Armando Lara Yaffar • McKesson • Patrick Odier • OECD printing facilities • Pier Carlo Padoan • Mariano Rajoy • Najib Razak • Alex Salmond • Skandia • Tax Justice Network • Edward Troup • Margrethe Vestager • Heinz Zourek