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China: Guidance on Chinese general anti-avoidance rule published for comment

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Khoonming Ho


Lewis Lu

On July 3 2014 the Chinese State Administration of Taxation (SAT) released draft GAAR administrative measures for public comment. The draft GAAR administrative measures provide guidance on when a tax avoidance scheme is in point, on the internal tax authority protocols for selection of GAAR cases, on the documentation which may be demanded from taxpayers, and on the manner in which tax adjustments for unwarranted tax benefits can be made. The existing Chinese domestic GAAR principle is set out in the Corporate Income Tax Law and its Detailed Implmentation Rules (DIR). Further guidance is provided in Guo Shui Fa [2009] No2 (Circular 2), which directs the local tax authorties to evaluate potential tax avoidance arrangements with reference to the substance over form principle, while having regard to specific, enumerated aspects of the arrangement. However, Circular 2 does not explain the nature of the documentation required from taxpayers, or the manner in which a GAAR tax adjustment is to be conducted, nor does it explain which third parties may be pursued for further information. Existing guidance also leaves unclear the precise manner in which tax-avoidance arrangements are to be identified. The draft GAAR administrative measures provide for greater detail in this regard.

The draft GAAR administrative measures explain that the main features of a tax-avoidance arrangement are (i) that the sole or main purpose, or one of its main purposes, is to obtain tax benefits, and (ii) that the legal form of the arrangement is in compliance with the tax law and regulations, but not in conformity with economic substance. This reiterates the 'purpose' focus of the GAAR test set out in the DIR and the need to consider the form and substance of the arrangement in making the evaluation, as noted in Circular 2.

Rules on order of precedence are set out such that the application of domestic special tax avoidance rules (SAARs) comes before the GAAR, and the use of treaty SAARs comes before domestic anti-avoidance provisions. Under these rules, transfer pricing, cost-sharing arrangement, controlled foreign company and thin capitalisation provisions are to be applied in preference to the GAAR, and beneficial ownership and limitation on benefits (LOB) rules in treaties are to be applied before domestic anti-avoidance rules.

The draft GAAR administrative measures provide detailed documentation requirements for taxpayers. It is also explicitly stated that documentation may be demanded by the tax authorities from the taxpayer's tax advisers. It is provided that, beyond the 60 day limit for supplying documents set out in Circular 2, an extension of 30 days may be available in special circumstances.

The draft GAAR administrative measures shoud provide a greater degree of transparency for the procedures by which GAAR cases are administered. Where made final, the draft measures would apply to all arrangements concluded and executed after January 1 2008, except where GAAR disputes have already been settled before the measures taking effect. Notably, the measures do not apply to solely domestic transactions with no cross-border element, and are also not to apply to Circular 698 offshore indirect transfer cases, for which separate guidance is to be issued.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082
Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

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