A Brief Introduction to the Chinese GAAR Regime /Li, Xiaoyi

A Brief Introduction to the Chinese GAAR Regime

GAAR is an important measure to protect countries from tax abuses.

China’s GAAR regimes were mainly constituted by several provisions in income tax law, tax collective and management law and the regulations on the implementation of related tax laws. There is no separate tax law for anti-avoidance, however, STA Order 32 (the Order) was promulgated to introduce detailed GAAR provisions.

Unlike the EU ATAD, Chinese GAAR is designed for enterprise only and cannot be extended to individuals. There was no similar provision or legal liability in Chinese tax law regimes until the 2018 revision of the Chinese Individual Income Tax Law (IITL). Albeit the GAAR provision for individuals is murkily inexplicit, no document is promulgated for further clarification.

STA Order 32 was constituted by 6 chapters. Art. 1 to 6, Chapter 1 is the general rule of GAAR regulation. Art. 7 to 9,Chapter 2 demonstrates the reporting procedure of a case in scope. Art. 10 to 15, chapter 3 provides requirements for tax investigation. Art. 16 to 18, chapter 4 depicts the procedure ofinvestigation outcome confirmation.

Art. 19 to 21 is chapter 5, all about dispute resolution.

Chapter 1 defines key elements and primary rules.

Chinese GAAR applies to abusive arrangements without reasonable business aim. These arrangements are artificially designed while obtaining tax benefits is one of the main purposes. They usually lack legal substance even though theirform may adhere to tax regulations.

The Order defines tax benefits as reducing, exempting, or deferring tax payments. Pure domestic arrangements are out of the scope of the Order, so as severe illegal actions that may lead to fraud or crimes. GAAR, as an intense measure, should be applied after the application of SAARs and tax treaty adjustments. Once the assessment outcome is confirmed, the competent tax authority may recharacterize arrangements, deny transactions, and reallocate tax liabilities.

Tax officers are required to report level by level. Casesmust be reviewed by the provincial tax bureau and permitted by the STA when tax officers raise, close, and amend a new case.

Taxpayers can raise a defense for their arrangement within 60 days of receiving the investigation notice by submitting a full set of documents and proofs, otherwise, the tax authority can perform a tax assessment. Taxpayers can apply for an additional 30 days by submitting a documental request to the tax authority. During the investigation, the tax authority can require further information from related parties or individuals. An EOIR may be invoked for external information.

Tax authorities should complete and close the case within 9 months. The tax authority in charge will send out a documental notice of special tax adjustments once the case concludes.

If the tax adjustment is unacceptable to taxpayers, they can refer to law relief: administrative review or court suit. If double taxation was caused by the GAAR adjustment, STA will eliminate domestic double taxation, or raise a MAP.