Case Analysis on the non-discrimination article in tax treaty Li Bin

Case Analysis on the non-discrimination article in tax treaty Li Bin 

My presentation is about a case. 

Case fact 

The main case fact is as follow. A Italy parent company wholly owned a subsidiarycompany, and the subsidiary hold 33% share of a Chinese company. And the parent company merged the subsidiary, and eventually the ownership of the Chinese companychanged, so the Chinese tax authority informed the parent company that it was liabletopay income tax in China, since the transaction was characterized as an indirect transfer base on a specific rule for non-resident enterprises. The Italy parent company raised3arguments to the court, one of the arguments focused on the discrimination argument against non-Chinese nationals. The courts including the appeal court uphold thetaxauthority. 

China-Italy Tax Treaty at that time stipulated that “nationals of a contracting state shall not be subjected in the other contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connectedrequirements to which nationals of that other state in the same circumstances are or maybe subjected.This non-discrimination provision on the basis of nationality is identical totheprovisions of article 24(1) of the OECD Model Convention (1977). 

The court ruled that there was no discrimination against the parent company, “although some special rules are applicable to the administration and collectionof Chinese enterprise income tax from non-Chinese tax resident enterprises, these ruleswere enacted for the purpose of reflecting the special features of these non-Chinesetaxresident enterprises. These rules cannot be taken as evidence of discrimination against parent company. This is also a common practice throughout the world nowadays.” Comments on the Court’s reasoning 

Some scholars argued that it was an offshore transaction which is different fromChinese domestic share transfers, so it would have been infeasible to conduct acomparability test for this transaction. Also the applicable rule to the parent company on

this issue was a special rule, which was applicable only to non-residents transferringshares in Chinese companies. 

The scholars also believed that the court missed that whether denying the exemptiontreatment is discrimination, they thought that except the general rules, the non-resident are subject to stricter criteria for reorganization tax exemption. So that is discriminationintheir view. 

My personal view 

The discrimination for treaty purpose only refer to direct discrimination, it is muchnarrower than the scope of discrimination in EU law. In this case the alleged discriminationwas based on nationality. According to Prof. Zhu in law school of XMU, in the samecircumstance in non-discrimination article means that keep all the other conditionsunchanged and only the nationality changes. So image two scenario, the first scenario, aItaly company changes its nationality and it then the company would become a Chineseresident, which make it incomparable here because the resident of the test companychanges. The other scenario, a resident company of China (maybe because the companyhas its effective management place in China) incorporates in Italy and have, sothenationality of the company is Italy, in this scenario will the company be more burdensomecompare to a company incorporate in China? No, so it is not discrimination.