The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2. The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules. The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:
Observations of “clarifications” to the law:
- Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
- Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
- It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
- There is not a GAAR review committee.
- Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
- Documentation may also be requested directly from the tax advisors to the taxpayer.
- GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.
This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques. There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation. Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.
It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer. This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.
GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.