Transfer Pricing Insider
Volume: 3 Number: 2
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CHINA FOCUSES ON TAX AVOIDANCE: TREATY ABUSE FOUND BASED ON NO "LEGITIMATE" BUSINESS PURPOSE
Source: PATRICE MARCEAU AND DANIEL CHAN (DLA PIPER, CHINA)
If one had to define in one word (or two!) the main trend in PRC tax in the last few months, "anti-avoidance" would be it. In recent months, we have seen in succession: two local tax bureau decisions attacking the integrity of treaty-based holding structures; the long-awaited circular from the State Administration for Taxation (SAT) on special adjustments, including transfer pricing; and a notice from the SAT addressing specifically anti-avoidance with respect to the payment of dividends to a tax treaty jurisdiction entity.
The trend is definite and shows that the PRC is fast catching up on tax avoidance, learning to use every tool in the box to counter what it perceives to be abusive tax planning.
The Two Local Tax Bureau Cases
The first case was issued on November 27, 2008. It involves the Chongqing tax bureau and the sale to a PRC purchaser of a sole purpose Singapore holding company of a PRC entity. When the PRC purchaser sought the required authorizations to transfer the purchase price abroad to the foreign seller, the tax authorities reviewed the matter and concluded that the Singapore entity should be disregarded because it lacked economic substance. On that basis, they treated the gain on the disposition of the Singapore entity as a gain on the disposition of the PRC entity itself and imposed withholding tax on the outbound purchase price. As justification to disregard the Singapore entity, the authorities noted specifically (i) its minimal capital and (ii) the lack of business activities other than holding the interest in the PRC entity.
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