Recently, the State Administration of Taxation (SAT) issued the Administrative Measures on the General Anti-Avoidance Rule (GAAR) to further regulate and clarify various matters, such as applicable scope, judging criteria, adjustment methods, working procedures, dispute resolutions related to the implementation of GAAR by the Chinese tax authorities.
With the step-up of economic globalization, an increasing number of multinational companies are avoiding their tax liabilities via the globally integrated operation model and sophisticated tax planning schemes. This has eroded the tax base of many countries and received high attention from the international community. Against such a backdrop, the Group of Twenty (G20) entrusted the Organization for Economic Co-operation and Development (OECD) to execute action plans to counteract Base Erosion and Profit Shifting (BEPS), which has brought together a global effort to tackle base erosion and profit shifting issues.
On 16 November 2014, Chinese President Xi Jinping, speaking at the second phase of the Ninth G20 Leaders’ Summit in Brisbane, Australia, pointed out that “efforts should be made to reinforce the international collaboration on tax matters, to crack down on cross-border tax avoidance and evasion, and to help the developing countries and low-income countries improve their capabilities of tax collection and administration.” It is the first time that tax matters were noted in the statement by China’s paramount leader in such a high-profile international political context. The release of the Measures represents a forceful action echoing President Xi’s instructions to “crack down on cross-border tax evasion and avoidance”.
After proactively drawing upon experience and practices of other countries, China’s enforcement practices, and extensive comments collected from different aspects of the country, the International Taxation Department has finalized the Measures after rounds of revisions. Based on the existing laws and regulations, the Measures further clarify the major features of a tax avoidance scheme and the adjustment methods upon invoking GAAR. In the meantime, it is repeatedly reemphasized that GAAR should not be invoked until all other regular administration and anti-avoidance measures are exhausted.
“The Measures provide a set of sound procedures, covering all phases of GAAR implementation, from case selection, examination, to conclusion”, said the in-charge official. It also sets up detailed and operational procedural rules for the roles and responsibilities of tax authorities at different levels in each phase, aiming to ensure transparent and fair implementation of GAAR. In view of the complexity of GAAR examination and adjustment, the final assessment sits with the SAT.
