China signals action against cross-border tax avoidance
The new administrative guidance was released last month. It describes how the tax authorities will apply the 'special tax adjustment' powers available to them under the country’s general anti-avoidance rule, set out in Article 120 of the Corporate Income Tax Regulations.
Tax planning arrangements will be deemed to amount to tax avoidance if their sole or main purpose is to 'obtain tax benefits', and if they comply with tax law only in form and not in economic substance. Such arrangements will be subject to adjustment by the tax authorities under the general anti-avoidance rule, according to tax accountants Ernst & Young.
The 'special adjustment' to a transaction will be calculated by comparing it with similar arrangements that contain reasonable commercial purposes and economic substance. The adjustment can be done: by re-characterising the nature of the transactions; by re-casting the nature of items of income, deductions, beneficial tax treatments or reallocating them between the parties to the transaction; or by disregarding a counterparty to a transaction for tax purposes; or treating parties to the transaction as a single entity; or by 'any other reasonable methods'.
The new guidance covers only legal cross-border transactions and payments, and is not concerned with tax evasion or fraud.
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