The Chinese government has finalized administrative measures implementing its general antiabuse rule (GAAR), the State Administration of Taxation (SAT) announced December 12.
The guidance implements GAAR rules introduced in 2008, addressing the law’s scope, judging criteria, adjustment methods, working procedures, and dispute resolutions, the SAT said in English-language press releases.
The new regulations clarify that an arrangement is a “tax avoidance arrangement” subject to GAAR if obtaining a tax benefit is its “the sole purpose or the main purpose” and if the tax benefit is obtained “by using a scheme which is not consistent with its economic substance even though its form may be permissible in accordance with the tax laws,” the SAT said.
The SAT noted that if an indirect offshore equity transfer involves tax avoidance arrangements it could be subject to GAAR.
Domestic transactions are excluded from the scope of the rules, as are illegal activities, such as tax fraud, though.
“Once GAAR is invoked, tax authorities are empowered to make special tax adjustments in accordance with the principle of ‘substance over form’ by referring to similar arrangements with a reasonable commercial purpose and economic substance as the benchmark,” the SAT said.
The adjustment methods include re-characterizing the arrangement; disregarding the existence of a party to the transaction for tax purposes, or deeming two parties to a transaction as one entity; or any other reasonable method.
Companies have administrative and judicial rights to appeal, as set out in the guidance.
According to the SAT, guidance was needed to create a more transparent, consistent, and fair application of the GAAR rules.
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