Joint Venture Becomes the Main Object of General Anti-Tax Avoidance Investigation

Posted by hwuason2012 on September 27, 2012 under Anti-Avoidance, International tax | Be the First to Comment

Joint Venture Becomes the Main Object of General Anti-Tax Avoidance Investigation

 By Liu TianyongBeijing Hwuason Lawyers

Due to long term loss and scale expanding to the contrary, foreign invested enterprises have become one of SAT’S most important focuses recently. Known from general anti-tax avoidance in 2010, Join Venture has become the investigation core; taking Dalian anti-tax avoidance case, Kangshifu indirectly share transferring case in 2011 for examples.

The general feature of Join Venture is always like that: setting up in China according to PRC’law, part of the investment coming from overseas and certain control power held by foreigninvestors. Its ownership structure is much more complicated than WFOE and China domesticenterprise. And Chinese and foreign parties’ pooling the interests and sharing the risk makeJoin Venture a tool for both parties. Meanwhile, it is also qualified as a Chinese legal person innature, while intimately related with foreign investment, which makes its business modevaried.


Part one: The Reason Why Joint Venture Becoming the Main Investigating Target of General anti-tax avoidance


1. The development of legal system of revenue impacts tax status of Join Venture.

Joint Venture is one of the main forms for foreign investment. Thanks to loose economic policy and investment orientation over the years, foreign owned enterprises enjoy super-national treatment and other preferential policy, and there is not too much limitation concerning legality in business act out of legal sense. In the wake of building up Chinese national strength, market maturity and competitive situation between enterprises, it is necessary to create a more purified marketing environment. Chinese government revised a set of law and regulation, basically unified the parallel system, and adjusted all enterprise in various natures without discrimination. Till now, wholly foreign owned enterprises and Join Ventures have to relocate their marketing roles and restrain themselves with stricter new laws and regulations. In thissituation, if they are not able to adapt to the new business environment, it is possible for them to face tax risks

2. Both strengthening internal cooperation between government departments and developing bilateral anti-tax avoidance assist anti-tax avoidance investigation

Due to Join Venture’s complicated operating structure, outbound affiliated parties and mature trading mode, it is not easy for tax authority which is not experienced in transfer pricing to recognize during anti-tax avoidance period. While recently, a law-based and effective government has been built and the internal cooperation between departments and hierarchy has been strengthened, it is convenient for department to query valid information needed. The operating procedure is more and more transparent, and it is also hard to do some illegal operation. In this event, tax authority reasonably turns its main point to them.

Furthermore, international anti-tax avoidance cooperation is becoming global wide gradually but not regional. As far, China has signed bilateral tax treaty with over 100 countries and districts, which clearly regulated the measures in information exchange and mutual assistance in tax collection. More than that, many countries are using other legal system of revenue and OECD general standards for reference, following the development of international tax, in the purpose of unifying tax laws. In such a background, the scope for transnational enterprises to obtain tax interest grows more and more narrow.

3. It is sensitive for Join Venture to transfer equity

SAT issued GUOSHUIHAN [2009] No. 698, which explicitly put certain limitation on nonresident enterprises direct and indirect equity transferring. Out of operation strategy and other arrangement, in recent years it is more and more frequent for Join Venture to transfer its equity.

At the same time, foreign investment vehicle often choose to be set in low tax rate area or even tax heaven. Through arranging transfer pricing, they hardly pay tax in China. This situation make it fits with general anti-tax avoidance regulated in No.698. And it is comparatively easy to obtain internal information; therefore tax authority puts Join Venture as main objects in anti-tax avoidance recently.

Part two: EnterprisesCoping Mechanism in Current Situation

1. Join Venture should make a clear judgment for current situation, enhance self-checking, and take precautionary step SAT issued a series of normalizative documents of law such as Guoshuihan[2009]No.698, No.601, which cancelled Join Venture’s tax advantages, and focused its tax behavior. At present, enterprises should adjust its behavior on time according to those policies, strive for drawing close to the requirements of those normalizative documents of law and finish internal adjustment before possible investigation risk. Meanwhile, during the period of restructure and operation, enterprises should pay attention to its regulatory compliance, and take care of keeping files, records and accounting vouchers, so as to prepare for document submitting in the future.

2. Enterprise which wishes a long-term development should overweight internal communication and distribute profit reasonable.

Known from general anti-tax avoidance cases, the reason leading to Join Venture’s anti-tax avoidance often lies in their unmerited internal communication coordination. In the profit distribution, apart from certain investment profit both Chinese and foreign parties obtain from yearly profit distribution, Join Venture also takes advantages of related transaction with outbound parent company, such as disclosure fee, raw material purchasing and selling product to get some part of profits. This unequal status between two parties in the profit sharing mechanism leads to contradiction. Stimulating by other factors, it usually becomes the main conflict between the two investing parties. And the outcome of such conflict is to expose Join Venture’s drawback under public sight, and to provide clue and basis for tax authority to intervene.

3. There should be reasonable profit during enterprise management, and also a fair price between related parties’ transaction regardingassets, commodity and stock.

Joint Venture is easy to be doubted that they transfer profit out of China via its relationship. In this consideration, SAT targets those enterprises with long-term loss, meager profit and fluctuating profit but extended their operation range as main investigated object in Special Taxation Adjustment Implementation Regulation(Trial) . At the same time, local taxation authorities gave concrete figures on each industry’s average rate of profit and lowest profit index regarding to industrial characteristics. Enterprise may choose to maintain its profit rate within given amplitude range, so as to reduce doubtable point in tax avoidance and to prevent risk from investigation. Besides, trading behaviors between related party in asset, equity and commodity may refer to customs price, industry index, and marketing value to fix a price, and make it fit to the rules.


All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.


Liu Tianyong


Beijing Hwuason Lawyers – Senior Partner

Mr. Liu Tianyong is one of China’s most prominent tax lawyers, founding the first specialized tax law firm inChina. He is a Senior Partner at Hwuason and regularly advises both international and domestic clients on all aspects of Chinese tax law.

Mr. Liu Tianyong is also regularly interviewed by the media on China taxation and business issues. In the past he has undertaken interviews with organizations such as CCTV, Legal Daily, People’s Daily, China Taxation News, China Business, Economic Daily, Xinhua News Agency, and China Business News.


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