“The increasing of taxation revenue is surpassing GDP in the recent years. In general, administrative litigations on taxation are less than 1% of the administrative cases nationwide. China’s taxation is in front of overwhelming reforming pressure”, Liu Tianyong (JSD), founding and managing partner of Hwuason Law Firm was interviewed by the CEN reporter on Feb 24th.
Almost fifteen-year’s taxation experience, Mr. Liu posed a concluding remark that “though the taxation rate is decreasing all the time, our national taxation revenue is actually increasing.”
Controversy 1: Reasonable Tax Avoidance: Right or Wrong
According to the statistics released by Ministry of Finance on Feb 14th, the total national taxation revenue in 2011 is almost 9 thousand billion Yuan, with an increase of 1.7 thousand billion to 2012. Compared with the 9.2% GDP rate, the taxation increasing rate is 22.6%.
“Regardless of the inflation and administrative control, high nominal taxation rate is the fundamental cause of this.”Liu said.
In general, taxation amount is 20% of total GDP in developed countries, while in China it’s 30% or more.
In Liu’s opinion, taxation rate is more than a mere number. It is a symbol of our taxation system. It is also the indirect incentive for enterprises to reasonably avoid tax.
“The basic principles of tax reform are simplifying the taxation procedure, expanding tax base, lowering taxation rate, and restricting administration. Reasonably avoid taxation is ungrounded by law and contrary to reform. The right thing to do is legitimately paying the tax and enjoying specialized tax benefits.” Liu said in the interview.
Take Business Tax for instance, you have to pay the tax when you loss, if there is any cash flow in your account. This 3% to 5% BT rate is not deductable.
“This may limit the enterprise’s daily operation.” Liu remarked.
However, it is good to see a BT/VAT reform is piloted in Shanghai and nationwide. Beijing will soon be included in the league after a city-wide taxpayer surveying. This pilot reform may presumably lessen 47 to 70 billion Yuan.
Controversy 2 Enterprise sue the big bro: bliss or curse
“Commoners do not fight with governors” is a common sense in China. It is also a creed for doing business in China.
Things are different elsewhere: in China Taiwan, there are almost 5000 taxation litigation cases every year, taking more than 50% share of the administrative litigations. In mainland China, there are only 2000 more or less. In the United States, there are usually 200 thousand similar cases in a year.
“Administrative litigation and review is an appropriate and important outlet for law and economics relief in a major economy,” Liu said, “however, such cases are not always the priorities for enterprises on their taxation issues. Some of my clients will ask why should I take the pain to sure the government after I pay the bill?” Other than paying the evaded tax, enterprises are also restricted to tax penalty on tax evasion. “For enterprise, paying the bill is a sign of good attitude to the compromising authority,” Liu added, “litigation should be the routine gateway for solving such matters. Case law and tax reform are both important in professionalized legal field such as taxation. ”
Controversy 3 Administrate Discretion: Yes or No
In China, nominal taxation rate has way up higher than the realistic taxation rate. It is the major cause of local discretion.
Liu told the CEN reporter, “In order to introduce investment, local governments are eager to exchange tax credits with enterprise resources. Some Fund and Trust companies are advocating and lobbying in these places to dip a share. ”
“It’ll be bliss, if nothing wrong happens,” Liu commented, “the government will strike a backfire on tax avoidance once the enterprise goes down.”
In the case of Hongyuan Tech Company in Jiangxi, the enterprise was charged with tax evasion in a government conference briefing. Hongyuan Tech filed an administrative litigation compliant in order to achieve a settlement with Nanchang government. The intermediate people’s court of Nanchang did not register the case in the reason that the conference briefing on the settlement of LCOS program of Hongyuan Tech is not a specific administrative action but a procedural action.
The superficial massage is the lost of accountability of local government and the magnification of discretion among the local tax authority. In a word, we need a comprehensive tax legislation to imply future tax reform.
For now, China does not have a specific legal system for taxation. The Law of Tax Collection has substituted a basic law of taxation. At the same time, many regulatory provisions and policies are posted every now and then, which has entitled a great potential of discretion in taxation practice.
“Reform in taxation law and policy is highly demanded for further economic and social development in China.” Liu concluded.