CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
The tax regime covers digital products through exist - ing tax categories such as value-added tax (“VAT”), CIT and IIT, and implements differentiated tax incen - tive policies. 5. Anti-Avoidance and Anti-Evasion Measures 5.1 Definition and Identification of Tax Fraud, Evasion, Tax Avoidance and Abusive Schemes The Chinese legal framework distinguishes tax fraud, tax evasion and tax avoidance from one another by designating each with different legal consequences. The cross-border manifestations of such conduct pre - sent unique challenges for tax administration. Tax Fraud China defines tax fraud as the act of taxpayers obtain - ing tax refunds from the state through false declara - tions or other deceptive means. Core elements include fabricating facts and fraudulently obtaining tax refund eligibility. Examples of tax evasion such as taxpayers who make false declarations by forging accounting books and vouchers, signing fake contracts to con - ceal income, falsely reporting expenses, and fraudu - lently obtaining tax benefits, constitute “deception or concealment” under criminal law. Cross-border identification • Fabricated export refunds: Overstating export prices, falsely declaring goods to qualify for higher refund rates, or using untaxed goods to claim refunds. • Circular trading schemes: Repeatedly exporting and importing the same goods (often repackaged or misclassified) to fraudulently generate export tax refunds and exploit import duty exemptions. • Fraudulent use of invoices: Utilising false or illegally obtained VAT special invoices to substantiate fraudulent export refund claims, often in conjunc - tion with other schemes. Tax Evasion This refers to the act of evading tax payments by means of deception and concealment such as mak - ing false declarations or failing to declare taxes. Char -
acteristics such as subjective intent and illegality are utilised to gauge the severity and scope of the crime. Cross-border identification • Use of offshore structures: Establishing entities (eg, companies, trusts) in secret jurisdictions to conceal income, assets or ownership. • Document fraud: Creating or altering financial documents, contracts or invoices to misrepresent the nature or terms of cross-border transactions. • Abuse of legal processes: Misusing bankruptcy, liquidation or corporate dissolution procedures to evade tax liabilities and frustrate enforcement actions. Tax Avoidance This refers to taxpayer(s) seeking to reduce, exempt, or postpone the payment of taxes by establishing shell companies or making other legal arrangements that have no real business purpose. Cross-border identification • Avoiding the definition of a PE: Because ancil - lary or preparatory business activities are not considered PEs, the OECD Model Tax Guidelines unknowingly leave a lacuna in the law that digital companies can utilise to avoid taxes. Furthermore, the OECD Model Tax Guidelines require a PE to possess three characteristics: physical location, relatively long duration, and substantial economic activity. However, in the digital era, companies can operate without a physical location. • TP of intangible assets: Digital enterprises, due to the very nature of their work, rely heavily on their intangible assets, which are characterised by their high liquidity. For example, companies can register their core intellectual property (“IP”) in jurisdictions that impose lower taxes, without having to move research and development personnel or physical equipment there. • Thin capitalisation: Dividend expenses generated from equity financing are not deductible before tax, while interest expenses from debt financing are tax-deductible. Therefore, companies often increase the debt ratio between subsidiaries and the parent company to inflate interest expenses. • Use of tax havens: Typical tax havens worldwide include the Cayman Islands, Bermuda, etc. Some
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