Academic journal article Asia Pacific Law Review

What Is the 'Law' in Chinese Tax Administration?

Academic journal article Asia Pacific Law Review

What Is the 'Law' in Chinese Tax Administration?

Article excerpt

I. Introduction

Paradoxically, the discourse in China about the rule of law in taxation is going through both a primitive and a dynamic phase. The discourse is primitive in obvious ways. The meaning and scope of 'law' are not yet clear, and there is wide divergence between what the written rules say about this matter and actual practices. Many taxpayers and tax professionals do not distinguish between official prescriptions that have the force of law and those that do not, and they harbour a high tolerance for inconsistencies among informal rules which have a purported legal effect. Litigation against tax agencies is still relatively rare. On the other hand, within just the last few years, the rule of law in tax administration has also witnessed significant progress. The SAT has made surprising advances making procedural improvements in rulemaking, audit procedures, administrative appeals and other areas, heeding the State Council's directives on 'administration in accordance with the rule of law'.1 Prominent public criticisms of the lack of rule of law in taxation are heard with greater frequency. Finally, China's attempt to curb real or alleged international tax avoidance is rapidly drawing international attention and fuelling rule of law concerns.

This article aims to lay a foundation for analyses of the rule of law in Chinese taxation, by tackling the question, what is 'law' in China's tax system? The answer given may be summarised as follows. The Law on Legislation2 (LL) sets out a system of legal norms that only recognises State Council regulations and ministerial regulations as having the force of law, insofar as documents issued by central executive branch entities are concerned.3 The judiciary has explicitly endorsed this view. However, this view has been largely divorced from actual practice, and in the realm of tax administration, only a miniscule portion of the MOF and SAT 's tax rulemaking has taken forms that would be recognised as law by the LL. The remaining and vast majority of MOF and SAT rules have, until recently, been barely distinguishable from government internal documents. Even where tax authorities attempt to impose self-constraints on agency rulemaking, they adopt a much more expansive view of the scope of the law than do the LL and courts. There are thus at least three sharply diverging positions about what constitutes the law in tax administration:

1. the position of the LL and the judiciary;

2. the approach of the MOF/SAT in practice and acquiesced to by many tax professionals; and

3. the SAT 's 'reformist' view newly announced in 2010.

This divergence is partly hidden by the paucity of civil tax litigation, which also means that there has been little external constraint on tax rulemaking, despite the tax authorities' theoretical vulnerability in terms of the legal effectiveness of their pronouncements.

Part II of this article describes the system of legal norms laid out in the LL and related regulations, as well as the judicial understanding of that system for purposes of formal adjudication. Part III shows how the view of the scope of law described in Part II has had little bearing on rulemaking in Chinese taxation, and how tax administration has operated, in an important sense, almost entirely outside the scope of law. Part IV summarises the SAT 's own view of the scope of tax law as expressed in a very recent regulation governing rulemaking procedures by tax agencies. This view differs significantly from that of the LL, but is nonetheless a principled view, and represents an important shiftin tax administration. The conclusion analyses possible directions for future development.

II. The System of Formal Legal Rules

A. The law on legislation and related regulations

The LL is a foundational statute in the Chinese legal framework,4 and is important both for its explicit provisions and as a reference point for the executive and judicial branches' understanding of the law. …

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