Academic journal article Asia Pacific Law Review

Tax Administration in China: Is It Rule without Law?

Academic journal article Asia Pacific Law Review

Tax Administration in China: Is It Rule without Law?

Article excerpt

I.Introduction

In recent years, particularly after 2010, Chinese tax authorities' campaigns against tax avoidance have been successful and fruitful, especially in the cracking-down on manipulation of transfer pricing and other avoidance arrangements.1 In 2015, anti-avoidance investigations contributed tax revenue of Chinese Yuan (CNY) 58 billion.2 Compared with just CNY 0.46 billion collected from anti-avoidance actions in 2005, the progress made within the ten years is remarkable.3 The improved capability of Chinese tax authorities in dealing with avoidance cases is one of the main reasons for this impressive achievement. This also reflects the efforts made by the State Administration of Taxation (SAT) in promoting nationwide personnel training of international tax specialists.4

The achievement of Chinese tax authorities is only one side of the story. On the other hand, the significant tax shortfall revealed in anti-avoidance actions indicates disagreement on the tax affairs between tax authorities and taxpayers. However, compared to widespread reports of tax authorities' successful crackdown on avoidance cases, there is little news of dissatisfied taxpayers challenging tax authorities' decisions in courts, or news of disputes relating to other taxes. Although China is not a common law state, cases have been heard in relation to various areas (e.g. civil, criminal and administrative litigation) and against various government agencies, while representative cases are playing an increasingly important role.5 Tax-related litigation seems to be an exception, however, which prompts the author to investigate the underlying reasons for this.

Useful exploration has been done to explain the low tax litigation rate, but was mainly based on the perception of the lack of the rule of law in China.6 By looking at Chinese tax administration of large enterprises, this article comes to the rather different conclusion that the low incidence of tax disputes and litigation isa result of the adoption of preventive tax policies: the combination of rewards and punishment measures with respectful treatment of taxpayers. This approach of tax administration also reflects the progress made in China in pursuit of the target of 'governing the country in accordance with law' (i.e. the rule by law). To explain why people pay taxes, Feld and Frey put forward the notion that there is a psychological tax contract based on mutual trust and respect between taxpayers and tax authorities.7 They suggest an appropriate mixture of respectful treatment of taxpayers, rewards and punishment measures can provide optimal balance to improve tax compliance and reduce the cost of tax collection.8 In a conventional command and control approach to regulation, the extent of tax office enforcement is negatively correlated with taxpayers' compliance.9 Besides the traditional belief in adopting deterrent policies to punish and reduce tax evasion, improving taxpayers' voluntary commitment to paying tax, i.e. tax morale,10 is an important target pursued by tax administration reforms in various countries.11 This is consistent with Feld and Frey's theory of the psychological tax contract and advocacy of a comprehensive approach to taxpayers, namely the preventive tax policies examined in this article.

In the United States (US), preventive tax policies were advocated as early as the 1940s. An important part of these proposals is to promote administrative resolution of tax cases and reduce tax disputes and litigation, and measures based on these proposals have been gradually absorbed into the US tax system.12 This article adopts a broad definition of preventive tax policies, incorporating Feld and Frey's concept of a psychological tax contract between taxpayers and tax authorities into the analysis of China's preventive tax policies for large enterprises. In this article, preventive tax policies and tax administration indicate two aspects: (1) within the interaction between tax authorities and taxpayers, a combination of incentive and punitive tax policies and measures is made available to taxpayers, alongside respectful treatment of taxpayers; and (2) among government departments and agencies, new legal measures and constraints are gradually adopted to improve legitimacy and procedural fairness of tax administration. …

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