Taxation in the People's Republic of China

By Jinyan Li | Go to book overview

In China, however, the concept of tax planning does not exist in the sense that Western lawyers understand it: that is, to involve the arrangement of one's business to minimize or avoid a tax liability. There seems to exist a presumption in Chinese legal thinking that whatever is not permitted by law is prohibited. Any tax planning practices could amount to tax fraud, which is normally referred as tao shui lou shui. Tax planning for foreign businesses to take advantages offered by the Chinese tax laws, such as tax holidays and reductions granted in the special areas, is blessed by the tax authorities, but creative tax planning could be deemed tax evasion or fraud. For instance, Zhubao Consolidated Electronic Apparatus Factory was fined 1.5 million yuan for violating customs laws. 36 This case involved a consignment of video recorders that were imported from Hong Kong. The taxpayer and the exporter agreed that the video recorders would be broken down into parts and shipped separately through various ports and companies in order to avoid customs duty and import tax. The second consignment of parts was discovered by the Guangdong Customs, which confiscated the goods and imposed a fine of 1.5 million yuan. Although there was no suggestion of smuggling, the customs authorities argued that the regulation provides that where the value of electronic parts such as video recorder components is 60 percent or more of the value of complete sets of parts, or kits, such parts are taxable as complete units. The customs considered that, although the imports were legal in separate batches, they were illegal when viewed together. The appeal by the taxpayer to the local court was rejected.

Owing to the fact that Chinese tax laws are broadly worded and flexibly implemented, and the lack of experience in tax administration and adjudication, tax policy plays an important part in the interpretation of the laws. Public policy seems to dictate that citizens and enterprises owe an honorable duty to the state to pay taxes, and any attempt to reduce tax liability is presumed to be illegal. This presumption is reinforced by the traditional egalitarian ideology among the people that nobody should be any better off than others. It is not uncommon for a state- owned or collective enterprise to negotiate with local tax authorities to obtain the tax advantage that could be achieved in the West through tax planning. For private enterprises, similar bargains are either less successful or less available, which could be one of the reasons why they have been targeted as the most serious tax evaders.


NOTES
1.
For a more detailed account of taxation during the imperial period, see D. C. Twitchett , and J. K. Fairbank, The Cambridge History of China ( Cambridge, England: Cambridge University Press); S. K. Chen, The System of Taxation in China in the Tsing Dynasty, 1644- 1911 ( New York: AMS Press, 1970); Dong Qingzheng, and Sun Yugang, eds., Zhongguo Fushui Shi (History of China's Taxation) ( Beijing: China Finance and Economics Press, 1987); D. C. Twitchett, Financial Administration Under the T'ang Dynasty, 2nd ed. ( Cam

-26-

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Taxation in the People's Republic of China
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • 1 - Evolution of China's Tax System 1
  • Notes 26
  • 2 - Taxation of Goods and Services 31
  • Notes 45
  • 3 - Income Taxes on Individuals 51
  • Notes 63
  • 4 - Income Taxes on Domestic Enterprises 69
  • Notes 87
  • 5 - Income Taxes on Foreign Investment 99
  • Notes 116
  • 6 - Agriculture Tax 125
  • Notes 133
  • 7 - Local Taxes 137
  • Notes 146
  • 8 - Evaluation of the Current Tax System and Prospects for Future Reform 151
  • Notes 173
  • Selected Bibliography 177
  • Index 191
  • About the Author 195
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