Using sound taxation planning under ongoing system reforms

With the intensification of reform, China has undergone a number of tax reforms, two of which have been large. The first was in the 1990s, which saw the first steps taken in establishing a modern tax regime in China and completion of the laying of the foundations for the modern tax systems in China. The second started at the beginning of the second millennium and is still in the process of continuing intensification and improvement.

The starting point of the current round of reforms was the amendment of the Law on the Levy and Administration of Taxes, followed by the promulgation of the Enterprise Income Tax Law and the Law on Vehicle and Vessel Taxes. There were also several revisions of the Individual Income Tax Law, as well as the announcement in 2014 of the replacement of business tax by value-added tax reform, which is to be completed in 2015.

Improved direction

Through these reform measures, China’s tax systems are heading in a modern, objective and improved direction. In the next 10 years, a relatively sound, law-based and objective tax regime will be established. With the transformation of the functions of the central government, the authorities that taxpayers will have the most contact with in future will be the tax authorities, and taxation will be a major matter jointly faced by both governments and taxpayers.

The new round of tax reforms in China is progressing intensively and being promoted rapidly. Indirect taxes will be reduced progressively and direct taxes will continuously increase. The levying of property tax is on the verge of commencing, and other reforms of the tax authorities are progressively being carried out, with the current State Administration of Taxation (SAT) and local tax office system being progressively adjusted.

Scope expanded

The scope of international tax co-operation in the avoidance of double taxation and anti-tax evasion will be progressively expanded and relevant administrative systems will also be strengthened. The intensity of after-the-fact oversight and auditing of tax filings will also be increased, while the lawfulness and compliance of tax filings will be subjected to stricter examination.

The rights of taxpayers will also be more effectively protected, and the percentage of fiscal revenues accounted for by taxes will further increase. These changes will pose many new issues for taxpayers, including how to reasonably use financial and tax instruments to carry out business planning and decision making, and how to avoid double payment and overpayment of taxes so as to optimise profits and maximise benefits. To resolve these issues, duly carry out business decision making and effectively reduce costs, taxpayers must realise the importance of using tax planning.

Tax planning and new reforms

The most important property of tax planning is lawfulness. Law enforcement by the tax authorities and the payment of taxes by taxpayers will now be based on laws and regulations as strictly defined. The percentage of ministerial-level documents will progressively decrease, and the detail and practicability of laws will be enhanced.

Additionally, the requirements in respect of tax planning will be ever greater. Not only will in-depth professional finance and tax knowledge be required, but mastery of laws will be even more important. Only through a comprehensive application of professional finance and tax knowledge on the basis of laws can well-designed tax planning be carried out.

The field of tax planning will cover enterprises with legal personality and natural persons, and the demand by natural persons for tax planning is increasing. With the increase in direct taxes and commencement of the levy of property tax, an increasing number of natural persons will directly experience the important impact that taxation has on their lives. How to reasonably plan and duly dispose of one’s property will become an issue faced by more and more natural persons. Furthermore, as immigration continuously increases, how to properly invest and manage offshore assets and effectively reduce tax costs will also be major issues faced by immigrants.

In international business, the effect of tax planning is more and more prominent. Avoidance of double taxation and anti-tax evasion are difficult tax issues jointly being faced and addressed by countries around the world, and countries are strengthening their co-operation in this field and improving their own relevant systems. In recent years, with the continuous expansion in the scale of offshore investments by Chinese enterprises and natural persons, and in the sectors invested in, the most common issue being faced in offshore business is taxation. How to tax plan, effectively reduce tax costs, enhance enterprise competitiveness and adapt to the international market are issues that demand intense consideration before making decisions on offshore investment.

How to best use tax planning

1. Fully use tax break policies to lawfully enjoy the various breaks offered by governments. Attention needs to be paid to the temporal, geographical and other such restrictions attached to tax break policies to avoid tax violations arising from improper use of such policies.
2. Comprehensive familiarity with tax laws, regulations and ministerial-level documents, and comprehensive consideration of the various taxes that are the target of the planning. Balance the relationships among the various taxes, design multiple tax plans for each filing, and implement the optimum one among them to achieve the plan balance point.
3. Familiarity with foreign tax laws and international bilateral and multilateral tax agreements, in order to effectively carry out capital and substantive operations.

Tax planning, established on a basis of lawfulness and compliance, and integrating professional finance and tax knowledge, is a method of rationally using tax laws and regulations to avoid overpayment of taxes and double taxation, thereby effectively reducing tax costs. Against the background of reform of China’s tax systems, proper use of tax planning by a taxpayer is conducive to reducing tax costs.

Yu Zhe is a partner at AllBright Law Offices in Qingdao