"Administrative Measures on the General Anti-Avoidance Rule (Trial)" ("GAAR") will come into effect on 1st January, 2015

SAT has released “GAAR” recently, which has further specified the relevant rules on the general anti-avoidance, based on the Corporate Incoming Law and its Detailed Implementation Rules, and Implementation Measures on Special Tax Adjustments (Trial). Then main content includes:

Application scope

Arrangements not involving cross-border transaction or payment; and

Illegal tax behaviors potentially related to avoiding tax payments, avoiding paying taxes due for recovery claim from tax authorities, cheating on taxes payable, refusing to pay taxes and provide forged tax invoices.

Major features of a “tax avoidance arrangement”:

Obtaining a tax benefit is the sole purpose, or the main purpose; and

The tax benefit is obtained by using a scheme which is not consistent with its economic substance even though its form may be permissible in accordance with the tax laws.

”GAAR” should be the last resort to counter tax avoidance schemes

“GAAR” should only be evoked if a tax avoidance arrangement is properly dealt with by any of the other specific anti-tax avoidance measures.

Adjustment methods

Re-characterizing the arrangement in part or entirely;

Disregarding the existence of a party to the transaction for tax purposes, or deem this party and the other party to the transaction as the same, one entity;

Relevant income, deduction, tax incentives and foreign tax credits etc. will be re-characterized or re-allocated among parties to the transaction; and

Any other reasonable methods.

For these enterprises that have cross-border transactions, especially those who have numerous affiliate transactions, in order to eliminate the potential risks, it would be better to well arrange their business mode, amount of each transaction and the structure for investment. In addition, the relevant documents and evidence related to such transactions shall be well preserved, which would be required by the taxation authorities for the investigation on the general anti-avoidance.