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Taxation of Outbound Investment

Author: LiShi
Tutor: WuXuDong
School: Dongbei University of Finance
Course: Finance
Keywords: corporation tax outbound investment ideas to improve
CLC: F812.42
Type: PhD thesis
Year: 2013
Downloads: 19
Quote: 0
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Since the system reform and opening door policy, our companies become stronger, more and more Chinese domestic companies go investment abroad. The outward investment is helpful for the improvement of our economy by the use of the world resources, adjusting our inner investment system and competes in both the domestic and the world market. The world research indicated that tax influence on the foreign investment is more and more striking with the globalization of the world economy. The mother country tax system for investment abroad not only influences the location decision of outbound investment, but also the investment volume, financing of the investment and cross-border merger and acquisitions. It is worth to make research on our income tax system to support our companies compete in the world market.The effect of corporation tax on outward investment is obvious, because the tax will influence the after tax profit. But the extent of tax influence on investment is still under researching. In the real world, there are many factors the company should considered before making investment decisions, such as the other country’s business environment, political system, labor resources, market future, material available, etc. Some researchers have trying to identify tax effect on outward investment. Previous analysis focus on the host country’s taxation in attracting the foreign investment, pay less attention to mother country’s tax effect. In fact, the impact of mother country taxation is estimated to be relatively large. The mother taxation system influence outward investment volume, financing, location, and merger and acquisitions.The third part discusses the global investment and what mother taxation system should prepared for. International tax system should covered such items as tax jurisdiction, allocation of international profit, double taxation release, loss carry forward or afterward, tax sparing and anti-avoidance of taxation. These items can be find in domestic tax law and international tax treaty. International tax jurisdiction is an important part of tax system. It prescribes the tax principle and tax boundary. It is the rule to protect each country benefit. International tax system is classified into resident jurisdiction rule and source jurisdiction rule. Resident jurisdiction rule requires taxing its resident world wide income. And in order to release double taxation, allow the tax paid in foreign country credit to domestic tax. Source taxation rule only taxes domestic source taxable income. Practically few countries carry the complete resident jurisdiction rule and complete source jurisdiction rule. Many countries take a hybrid jurisdiction rule, relying on one jurisdiction principle and make some exceptions. This article compares the two principles, and introduces tax policies each concerned.The allocation of international revenue is the issue faced by international tax system. Cross border investment will cover more than2countries. International tax system difference may cause dispute on the allocation of cross border revenue, such as different source rule may cause one item to be taxed in both counties. This issue can be solved by countries negotiation. Tax treaty will be helpful, and international tax reconciliation system should be established.Double taxation release is quite important of international taxation. When dividend remits to its mother country, it has already been taxed by the host country. And if the mother country taxes dividend according to resident jurisdiction rule. The same income has bee taxed twice. Double taxation increases tax burden of the investment activity, and discourage its competition in the world market. There are credit method, exemption method and deduction method for releasing double taxation..Taxation avoidance is a problem which has attracted tax authority’s great attention. Multinational Corporations can take advantage of tax system difference among nations and move its profit from high tax country to low tax country by related party transactions. Statistic data proved that many outward investments located in low tax or not tax jurisdiction. In2007,16.5%Canada FDI located in Barbados, Bahamas, Bermuda and Cayman Islands. In1997, only5.4%Canada FDI found in that areas.In2010,14%of China investment flow to British Virgin Islands and Cayman Islands, which are called tax heaven. In fact most of value added activities are carried in high tax countries and the revenue is transferred to tax heaven. With the development of outward investment, international tax avoidance has become very common. Some multinational corporations take advantages of international tax system differences transfer profit from high tax country to low tax country by debt investment, tax heaven, cost allocation among group, etc. Tax avoidance plan have eroded related country’s tax base. Many countries have published some rules to deter such activities. The Anti avoidance tax rules many counties have set in laws are transfer prizing rule, CFC rule, thin-capitalization rule and general avoidance of tax evasion rule.Tax treaty is help to release double taxation and anti-avoidance of taxation. Even though the content is not the same among different countries, many treaties are based on OECD treaty model.Our international tax system is based on resident jurisdiction rule, and complys with tax neutrality principle, learning the other countries experience and focus on our country actual conditions. Chinese residences should pay income tax for their world wide income, non-residences should pay Chinese income tax for the Chinese source income. Foreign tax paid will be credit to domestic tax. Our income tax system includes anti-avoidance taxation rules, such as transfer pricing adjustment, cost sharing, control foreign company, thin capitalization and general anti-avoidance of taxation.Our outbound income tax system originated from1980s. At that time we have not many outbound investments. The main purpose of our international tax system was to attract the inbound investment. It did not pay enough attention to the outbound activities. Nowadays our outbound investment increases fast. The investment area are large. Cross-border merger and acquisitions increase. And the other countries income tax system reformed according to the outward development. Since2008, with the increase of outbound investment, some reform has been made on our original tax system, such as the indirect tax credit policy, thin capitalization, control foreign company rule etc. But there are still some problems in our current income tax system for the outbound investment, such as the credit system is too complicated to implementation, no specific tax policy for the cross-border merger and acquisition, treaty did not work efficiently, anti-avoidance of taxation rule is behind the way etc. In order to push the development of our outbound investment, our income tax system should stick to the following principles, keeping tax neutrality, protecting our nation’s benefits, supporting outbound investment, being easy to comply with and carry out. The paper proposes some ideas to improve the current credit system and gradually moving into exemption system, establish the incentive tax system for the outbound investment, propose ways to perfect current anti-avoidance taxation rules along with the cross-border activities’changing and perfect current tax treaty net work..

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CLC: > Economic > Fiscal, monetary > Finance, the state's financial > China's financial > Financial income and expenditure > Tax
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