Anti-tax avoidance measures are necessary in order to protect the tax revenues o

Question

Anti-tax avoidance measures are necessary in order to protect the tax revenues of a jurisdiction and to prevent the abuse of its tax legislations. In line with other developed tax jurisdictions, there are some general anti-tax avoidance measures under the taxation systems of both Hong Kong and mainland China.
Required:
a Assess and explain if there are any similarities in the anti-tax avoidance measures and rules between the two tax systems. (You are required to discuss the conceptual principles and approaches rather than the administrative procedures.) (12 marks)
b Identify three anti-tax avoidance measures which are implemented under the mainland China tax system but not in Hong Kong. Where appropriate, you should demonstrate your understanding of the anti-tax avoidance measures by examples. (18 marks)

Explanation / Answer

a. Both Mianland China and Hong Kong have few similar principles and policies as far as anti-tax avoidance measures are concerned.

Transfer pricing - Hong Kong does not have any specific transfer pricing provision that governs the transaction between two companies. However, it does have a general anti-avoidance rule that can be used to challenge transactions which are unreasonable and which are at non-arm's length. Mainland China also have policies in this regard where transactions that are unreasonable or at non-arm's length are tracked.

Thin capitalization - Although Hong Kong does not have thin capitalization rules, deduction of interest expenses is affected by anti-avoidance provisions. Mainland China alsp have similar principle regarding deduction of interest expense. If interest expenses exceeds a pre-defined threshold in China, it will be nondeductible in the current as well as the subsequent periods.

Both Hong Kong and Mainland China have rules that can be invoked if there is any deliberate attempt to avoid tax by conducting transactions that are fictitous.

b. In Mainland China there are provisions for Controlled foreign companies (CFC) whereby a Chinese shareholder is taxed on the proportionate shares of undistributed profits of CFCs that are located in low tax jurisdictions, provided there are no valid reasons for not distributing profits. Hong Kong does not have CFC legislation.

Mainland China has thin capitalization rules in place (as discussed in "a" above). As per the rules excessive interest expenses deduction are disallowed. There are no thin capitalization rules in Hong Kong.

Mainland China has proper transfer pricing policies at place. It uses a "best method" approach for selecting a transfer pricing method. The methods are transactional net margin method, profit split method, cost plus method etc. In Hong Kong there is no specific transfer pricing provision that governs the transaction between two companies.

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