Tax avoidance arrangements involve the deliberate use of intricate and unconventional legal structures to exploit tax advantages, with the aim of benefiting the taxpayer's interests. Although these arrangements are not inherently illegal, tax authorities can challenge them based on factors such as economic substance and the specific arrangements employed. It is crucial for taxpayers to understand the potential implications and risks associated with engaging in such practices.
China's tax authorities recognize various situations as tax avoidance arrangements, including transfer pricing, advance pricing arrangement, cost sharing agreement, controlled foreign enterprise, thin capitalization, and general tax avoidance arrangements. The authorities will review enterprises engaging in abuse of tax preferences, tax treaties, corporate organizational forms, using tax havens to avoid taxes, and other arrangements lacking reasonable commercial purposes.
When specific situations are identified as tax avoidance arrangements, tax authorities will re-characterize the economic substance of the arrangements and cancel the tax benefits obtained. Enterprises lacking economic substance, particularly those in tax havens facilitating tax avoidance, may have their existence challenged to prevent misuse of tax benefits.
In cases where tax avoidance arrangements are identified during a preliminary review, tax authorities may open special tax investigations. These investigations follow specific procedures, including issuing notices to the enterprise, requesting relevant information, and implementing adjustments if necessary.
To mitigate risks associated with tax avoidance arrangements, self-investigation and adjustment are recommended strategies. Enterprises can proactively adjust and pay taxes on their own if they identify potential risks or receive a risk reminder from the tax authority. This approach allows for greater flexibility and can result in time and cost savings compared to handling a tax investigation initiated by the authorities.