Post-Doctoral Global Fellow
Diheng Xu
Research Proposal
China and BEPS: Interactions between China and International Tax Norms
Base erosion and profit shifting (BEPS) is a phenomenon in international taxation that
multinational enterprises adopt tax planning strategies that exploit the gaps and mismatches in tax
rules between different countries to artificially shift profits to low or no-tax locations where there
is little or no economic activity, resulting in little or no overall corporate tax being paid. The G20
and the OECD have taken the initiative to develop multilateral solutions to combat BEPS by
releasing BEPS Action Plan (2013) and the 2015 Final Report. The solutions are expected to be
integrated into the domestic tax law and tax treaties of countries around the world over the coming
two years.
China encounters challenges of BEPS as well. Although China is not a member of the OECD,
the OCED BEPS program has involved China into the discussion and development of the Final
Report.
This research aims at analyzing the interaction between China and international tax norms,
focusing on implications derived from BEPS in the context of international tax competition.
The main research question is
What are implications for both Chinese tax system and international tax norms through
interactions between China and BEPS?
By analyzing China’s reaction to BEPS and to international tax norms of countering BEPS, the
research aims at discovering BEPS’s implications for Chinese tax system and China’s role in
influencing international tax norms.
The major methodologies adopted in the research are legal analysis, comparative studies, and
historical analysis. The research will perform legal analysis and comparative analysis to the
application of BEPS Final Report in China. Subsequently, if there are mismatches or tensions
between Chinese tax circumstances and BEPS Final Report, the research will conduct historical
and legal analysis to describe the origins for those tensions. Consequently, based on the previous
analysis, the research will conclude with implications for both China and international tax norms
against BEPS, thus answering the main research question.
The outcome of the research is expected to be in the form of a published English article in a
high-ranking (tax) journal.
The results will benefit academia, policy makers, and practitioners. This research is rather novel
and up to date. The OECD 2015 BEPS Final Report was released on 5 December 2015. Only a
few authors have discussed the new report from the perspective of China. Therefore, the results of
the research will be interesting not only for academia, but also for policy makers and practitioners.
For academia, the research fills in the gap of the relationship between China and BEPS with the
latest outcome. It is also sheds light on the development of establishing a new international tax
system. For investors, it will be helpful for them to know better about the investment environment
in China, and to make further decisions. For policy makers, the results will be useful for them to
form an insight into the issue as well.
1
Post-Doctoral Global Fellow
Diheng Xu
1. Aim of the research
This research aims at analyzing the interaction between China and the international tax norms
with the focus on implications derived from BEPS in the context of international tax competition.
By analyzing China’s reaction to BEPS and to international tax norms of countering BEPS, the
research is with the purpose of discovering BEPS’s implications for Chinese tax system and
China’s role in influencing international tax norms.
2. Research background and relevance of the research
With the development of globalization, multinational enterprises (MNEs) have more capabilities
to employ and allocate resources all over the world. However, national tax laws have not kept pace,
which results in gaps and mismatches that create conditions of double non-taxation for MNEs via
tax planning.1
Base erosion and profit shifting (BEPS) is a phenomenon in international taxation that MNEs
adopt tax planning strategies that exploit the gaps and mismatches in tax rules between different
countries to artificially shift profits to low or no-tax locations where there is little or no economic
activity, resulting in little or no overall corporate tax being paid.2 BEPS is not new in international
taxation. 3 Nevertheless, increased media exposure of specific MNEs’ tax planning strategies
brought BEPS to the public attention, especially under the background of the financial and
economic crisis. 4 According to the statistics released by the Organisation for Economic Cooperation and Development (OECD), it is estimated that the annual loss of tax revenue caused by
BEPS is 100 to 240 billion US dollars.5
As an international tax problem, BEPS requires international solutions. The G8, and
subsequently, the G20 took the initiative urging the OECD to develop multilateral solutions to
1
Yariv Brauner, What the BEPS, 16 Fla. Tax Rev. 55, 116 (2014) 57.
About Base Erosion and Profit Shifting (BEPS), the Organisation for Economic Co-operation and Development
(OECD), http://www.oecd.org/ctp/beps-about.htm, accessed 10 September 2016.
3
Pascal Saint-Amans & Raffaele Russo, What the BEPS Are We Talking About?, OECD,
http://www.oecd.org/forum/what-the-beps-are-we-talking-about.htm, accessed 10 September 2016.
4
For instance, Bloomberg named those tax planning as “The Great Corporate Tax Dodge”, and New York Times also
reported “How Apple Sidesteps Billions in Taxes”. See The Great Corporate Tax Dodge, Bloomberg,
http://topics.bloomberg.com/the-great-corporate-tax-dodge/, accessed 10 September 2016; How Apple Sidesteps
Billions in Taxes, New York Times, http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-lowtax-states-and-nations.html?_r=0, accessed 10 September 2016.
5
OECD, About Base Erosion and Profit Shifting, http://www.oecd.org/ctp/beps-about.htm.
2
2
Post-Doctoral Global Fellow
Diheng Xu
combat BEPS.6 Since 2013, OECD has released a detailed BEPS Action Plan for solutions.7 On 5
December 2015, the OECD released the 2015 Final Report for tackling tax avoidance worldwide.8
The proposals are expected to be integrated into the domestic tax law and tax treaties of countries
around the world over the coming two years.9 As the OECD has announced, the Final Report is
not only for solving problems of developed countries, but is also for the sake of developing
countries. Over 80 developing countries are involved in the discussion of the BEPS package. 10
The BEPS package seems like an opportunity to establish a modern international tax framework,
which means a new international tax norm.11 Since the promulgation of the 2015 Final Report,
many countries reacted efficiently to embed or promise to embed certain BEPS action plans into
their own tax systems.12
China encounters challenges of BEPS as well. As a major recipient of foreign direct
investment (FDI) and a major source of outbound FDI, China is even deemed as a main victim of
BEPS. 13 In different political declarations, China has expressed strong support for the BEPS
initiative as a G20 member.14 BEPS provides China an opportunity to participate in the creation
6
Originally, The Group of Seven (G7) is a forum composed of 7 top wealthy countries in the world with respect to
the GDP. In 1997, Russia joined the group and G7 became the Group of Eight (G8). The G8 includes Canada, France,
Germany, Italy, Japan, Russia, the United Kingdom, and the United States. The G20 aims to be a forum for cooperation
and consultation with respect to the international financial system. It consists of Argentina, Australia, Brazil, Canada,
China, the European Union (EU), France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia,
South Africa, South Korea, Turkey, the United Kingdom, and the United States. See Peter Essers, International Tax
Justice between Machiavelli and Habermas, 68 Bull. Intl. Taxn. 2 (2014) 56.
7
OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), available at
http://www.oecd.org/ctp/BEPSActionPlan.pdf. For more reports after 2013, see OECD BEPS Reports,
http://www.oecd.org/tax/beps-reports.htm.
8
OECD, BEPS 2015 Final Report, http://www.oecd.org/tax/beps/beps-actions.htm.
9
Pascal Saint-Amans and Raffaele Russo, The BEPS Package: Promise Kept, 70 Bull. Intl. Taxn. 4 (2016) 241.
10
Ibid.
11
It is a major objective of the BEPS package to lay the foundations of a modern international tax framework under
which profits are taxed where economic activity and value creation occur. See ibid.
12
For instance, Australia passed the “Multinational Anti-Avoidance Law” in December 2015, which echoed with
Action 7 of the BEPS Final Report. Its main focus was on controlling the attribution of profits to permanent
establishment. See L. Burns, Multinational Anti-Avoidance Law: Australia’s Response to BEPS Action 7, 22 AsiaPac. Tax Bull. 1 (2016). The EU also took initiatives to amend the Mutual Assistance Direction that required Member
States to automatically exchange information on advance tax rulings and advance pricing arrangements (APAs). See
H.M. Liebman, W.E.C. Heyvaert & V. Oyen, Countering Harmful Tax Practices: BEPS Action 5 and EU InitiativesPast Progress, Current Status and Prospects, 56 Eur. Taxn. 2/3 (2016).
13
Jinyan Li, China and BEPS: From Norm-Taker to Norm-Shaker, 69 Bull. Intl. Taxn. 6/7 (2015) 356.
14
China’s first official position on BEPS was released by Jiangsu Tax Bureau on 29 April 2014. It issued a paper titled
“Administrative Plan on International Tax Compliance for 2014-2015”. See PwC tax news,
http://www.pwchk.com/webmedia/doc/635369604014878505_chinatax_news_may2014_10.pdf,
accessed
10
September 2016. Yuesheng Jiang, Value Creation Theory of the BEPS Report and China’s Reasonable Share in
Global Value Allocation, 22 Intl. Transfer Pricing J. 4 (2015).
3
Post-Doctoral Global Fellow
Diheng Xu
of the international tax law norm. Although China is not a member of the OECD countries, the
BEPS program has involved China into the discussion and development of action plans. 15
Moreover, on the 2016 G20 Summit held in Shanghai, China proposed to implement the outcome
of the BEPS program and advocated for more participation of developing countries. A main
advocate was to realize equal implementation of BEPS among all the participated countries.16
Meanwhile, China has launched its own measures to tackle BEPS problems, including transferring
the outcome of the OECD BEPS Action Plan to domestic laws, and promulgating its own BEPS
measures.17 For instance, as Li (2015) summarized, Chinese BEPS measures adopted from the
OECD include the general anti-avoidance rule (GAAR), the offshore indirect transfers circular
(2015), beneficial ownership circulars, the outbound payments notice (2015), and special tax
adjustment measures (2009). 18 They are considered as localization of the BEPS initiative in
China.19
With respect to the Final Report, China’s reaction towards it is not only an issue of its own tax
authorities, but concerns also international investors. Moreover, it reflects China’s attitude towards
the international tax norms. After the 2015 Final Report, the Chinese State Administration of
Taxation (SAT) is working on reactions to the Final Report.20
However, there are concerns about the application of the BEPS Final Report to China. The
BEPS program was initially designed by OECD countries with the objective of attributing more
profits to the jurisdiction where intangibles are generated, most of which are developed countries.21
Nevertheless, the problems China face can differ from the developed countries. In addition,
compared to most developed countries that have already formed a free market economy system,
China has its own political, economic, and legal systems. Are there tensions if directly
15
Jun Wang, Chinese Taxation on the Move, 70 Bull. Intl. Taxn. 9 (2016) 519.
Tax news from the State Administration of Taxation in China, 2 March 2016,
http://www.chinatax.gov.cn/n810219/n810724/c2024255/content.html, accessed 14 September 2016.
17
Jun Wang, Chinese Taxation on the Move, 70 Bull. Intl. Taxn. 9 (2016) 519.
18
Jinyan Li, China and BEPS: From Norm-Taker to Norm-Shaker, 69 Bull. Intl. Taxn. 6/7 (2015) 357-358.
19
PwC news, http://www.pwccn.com/webmedia/doc/635724803981704754_chinatax_news_jul2015_31.pdf,
accessed 14 September 2016.
20
OECD, China Takes Important Step to Boost International Co-operation against Tax Evasion,
http://www.oecd.org/tax/transparency/chinatakesimportantsteptoboostinternationalcooperationagainsttaxevasion.htm, accessed 14 September 2016; Jun Wang, Chinese Taxation on the Move, 70 Bull.
Intl. Taxn. 9 (2016) 519.
21
Jinyan Li, China and BEPS: From Norm-Taker to Norm-Shaker, 69 Bull. Intl. Taxn. 6/7 (2015) 370; Yuesheng
Jiang, Value Creation Theory of the BEPS Report and China’s Reasonable Share in Global Value Allocation, 22 Intl.
Transfer Pricing J. 4 (2015) 223-224.
16
4
Post-Doctoral Global Fellow
Diheng Xu
“transplanting” the international tax norms to China? If so, are there possibilities to alleviate the
tensions? Therefore, the research aims at analyzing China’s reactions towards the OECD 2015
BEPS Final Report in the context of international tax competition and discovering both
implications of the BEPS for China and China’s role in shaping international tax norms.
This research does not only have academic values, but can also be of interest for policy makers
and practitioners. Firstly, it will be a contribution to the body of knowledge on the specific issue
of China’s reaction to BEPS and implications for international tax norms. Moreover, considering
China’s position in the world economy, this research provides insights for policy makers and
practitioners as well. China is a major destination of FDI at present and predictably in near future.22
Considering its position in the arena of international tax competition, it is significant to find out
China’s attitude towards BEPS and international tax norms, and the rationale behind them. If there
are tensions between China and international tax norms, the research can contribute to the
implications for both China and international tax norms to alleviate the tensions. It can also shed
light on establishing a new international tax system, which provides prospects on further actions
against BEPS. Thus, it is not only an added value to the academia, but could also be useful for
policy makers and practitioners.
3. State of the art
Many publications have introduced and analyzed BEPS problems and the OECD BEPS
initiative from different perspectives since 2013. Brauner (2014) systematically analyzed the
OECD BEPS Action Plan and provided an interim evaluation. He advocated international
cooperation rather than competition to solve the problem, and also claimed for more innovations
in establishing international tax norms.23 Baker (2013) also argued that the OECD program could
only succeed by conducting meaningful reform and achieving consensus among developed and
developing countries.24 After the publication of the 2015 BEPS package, some authors focused on
the implementation of the Action Plan. Cooper and Stewart (2015) generalized some countries’
China was the world’s largest FDI recipient in the past five years. See data from the World Bank,
http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD/countries/1W-CN?display=default, accessed at 14
September 2016. According to the 2015 A.T. Kearney FDI Confidence Index, China ranks second as a future FDI
destination for many investors. https://www.atkearney.com/research-studies/foreign-direct-investment-confidenceindex/2015, accessed 14 September 2016.
23
Yariv Brauner, What the BEPS, 16 Fla. Tax Rev. 55 (2014); Yariv Brauner, BEPS: An Interim Evaluation, 6 World
Tax J. (2014).
24
Philip Baker, Is There a Cure for BEPS?, 5 Brit. Tax Rev. (2013).
22
5
Post-Doctoral Global Fellow
Diheng Xu
fast reactions to BEPS and analyzed challenges for those countries’ full implementation of the
BEPS package.25 Saint-Amans and Russo (2016) introduced details of the 2015 BEPS package
and concerns for its implementations.26 With the further implementation of the BEPS package in
different countries, more actions are expected, especially by developing countries.
As to the relationship between China and BEPS, some authors have introduced BEPS problems
in China and argued for China’s own position towards combating BEPS. Li (2015) maintained that
BEPS provided China the opportunity turning from a norm-taker to a norm-shaker by actively
participating in the OECD programs.27 Jiang (2015) pointed out the current problems of the global
value allocation in the OECD BEPS Action Plan from Chinese tax authority’s perspective, and
suggested China to gain a reasonable share of the global value allocation. 28 Tang (2015) also
analyzed the distinctions between Chinese rules on hybrid instruments and the OECD approach
under the BEPS initiative. 29 Wang (2016) introduced the current tax reform in China, and its
prospect on further reform on BEPS. 30 Nevertheless, there is no research covering systematic
analysis on the interaction between China and international tax norms after the 2015 Final Report.
4. Research questions and methodology
4.1 Research questions and sub-questions
The main research question is
What are implications for both the Chinese tax system and international tax norms through the
interactions between China and BEPS?
The sub-questions are
What are China’s reactions towards the OECD 2015 Final Reports?
How can the BEPS Final Reports address BEPS problems in China?
25
Graeme Cooper & Miranda Steward, The Road Home? Finalizing and Implementing the BEPS Agenda, 69 Bull.
Intl. Taxn. 6/7 (2015).
26
Pascal Saint-Amans & Raffaele Russo, The BEPS Package: Promise Kept, Bull. Intl. Taxn.4 (2016).
27
Jinyan Li, China and BEPS: From Norm-Taker to Norm-Shaker, 69 Bull. Intl. Taxn. 6/7 (2015).
28
Yuesheng Jiang, Value Creation Theory of the BEPS Report and China’s Reasonable Share in Global Value
Allocation, 22 Intl. Transfer Pricing J. 4 (2015).
29
Jieyin Tang, Distinctions between Chinese Rules on Hybrid Instruments and the OECD Approach under the BEPS
Initiative, 17 Derivs. & Fin. Instrums. 4 (2015).
30
Jun Wang, Chinese Taxation on the Move, 70 Bull. Intl. Taxn. 9 (2016) 519.
6
Post-Doctoral Global Fellow
Diheng Xu
Are there tensions between China and the BEPS Final Report? If so, are there possibilities to
alleviate the tensions?
What is the prospect for China to address BEPS problems? What is China’s role in shaping
international tax norms by adopting or not adopting BEPS?
In order to answer the research questions, it is necessary to establish a benchmark first. In order
to evaluate the influences of BEPS to China and China’s role in shaping international tax norms,
it is suitable to build up a benchmark based on the common objectives and purposes of Chinese
taxation and the international tax norms towards BEPS.
4.2 Methodology
The major methodologies adopted in the research are legal analysis, comparative studies, and
historical analysis.
The research will perform legal analysis and comparative analysis as to the application of the
BEPS Final Report in China. According to these methodologies, the research aims at discovering
whether there are mismatches and possibilities of embedding the BEPS Final Report in China.
Subsequently, if there are mismatches or tensions between Chinese tax circumstances and the
BEPS final reports, the research will conduct historical and legal analysis to describe the origins
for those tensions, with an emphasis on China’s political and economic systems.
Consequently, based on the previous analysis, the research will conclude with implications for
both China and international tax norms against BEPS, thus answering the main research question.
5. Limitations
It is not the purpose of the research to debate on whether or not China should be categorized as
a developing country. It only aims at presenting differences between the Chinese tax system and
the international tax norms, which are majorly established by developed countries. Thus, the
research distinguishes China from OECD countries.
6. Expected results
It is the aim of the research to answer the research questions, i.e. providing implications for both
China and international tax norms through the interactions between China and BEPS. The outcome
7
Post-Doctoral Global Fellow
Diheng Xu
of the research is expected to be in the form of a published English article in high-ranking (tax)
journal.
The results will benefit academia, policy makers, and practitioners. Obviously, this research is
rather novel and up to date. The OECD 2015 BEPS Final Report was released on 5 December
2015. Only a few publications have discussed the new report from the perspective of China.
Therefore, the result of the research will be interesting not only for academia, but also for policy
makers and practitioners. For academia, the research fills the gap in analysis on the relationship
between China and BEPS with the latest outcome. It is also important to further the development
of establishing a new international tax system. For investors, it will be helpful for them to know
better about the investment environment in China, and to make further decisions. For policy
makers, the results of the research will be useful to form an insight into the issue.
7. References
Reuven S. Avi-Yonah, International Tax as International Law: An Analysis of the International
Tax Regime (Cambridge University Press) 2007.
Philip Baker, Is There a Cure for BEPS?, 5 Brit.Tax Rev. (2013)
Yariv Brauner, What the BEPS, 16 Fla. Tax Rev. 55 (2014)
Yariv Brauner, BEPS: An Interim Evaluation, 6 World Tax J. (2014)
Graeme Cooer and Miranda Stewart, The Road Home? Finalizing and Implementing the BEPS
Agenda, Bull.Intl. Taxn., 6/7 (2015)
Peter Essers, International Tax Justice between Machiavelli and Hebermas, 68 Bull.Intl. Taxn. 2
(2014)
Yuesheng Jiang, Value Creation Theory of the BEPS Report and China’s Reasonable Share in
Global Value Allocation, 22 Intl. Transfer Pricing J. 4 (2015)
Jinyan Li, China and BEPS: From Norm-Taker to Norm-Shaker, 69 Bull. Intl.Taxn. 6/7 (2015)
H.David Rosenbloom, Cross-Border Arbitrage: The Good, the Bad, and the Ugly, 85:3 Taxes 115
(2007)
8
Post-Doctoral Global Fellow
Diheng Xu
Pascal Saint-Amans and Raffaele Russo, The BEPS Package: Promise Kept, Bull. Intl. Taxn. 4
(2016)
Miranda Stewart, International Tax, the G20 and the Asia Pacific: From Competition to
Cooperation?, 1 Asia Pac Policy Stud 3
Jieyin Tang, Distinctions between Chinese Rules on Hybrid Instruments and the OECD Approach
under the BEPS Initiative, 17 Derivs. & Fin. Instrums. 4 (2015)
Jun Wang, Chinese Taxation on the Move, 70 Bull. Intl. Taxn. 9 (2016)
Wei Xiong and Chris Evans, Towards an Improved Design of the Chinese General Anti-Avoidance
Rule: A Comparative Analysis, 68 Bull. Intl. Taxn. 12 (2014)
9