A Research On The Tax System And Management On China’s Foreign Direct Investment

Based on the capital exporting country’s point of view, this thesis makes a comprehensive and systematic analysis on the taxation of FDI. On the one hand, taxation on FDI must comply with the principle of horizontal equity and tax neutrality. We can use the number "0,1,2" to illustrate vividly the international tax relationship of FDI. Number "1" refers that foreign source income of FDI should be taxed, and under the same conditions it should be taxed equally with the income of investors of the home country or the host country. Number "0" refers that transnational taxpayers of FDI may make use of various international tax avoidance ways to reduce their tax burden. Number "2" refers that transnational taxpayers of FDI bear double or multiple taxation due to the overlap of two or more counrties’tax jurisdiction. Most countries approve the viewpoint that situation of the number "0" and "2" should be avoided and "1" should be maintained in order to improve the efficiency of international capital flow. In order to push forward "2" to "1", we should perfect tax system including the alleviating system of international double taxation and the coordination of international tax system. In order to push forward "0" to "1", we should strengthen tax administration including anti-tax avoidance system and international tax administration cooperation. On the other hand, taxation on FDI should also abide by the principle of vertical equity and tax regulation. Compared with domestic investment, FDI faces with unfamiliar political, economic and social circumstances of the host country, and thus bears more risks. It accords with the principle of vertical equity for the capital exporting country to give tax preferences to FDI. At the same time, owing to the market failure such as externalities, information asymmetry, and high risk of FDI, deviating from tax neutrality and playing tax regulation functions is probably more conducive to optimal allocation of international capital. This deviation from tax neutrality expresses as the universally practiced tax incentive system on FDI of capital exporting countries. In conclusion, from the capital exporting country’s point of view, this thesis comes down to two aspects on FDI taxation. One aspect is the tax system of FDI, which includes the alleviating system of international double taxation and the tax incentive system on FDI. The other aspect is the tax administration of FDI, especially the anti-tax avoidance system. This thesis is divided into six chapters:Chapter one is the introduction. This chapter introduces the background and significance of the research, reviews the literature at home and abroad, defines the research scope, method and framework, and lists the innovation and shortage of this thesis.Chapter two is an analysis of the correlation of tax and FDI. The thesis clearly defines the connotation of FDI, and the fundamental difference between FDI and foreign portfolio investment(FPI) is that FDI acquires the control of the production and operation of foreign enterprises. According to different classification standard, FDI can be divided into different forms. With the implementation of the "going out" strategy, China’s FDI experiences a rapid development.Influence factors of FDI include host-country factors and home-country factors. The former includes policy framework, economic factors and commercial convenience of the host country, and the latter includes economic development level and policy framework of the home country. As an important factor of FDI, tax plays a more and more important role in FDI decision-making. The international tax relationship of FDI is consisting of four aspects:the levy and payment relationship between country and taxpayer, the distribution relationship between taxpayers, the distribution relationship between countries, and the coordination relationship between countries. Tax principle of FDI includes equity and efficiency. The equity principle includes equity between taxpayers and equity between countries. The efficiency principle includes tax neutrality and tax regulation. Proceed from this analysis, we can come down to three problems on FDI taxation:the problem of international double taxation and its alleviation, the problem of tax incentive and the problem of international tax avoidance and anti-avoidance. The first two problems are about tax system, and the last problem falls into the category of tax administration. The thesis deeply analyses tax factors on FDI decision-making and establishes the framework of the overall effective tax rate on foreign source income (tfsi) of FDI. tfsi is not only determined by the statutory/effective tax rate of the host country, but also depends on the type of tax jurisdiction and the double taxation alleviation method of the home country, the relationship between the statutory tax rate of the home country and the statutory/effective tax rate of the host country, and whether the home country adopt the practice of tax sparing credit and tax deferral. Tax affects FDI in two different ways. The first is that tax affects the after-tax net margin of domestic investment, and investors make decision by comparing it with the after-tax net margin of FDI. The effective tax rate of the home country play a role in this way. The second is that tax affects tfsi and thus affects the after-tax net margin of FDI, and investors make decision by comparing it with the after-tax net margin of domestic investment. The statutory tax rate of the home country and the statutory/effective tax rate of the host country play a role in this way. The thesis analyses the correlation of FDI with the statutory/effective tax rate of the home country and the statutory/effective tax rate of the host country, and makes an empirical test using the data of ten countries’investment in China of2000-2009.Chapter three is an analysis of international double taxation and its alleviation of FDI. The thesis analyses the mechanism of international double taxation. The premise of international double taxation is the emergement of transnational taxpayers and objects of taxation, and the reason is the overlap of tax jurisdictions of various countries. With regard to the international double taxation caused by the overlap of the same kinds of tax jurisdiction, international coordination is necessary. With regard to the international double taxation caused by the overlap of different kinds of tax jurisdiction, the resident tax jurisdiction is usually restricted and the home country adopts certain methods to alleviate double taxation.In the thesis, we make a comparative analysis on the different alleviation effects among tax exemption method, tax credit method and deduction method, and investigate the economic effects of various alleviation methods under the principle of capital export neutrality, capital import neutrality and national neutrality. On the basis of the principle of capital export neutrality, the home country should adopt tax credit method. On the basis of the principle of capital import neutrality, the home country should adopt tax exemption method. Under the goal of global welfare maximum, the home country should adopt tax credit method. Under the goal of national welfare maximum, the home country should adopt deduction method.Chapter four is an analysis of tax incentive on FDI. There exists market failure on FDI, including externalities, information asymmetry and high risk, which needs government intervention to provide financial support, investment insurance and information service. Tax incentive is one of the most important devices for the government to intervene FDI, with the mechanism that tax affects marginal benefit and marginal cost of investment. The home countries usually use four types of tax incentive tools to encourage FDI:tax rate, tax base, tax amount and tax time. These tools work in two different ways. The first way works through the home country’s own tax system, that is, the home country directly gives preferential tax treatment to foreign source income of FDI. The second way works through the host country’s tax system, that is, the home country doesn’t directly give preferential tax treatment to FDI, but the tax treatment of the home country makes the host country’s tax incentive policy to attract foreign investment benefiting FDI. In these two ways, the overall tax burden of FDI is reduced and thus the motivation of FDI is improved. Finally, tax incentive effect of FDI is analysed theoretically, and an empirical analysis is made on the influence of tax sparing credit on1989-2000Japanese FDI. The conclusion is that tax sparing credit has an important influence on the FDI location choice of investors from tax credit countries.Chapter five is about the improvement of the tax system on FDI. The thesis describes systematically China’s current tax system on FDI, analyses the problems, and puts forward some basic principles and specific paths to perfect China’s tax system on FDI on the basis of learning from international experience. The general principle is that we should change the past one-sided emphasis on source of income tax jurisdiction and pay attention to exercise resident tax jurisdiction. At the same time, aiming at effectively exercising resident tax jurisdiction, we should review and perfect the past basic definition and system of international taxation which is aiming at mainly exercising source of income tax jurisdiction. The specific principle includes four aspects:reflecting tax neutrality, at the same time giving appropriate tax incentive; giving tax preference at the same time safeguarding national tax rights; emphasizing system optimization at the same time considering the adaptability of administration; learning from international experience at the same time adapting to the actual condition of our country. The path to perfect China’s tax system on FDI includes two aspects. On the one hand, we should perfect our alleviation system of international double taxation. In the short term, we should improve the tax credit method; in the long run, we should establish the alleviation system including tax credit method and tax exemption method. On the other hand, we should optimize our tax incentive system on FDI and establish a system reflecting national policy guidance and consisting of a variety of policy tools.Chapter six is about the strengthening of tax administration of FDI. On the contrary with international double taxation which aggravates tax burden of FDI, international tax avoidance reduces unduly tax burden of FDI. Both of them violate the principle of tax equity and tax neutrality. On the basis of investigating the problem of international tax avoidance, this chapter puts forward the basic framework of tax administration of FDI. From the unilateral perspective, domestic tax administration of FDI should be strengthened. On the one hand, daily routine tax administration of FDI should be strengthened from administration system, supporting measures and external environment. On the other hand, anti-tax avoidance of FDI should be strengthened from perfecting the special tax rules for controlled foreign companies and tax administration regulations for transfer pricing. From the multilateral perspective, international tax administration cooperation should be strengthened. On the one hand, by exchanging tax information we should relieve the information asymmetry problem between tax collectors and taxpayers in the tax administration of FDI. On the other hand, by establishing the international tax assistance system we should resolve the contradiction of the internationalism of taxpayers and the nationalism of the tax administration, and solve the problem of the imperfection of tax administration means on condition of the restricted tax jurisdiction.