On The Use Of The Economic Substance Doctrine In The Enterprise Mergers And Acquisitions Tax Law

In recent years, as China’s market economic system continues to be improved and the internationalization of the market is increasing, mergers and acquisitions between Chinese enterprises and between enterprises in China and abroad are more frequent, and the amount involved in merger and acquisition transactions is larger and larger. According to the statistics, a total of2458transaction merger and acquisition cases were completed in2012in China, of which there were2098cases with discloseable transaction amount, and the amount of discloseable merger and acquisition transactions was US＄127.445billion, which reached a new record. At the same time, the state has also made efforts to continue to improve the taxation systems related to merger and acquisition transactions. The promulgated Enterprise Income Tax Law, Circular on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Re-organisations (Cai Shui [2009] No.59) and Measures for the Administration of Enterprise Income Tax in Connection with Enterprise Reorganisation (Cai Shui [2010] No.4) and the introduction of rules and provisions and other relevant laws and regulations together constitute a framework for China’s taxation systems related to enterprise merger and acquisition. However, practice has proved that there are defects for China’s merger and acquisition tax system in dealing with tax avoidance in mergers and acquisitions and how to use merger and acquisition policies to guide merger and acquisition transactions to adapt to China’s economic system reform and industrial structure adjustment. This paper attempts to use the economic substance doctrine has developed maturely in the United States and its relevant systems to address the two problems faced with the merger and acquisition taxation system. Through the analysis of China’s merger and acquisition taxation system, and the detailed summarization and analysis of the United States economic substance doctrine and its culture, combined with the current merger and acquisition market in China at this stage, the author tried to make legal recommendations for improving China’s merger and acquisition taxation system at the present stage.In the first chapter, first starting from the Circular on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Re-organisations and the Measures for the Administration of Enterprise Income Tax in Connection with Enterprise Reorganisation that specialize in regulating the merger and acquisition of enterprise income tax, the main framework of China’s merger and acquisition tax system was introduced in the form of case. Then, through the case of the United States Gregory v. Helvering, the case of the United Kingdom IRC v. Ramsay and the case of tax avoidance design of land transfer for China’s Blackstone Company, insufficiency of specific tax rules in coping with complex merger and acquisition transactions was concluded. It was noted that the subjects of merger and acquisition transactions can achieve the purpose of tax avoidance under full legal condition in the merger process through careful design. When this behavior occurs in the mergers and acquisitions in China, in addition to the "general anti-avoidance rule" provided in the47th article of the new Enterprise Income Tax Law as well as some sporadic provisions that do not constitute a system, there was no better way. At the same time, it was also pointed out that, if there is not a good solution to this problem, it will be difficult to effectively achieve transformation of economic development mode and objectives of industrial structure adjustment by the tax system matching with the country’s macro-control policy.In the second chapter, the limitations of the specific rules of the tax law in resolving tax avoidance and control problem were first theoretically analysed. It was pointed out that applicable principles for flexible problem solving should be found in the statutory taxation principle and discretionary approaches, and meanwhile in the context of application by analogy, the intents of merger and acquisition transactions are incorporated into the range to be considered. And The reasonableness of this design was analyzed. Since no economic substance doctrine is existing in our tax law and relevant systems came out late, the "economic substance","disguising transaction","reasonable commercial purpose" and "step transaction" as well as general tax avoidance provisions in the law and other relevant concepts are interspersed and confused in the theoretical cycle. In the third section of this chapter, the relationship between these concepts was analyzed, and in theory, the requirement for confirming "economic substance doctrine" as a fixed concept was put forward.In the third chapter, the history of the United States economic substance doctrine was first recalled; then a detailed analysis and presentation on the specific constitution of the United States economic substance doctrine was made, and it was noted that the entire system of the economic substance doctrine is composed of four areas, namely, when to start economic substance review, the content of merger and acquisition transaction reviewed by the economic substance doctrine, how to review the part needed to be reviewed and how to avoid the abuse of the economic substance review. It was also pointed out that because of the characteristics of the United States law systems, different courts have their own different opinions on the development process of the economic substance, especially on the definition of with economic substance or not. This caused that the United States selected the economic substance doctrine as culture in order to achieve its domestic tax policies and to enhance tax compliance. In the last section of the third chapter, the cultural history of the United States economic substance doctrine was combed through, providing a reference to how to apply the economic substance doctrine in achieving our national tax policy and completing the regulatory objectives by analyzing the economic substance doctrine of the United States culture in the fourth chapter.In the fourth chapter, the terms of the cultural economic substance doctrine were analyzed, namely, No.7701section in the United States Revenue Code. After the adoption of the cultural economic substance doctrine, the domestic disputes in the United States and how the terms of the cultural economic substance doctrine converge with the previous provisions were analyzed. It was pointed out that by increasing the applicability of the economic substance doctrine, limiting the applicable scope of the economic substance doctrine, and requiring the administrative regulators and taxpayers in the use of the economic substance doctrine to take an initiative to disclose, the tax regulation policies in the area of mergers and acquisitions in China will be more efficient and the regulatory objectives will be orderly implemented.In the fifth chapter, the system construction of China’s economic substance doctrine was recommended by drawing on the United States. First, it was proposed that at this stage, the lawful definition of the economic substance doctrine should be improved based on the existing general anti-avoidance provisions, and a combination of objective and subjective factors for tax avoidance arrangements should be adopted. Second, the specific content of the economic substance doctrine was proposed. At this stage, taking into account the complexity of merger and acquisition transactions and the specialization of taxation, the right to such a review should be handed over to the tax authorities. However, when the tax authorities are given such a right of review by taxpayer or when the merger and acquisition subjects doubt the review results, the courts must be involved to determine whether there is economic substance.