| With the speed up of globalization and the increase of the cross-boarder investment,the position of the cross-boarder investors has become more and more important in the international economy and the international taxation mainly having the cross-boarder investors as the major revenue objects for the income of cross-boarder operation that also has become more and more important. In international taxation,cross-boarder investors use the deficiency or vague parts of the tax laws of all the countries or the regulations of taxation agreement,adopting the opening method that is legal in form to reach the target of evade, lower or delay the rate paying duty they should bear. Thin capitalization is the investment the cross-boarder investors invested in the companies in the host country,irrelevantly raised the owing proportion in order to lower the proportion of capital stock,sequentially creating an international tax avoidance method of increasing interests and obtaining more deduction before taxation. At present, thin capitalization has already become one of the tax avoidance methods adopted by international investors.The fundamental reason of adopting thin capitalization method for tax avoidance is because the treatment for interests and dividends in tax law is different. Because the dividends are distributed after tax,usually cannot be deducted before taxation,interest usually can be deducted before income tax. Although the host country company will pay withholding income tax when paying interests to none residence lender,but the withholding income tax rate of the interest is lower than that of the dividends,so the cross-boarder investors still can get benefit from it.Thin capitalization has great influence on the taxation of the host country and the cross-boarder investors,but the biggest casualty of thin capitalization is still the government of the host country and the share holders of the company in the host country, all the benefits of the none residence share holders and cross-boarder investors from thin capitalization tax avoidance method are naturally coming from the encroaching of the revenue of the host country,as well as the deprive of other share holders'benefits of the company. Details shown:The first is the influence on the revenue of the host country. Thin Capitalization directly invade the taxation income of the host country,and influence the effective exert of revenue adjusting function of the host country:high proportions of interests deduction abroad,reduced the earnings amount for the should-be-paid tax of the son company,disordered the economic order of the host country,since through the transfer of profit through paid interests can create the gloss of loosing for the investment of the company thereby create a negative effect of the host country for bad investment environment. The second is that thin capitalization made the capital structure of the son company not reasonable. High proportional debit and credit capital leads to the investing of multinational company not to its position,or take out the investment by way of taking back loan principal and interests. At the same time of obtaining high proportion creditor's rights income and share rights income, the multinational company bears limited economic and society liabilities with very low proportion. As for the mother company, the interests coming from the income of son company before tax, although withholding tax should be paid in the country the son company is at for this interest income, but under the condition that the mother company paying the tax, it can only create jural double taxation, the mother company usually can obtain credit or tax exemption in the country they are at, so for the same investment payout, the cost of dividend is great higher than that of interests, adopting"thin capitalization"is benefit for both son company and mother company.Based on the damages thin capitalization brought up for all the countries, for the sake of increasing the national taxation, protecting the national benefit of the countries that protecting investments,western countries and part developing countries adopt capitalization regulation to restrict the debt right financing on debt rights of the none residence investors. There are different regulations in the laws of different countries. There are mainly two kinds of methods:Fixed ratio method and normal trading principal.Fixed ratio method is also called safety port regulation that is taking debt and fixed ratio of the share (also called safety port) to judge whether"thin capitalization"exists, for those that exceed the ratio, the interests produced will be regarded as interest for shares. If the ratio of debt to capital stock of the company is within the fixed ratio regulated in the tax law, then the interest payout for the debt is allowed to be deducted before taxation; if the ratio of debt to capital stock of the company is exceed the fixed ratio regulation in the tax law, then the interest payout for the debt that is exceeding the fixed ratio part will not be allowed to be deducted before taxation, the debt interest exceeding the fixed ratio part will be regarded as dividends and collect income tax. The merits of this method are that it has provided clear direction for the financing arrangement of the enterprises,the demerits are that it is non-elastic, rigid and mechanically negative in some economically viable loan. Most of the countries are adopting this kind of method but with different ratio.Normal trading principal adopts the analysis method for individual case"substance is heavier than form"standard. Normal trading principal requires that the trading between related enterprises should also follow the trading principals of independent enterprises,that is to follow the open and fair market trading principals to do the trading between the related enterprises,its fixed price should be the same as the trading fixed price under the same situation between the none related enterprises,that will not be influenced by related relations and the personal fixing of the prices. If the interest of the loans between the related enterprises is higher than market interest rate,the exceeding part will belong to excess interest and should accept the control of the thin capitalization regulations. Sufficient flexibility is the advantage of the method,the shortcoming of this uncertainty is that, due to special circumstances associated with non-comparable prices is difficult to determine, this has brought difficulties for practical application. Countries adopt this method are comparatively less. Even if those countries that adopted normal trading principals, usually they will also combine them with safety port regulations.This article has done the comparison and research on the thin capitalization regulation of the United States, Australia, England and Japan etc. countries,we can see that the thin capitalization regulation has already become an important part of all the western countries in anti tax avoidance taxation system. For the sake of preventing multi national companies from big scale tax avoidance and guarantee the taxation income of the host country,making a set of thin capitalization regulation is quite necessary. But the restriction degree of this regulation should be decided according to actual situation of the overall economic environment and the policies of dealing with foreign investment of the host country,otherwise some negative effects that the legislators of the host country would not like to see will appear.With the gradually opening up of the foreign investment domain after our country entered into TWO,adding that the foreign currency under part of the capital are freely exchanged and can be expected that the capital account convertible will be an irresistible trend. External debts will be more selective,the space of thin capitalization created will be even bigger. In fact,since thin capitalization has many negative effects,for example:first,it severely erode the revenue income that our country government should get,and it directly influence the effective exert for the adjusting function of the revenue of our country;second, disorder the economic order of our country, create negative influence for the balance situation of our country in foreign currency collection and payout;third,since the transfer of profit has made the gloss of investment loss for foreign investors investing in our country,then make the negative effect that the investment environment of our country is difference that influence the enthusiasm of foreign investors to invest in China that make against the opening up policy of our country. So, the author thinks that the taxation authorities of our country should regard it highly and adopt anti tax avoidance measures with purpose.In some of the regulations issued by the National Taxation Bureau of China and the current related laws and regulations, as for the regulation of thin capitalization besides some of the regulations in the new enterprise income tax law,there is no other laws that list it specially,"thin capitalization"hasn't been used by formal document. With the development marketing economic of our country in the direction of depth, the operation force of the regulations besides tax law and faultiness in the tax law is gradually faded away. Mainly shown in the following aspects:stating from some degree, the management on capital principal regulations of foreign invested enterprises in our country is comparatively perfect. But at present, the related code only regulates a fixed enterprise scale,requires a kind of capital adequacy,only pay attention to the registration capital of the company and the static state control of the actual capital, lack in the monitoring of the capital flow direction and the dynamic regulated system of malfeasance profit transporting action. Although this has actually made a definite effect in preventing thin capitalization,but not made a proper thin capitalization regulation. This is totally different than the fixed ratio method adopted by the above mentioned countries. But vast international capital market continuously getting rid of the stale and bringing forth the fresh, the financing methods at home and abroad provide flexible fund resource channels, this has made the restriction of our country for foreign debts weak. According to the regulations of the new enterprise income tax law,there is a 15% discriminate between the interests and dividends,this has given the none residence enterprise using thin capitalization to do tax avoidance an obvious chance. The regulations in the new enterprise income tax law about loan interests of financing is too tenet and general. At present the lack of capable staff from the taxation department for anti tax avoidance also restricts the regulations of thin capitalization. The entering of WTO of our country has created an advantage for the flow of international capital in a bigger scope. At the same time of vigorously importing foreign investment, expediting the reasonable collocation of resources, guaranteeing the stabilization of the income after tax will be a not evasive problem of the taxation department of our country. Through analysis on the related regulations already adopted by foreign countries, taking their successful experience as reference, combining with the national situation of our country, brought up the measures of building up and perfecting the measures of answering to thin capitalization,the detailed measures are:The first is to definitude the applied object of capitalization tax system. For the sake of avoiding the none residences abroad enterprise re-loan to the enterprises at home through residence at home to evade the restriction of law,suggest that the applicable object of thin capitalization taxation system including financing between the enterprise with none residence enterprises and the financing between the enterprises and the related residence enterprises,that is the financing between the enterprises with that of the related parties.The second is under the background of needing greatly the attraction of foreign investment in our country,for the sake of building a loose and assured investment environment , adopting funded debts/ rights and interests ratio method is a comparatively better choice,that is to say the thin capitalization tax system of our country should adopt safety port regulation(fix up ratio method).The third is the suggestion for legislation of the application of thin capitalization regulations. Appropriate debts should be fixed / rights and interests ratio,considering the macro economic environment of our country and the thin capitalization taxation system preliminarily imported,we suggest the fixing of the safety port regulation ratio is relevantly loose, the ratio for general industry is fixed between 2:1 to 4:1,the ratio for finance industry is fixed between 20:1 to 35:1;we should be clear about the covered contents of creditor's rights and share rights as well as the choosing of the time point of calculation. We suggest that our country should adopt average method for liability and rights and interests;we should be clear about the calculation object of fixed debts/ capital stock ratio,the safety port ratio of our country should take the single shareholder as object for calculation;we should be clear about calculation method of the creditor's rights type financing from related party and rights and interests type of financing proportions. Clear about the handling of excess interests,as for the handling of excess interest taxation, we suggest do it according to the international habitual method,regulate that the interests paid for the excess limitation amount loans cannot be deducted before taxation and take it as dividend collecting withholding tax,at the same time it cannot enjoy the beneficiary treatment of exempt withholding tax.Prevent or restrict the action of thin capitalization tax avoidance,only having regulated thin capitalization actual regulation is not enough, we need to correspond the whole process of revenue legislation to revenue management. Considering the commonness of thin capitalization tax avoidance measure and other international tax avoidance measure,we can use the already existing anti tax avoidance revenue and management measure as reference. But because of the characteristics of capitalization,our country should set up special international taxation management organization and staff, perfect the declaration system of related enterprises, consolidate the onus probandi liability etc. revenue levy and management system,strengthen international taxation cooperation, increase the punish strength for tax avoidance etc. in order to strengthen revenue management.
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