Study On Thin Capitalization Rules

The thin capitalization is a way for multinational taxpayer to avoid tax payment to maximize the interest of the enterprises. The obvious incentive for the multinational corporation to apply thin capitalization is the different tax treatment of interest and dividends. At present, thin capitalization has become a wide-using approach of international tax avoidance used by multinational corporations. With respect to the damage and impacts on the tax revenue from thin capitalization, many countries have adopted specific thin capitalization rules to limit tax avoidance by thin capitalization.The thesis compared and analyzed the two main kinds of thin capitalization rules in some developed countries, which are "Arm's Length Principle" and "Fixed Ratio Approach". Under Arm's Length Principle, investments are reviewed using a 'substance over form' criterion on a case-by-case basis. The nature of the investment is reviewed in order to determine whether an unrelated party would have provided funding on the same or similar basis. This more flexible approach was recommended by the OECD Report in preference to the fixed ratio approach. The disadvantage here is that the rules are somewhat subjective and no clear guideline is provided to taxpayers, which lead to an obvious lack of certainty. Most countries use Fixed Ratio Approach to limit thin capitalization. The advantage of this approach is that it provides taxpayers with certainty guideline. However, this approach lack of flexibility and efficiency of enforcement.Besides the preface and the conclusion, the thesis is composed of the following three chapters:Chapter 1 introduces the basic theory of the thin capitalization. I firstly set forth its definition, then introduce its causes and in the end analyze its aspects.Chapter 2 firstly analyses "Arm's Length Principle" and "Fixed Ratio Approach" and compares these two approaches' advantages and disadvantages, and then reviews the legislation of some developed countries.Chapter 3 firstly analyses the old regulations and administrations in restricting thin capitalization in China before enacting the new Enterprise Income Tax Law, and then mainly analyses the new thin capitalization rules in the new Enterprise Income Tax Law and the Implementation of the Enterprise Income Tax Law, and gives several suggestions to perfect pertinent legislation of China.