Research On Legal Regulation For Tax Avoidance Of Multinational Company Via Thin Capitalization

Multinational corporations play an important role in promoting development of economic global, increase the flow of capital in the international to maximize the overall interests of the enterprise. For the pursuit of profit maximization, international investors seek to fall burden of tax by using different tax system in national. In recent years, there is a way of a high degree of complexity and concealment tax avoidance—Thin Capitalization causing the attention of people. Thin Capitalization is a way of tax avoidance to raise the proportion of debt financing and low the proportion of equity financing for increasing the interest lessening pre-tax expense and reducing the tax liability. It is harm to the host country and capital export country.The reason for writing this paper is that our tax sovereignty has caused serious damage by thin capitalization. If not to be prevented and restricted thin capitalization not only losses the revenue of our country, but also makes the illusion of poor investment climate of China, impacting the development of our economy in rapid, healthy and orderly. To restrict thin capitalization efficiently this paper began to study the basic theory of it. Firstly thin capitalization is concerned by economists of U.S. who research to maximize the benefit of enterprise. From the theory of MM to modified MM, how enterprises arrange the composition of capital under tax law. In legal perspective, the jurists research the reason of engender, the inherent nature, form, using methods, impacting to others of thin capitalization in the environment of tax law. Until the late nineties of 20th have scholars are concerned about the thin capitalization, the main fruit are mostly based on foreign legislation and practice.This paper discusses the regulation of thin capitalization approach: Arm's Length Principle and Fixed Ratio Approach. Arm's Length Principle focuses on the case studies. In an open and fair market economy, transactions between associated enterprises equal to unrelated business. This is a specific application in legal principle of substance over form. But because of its great uncertainty, arbitrariness and less efficiency, few countries adopt this principle. Fixed Ratio Approach provides a scientific and rational composition of capital for company to guide the arrangement of debt financing and equity capital. There is a clear basis and standards of law enforcement determined by Fixed Ration Approach with highly operation, improving efficiency of practice department, saving the cost of justice. So many countries in the world adopt this approach to restrict thin capitalization. However the Fixed Ratio Approach ignores the complexity of economic activity in the market and the case of equity, so there are some countries using this combined approach which regulate the thin capitalization, promoting merits and avoiding defects. This paper introduces three typical nations tax law—British, Australian and U.S. that is based on one of three methods, referring legislation and practice department of China.Subsequently, this paper analyzes the thin capitalization in economic activity in current situation. Thin capitalization has been quite common in economic, seriously damaging the sovereignty of our country's tax revenue and giving rise to potential hazards of our economy of security and stability. There is new Enterprise Income Tax Law of the People's Public of China and other related regulations have been enacted by State. From the existing provisions, the paper learning from foreign experience in legislation and practice analysis the insufficiency of the existing provisions and pose comments and suggestions to improving the tax system, which focus on three areas from the legislation, law enforcement to strengthening of international cooperation.This paper is divided into five parts:The first part is a literature reviewing, Scholars combed the process of thin capitalization. Firstly thin capitalization has been researched by economists in the U.S. Latter jurist research it to impact the State from the perspective of law and tax sovereignty. The paper mainly discusses the fruit theory of thin capitalization by foreign jurists. Basing on this theory, jurists in China especially discuss the main point of thin capitalization improve suggests after enacting of new enterprise income law.The second part focuses on the basic theoretical issue of multinational company via thin capitalization for tax avoidance. It researches the issue of multinational company via thin capitalization, analyzes the cause of thin capitalization, scope of application, form and serious impact of the host country and the capital export country.The third part mainly discusses the common method used by countries in the world to restrict the Thin Capitalization, analyzes the advantages and disadvantages of each method in practice, and briefly introduces tax laws of restricting thin capitalization of British, Australian and U.S. for taking our country reference.The fourth part issues that the phenomenon of thin capitalization which based on the certain date has performed in our economic life. The thin capitalization seriously has damaged to tax sovereignty of China, and is not conductive to the development of healthy, stability and orderly of our economy. It precise analyzes to the prescriptions for restrict thin capitalization which composed in promulgated laws. Legal regulatory framework of restricting thin capitalization of our country comes into being.The last part discusses that the existing laws and regulations have encountered some difficulties in practical operation and have existed the shortcomings. For the above defects legislative proposals and new measure and methods have been put forward by legislation who proposed it from three areas of legislative, enforcement of law and international cooperation to improve the tax law of China.