Research On Thin Capitalization Rules In China

The global mobility of capital has become more frequent and fluent with the development of globalization. To relieve the tax burden of investment, international investors get down to taking measures to avoid tax. Thin Capitalization is one of the measures. By increasing the rate of liabilities of total assets, it increases the interests deducted before reporting tax and finally reduces the tax payment. This measure would erode the tax benefits of countries and it also cannot be inspected easily by tax authorities. Therefore, each country makes rules to restrict the thin capitalization. Because of restriction of many factors, such as politics, economy, society and culture, we do not establish specific rules to restrict thin capitalization. There are only several rules in our present laws and regulations, like Enterprise Income Tax Law. However, these rules lack systematization and operability. On the other hand, our country is a developing country and we need import foreign capital, so it is not appropriate to restrict the thin capitalization strictly. With the opening up of our capital market and showing up of Thin Capitalization in the Enterprise Income Tax Law in2007, it becomes necessary to research the basic theory of thin capitalization and finally to propose the thin capitalization rules. Besides, it is also meaningful to direct our transnational enterprises to use the tax preparation techniques flexibly in the foreign countries.Based on this background, this thesis is about introduction at first which summaries the background, research purposes and significance, research logic, methodology and innovation.Then this thesis presents the literature reviews. Optimal Capital Structure is the based theory of thin capitalization, including M&M theory and Trade-Off Theory. Besides, this part also summaries and makes comments on previous studies at home and abroad on thin capitalization. The third part of this thesis introduces the basic theory about thin capitalization. It includes the definition, the cause and the impact of thin capitalization. Specially, it describes two methods (Arm’s Length Principle, Safe Harbor) which are used to restrict thin capitalization at present. By making comparison on the contents, strengths and weaknesses between the methods, Safe Harbor is more reasonable than the other one. After that, this thesis researches the thin capitalization rules in China on the base of the data of listed companies, including the choice of index, object and standard. The essence of thin capitalization is to increase the interest deducted before reporting tax by increasing the rate of liabilities, so this thesis thinks the companies which increase the rate because of the high tax burden should be restricted by the thin capitalization rules. To make a scientific standard, this part first analyzes the influencing factors of thin capitalization, which provides reality foundation for empirical analysis. Then, it uses quantile regression method to research the correlation between the rate and tax burden under different quantiles. Finally, considering the industry factors, this thesis proposes different standards aimed at different industries. On the base of the above analysis, the last chapter presents the conclusions.This thesis not only completes the influencing factors of thin capitalization, but also gets more conclusions than other researches by using quantile regression method. However, this thesis did not make research on the liabilities among related parties because of the lack of data. Therefore, we can focus on this issue in the further research.