Study On The Legal Regulation Of The Controlled Foreign Corporation In International Harmful Tax Competition

Economic globalization，with the boost of today’s accessible communication andthe gradual liberalization of economical control, has rapidly developed. Apart fromsome self-enclosed countries, all countries benefit from this open environment. Whileenjoy the benefits of globalization, countries have begun to take various measures andto enact various policies in order to have an advantage in the competition, so that thecountries themselves can keep and even enlarge interests. Among these measures andpolicies, the impact of the tax system can not be ignored. Owing to the profit-drivennature, investors tend to choose region or country which can maximize the after-taxprofit. It resulted in countries competing in optimizing their tax environment forinvestment at home and abroad, which even caused harmful international taxcompetition.This paper mainly discusses legal regulation on tax avoidance that the investorsbenefit from setting up controlled foreign corporations (referred as CFC) in taxhavens or countries and regions implementing similar tax policies, i.e. CFC rules. TheUnited States is the first country to develop CFC rules, and OECD is the firstinternational organization to recommend countries adopt CFC rules to weaken the taxavoidance by CFC. They have promoted, to some extent, the development of the controlled foreign corporation rules. As the representative of developed countries,OECD, however, in the process of promoting the tax guidelines and Tax InformationExchange system, posed a strong attitude and favored the traditional capital-exportingcountries. This caused the dissatisfaction of developing countries and resulted in aconflict between both sides. The point of conflict is that the definition of "moderate"competition and "harmful" competition. And this dispute will inevitably leadcountries for the CFC definition of the difference.It differs in the laws and regulations of the countries in the world about how todefine the CFC, i.e. the scope of application of the controlled foreign corporationrules. This paper introduces the current CFC rules in some countries to find thegeneral view of this rule, the CFC rules of the United States, and explores thedevelopment of CFC rules under the age of electronic commerce. From these points,we can find out the inspiration for the development of China’s CFC rules. Althoughforeign investment means significantly to China, investment abroad has advanced inrecent years by leaps and bounds. It has occurred frequently that domestic and foreigninvestors took advantage of loopholes in the domestic tax incentives and bilateraltreaties for CFC tax avoidance. Since the enterprise income tax is unified in2008, theChinese government has paid more and more attention to regulating tax avoidancebehavior through CFC and has also made a series of achievements in the controlledforeign corporation rules. As to the initiative of the OECD and other internationalorganizations in the Tax Information Exchange mechanisms and other tax areas, theChinese government, on the one hand, should stick to the sovereign, protect nationalinterests and respect other countries’ interests. On the other hand we also need a goodgrasp of international opportunities to strengthen bilateral and multilateralnegotiations to increase our rule-making right.The fundamental reason of the generation of CFC tax avoidance is that the hostcountries desire to increase their competitiveness to attract investment. If onecountry’s competitiveness relies solely on distorting domestic tax system, it will onlyhinder the formation of the pillar industries in the country and over-reliance onforeign capital rather, resulting in a vicious cycle. Therefore, it is necessary for China to support its pillar industries and deepen the domestic market for a county to develophealthily and sustainably.