Improving The Tax System Of China’s Thin Capitalization Under The Vision Of Balancing The Interests

With the reform and opening up, China’s economy has developed rapidly. A lotof foreign capital has been introduced, but the phenomenon of tax evasion throughthin capitalization is increasing too. Thin capitalization refers to a form ofinternational tax evasion: when choosing corporate capital structure, transnationalinvestors increase the proportion of debt and reduce the proportion of equity to getmore pre-tax interest deduction so they can reduce tax costs and maximize theirprofits. As an emerging international tax avoidance method, thin capitalization isbecoming more and more popular among foreign-funded enterprises because of itsconcealment and flexibility and is getting more and more attention around the worldand international organizations.Not long before, to avoid tax by transfer pricing were all the rage, then manycountries began to put more emphasis and stricter scrutiny on it, making it verydifficult for enterprises to avoid tax by transfer pricing. As an emerging internationaltax avoidance method, thin capitalization is more hidden compared with transferpricing and it has more obvious tax saving effect and lower legal risk than other taxavoidance methods, so it is more likely to be used by enterprises. For law-executors,the perniciousness of such a tax avoidance is also greater, especially in the taxsupervision, because it is very difficult to monitor. Thin capitalization can bring badeffects as following: first of all, it will affect the sovereign interests of a country byharming national tax regulation mechanism and eroding national tax base. Secondly, itwill disrupt the normal order of market economy, break fair competition amongenterprises. It is detrimental to both fair competition and economic interests of theenterprises.It is undeniable that our country is in the early stage of taxation regulation ofthin capitalization. China lacks comprehensive and specialized tax legislative system,we can only find some stipulations about this dispersed in related laws and policies.The newly enacted "Enterprise Income Tax Law" and relevant regulations has somerelevant provisions aimed at preventing thin capitalization, but these provisions hassome loopholes, such as: the supervision means is not perfect, the interests betweenstate and taxpayer, between states, between taxpayers is not balanced.To solve the above problems, China must try to improve our tax supervision system, balance the interests of related entities. This and only this can, on the onehand, standardize our thin capitalization tax law environment, protect tax sovereignty,reinforce international tax foundation; on the other hand, provide a fair marketenvironment and protect economic interests and competing interests of taxpayers.Therefore to improve taxation regulation of thin capitalization, the followingmeasures must be taken: the identification and characterization of thin capitalizationmust be clarified and normal transaction principle and safe harbor pattern must beconsummated in order to guarantee the revenue interests of our country; to ensure theinterests of honest taxpayers by protecting competition interest, creating smoothchannels for expression of interest and provide compensation for those who sufferlosses; to ensure interests of creditors through regulating related transactions,securities issuance system and other relevant systems. Under the interests balanceframework of thin capitalization, interest balance is both a state and a process, as thincapitalization constantly breaks the balanced process and keeps balance in the move,the pursuit of balance appears to be the main theme of taxation regulation of thincapitalization.