Study On The Taxation Of Indirect Transfers By Nonresidents

In the area of International taxation, the taxation of indirect transfers by nonresidents is a hot issue in recent years. Some countries tax foreign investors on gains realized on transfers of foreign entities that hold directly or indirectly immovable properties in these countries(e.g. Japan, Canada, Australia). Some non-OECD countries expand their taxing rights on nonresidents and start to tax a broader range of properties by foreigners, such as share transfers(e.g. India, China, Brazil). Legislation and practice on the taxation of indirect transfers are always disputable(e.g. Vodafone case in India, Notice 698 in China). The taxation of indirect transfers by nonresidents is kind of special, the enforcement of which is full of difficulties.The core issue of this paper is to solve how to tax indirect transfers, which means how to improve taxing rules of indirect transfers. The successful implementation of taxing indirect transfers depends crucially on improving voluntary taxpayer compliance. From the perspective of improving taxpayer compliance, this paper conducts a comparative study of legislation of indirect transfers taxation of six countries, and provides reference for improving China’s indirect transfer taxing rules. In combination of China’s taxation practice, it also compares and analyses China’s specific indirect transfer taxing rules(e.g. Notice 698 and Notice 7) at micro level, then proposes perfection suggestions. In addition, it proposes an assumption to consider constructing China’s indirect transfer taxation legislation beyond the framework of GAAR by learning from India experience.This paper proceeds as following:The first part defines the meaning of “capital gain from indirect transfers by nonresidents” within the research scope of this paper. With respect to capital gain from transfers by nonresidents, it firstly justifies source country’s taxing rights by applying economic allegiance theory and economic rent theory, and then justifies taxing rights from the perspective of model tax treaties. On the basis of justified taxing rights, it also discusses the possibility of using transaction forms to avoid taxes in property transfers, and the necessity to impose taxes on indirect transfers for countries.The second part is an overview about practice of countries’ indirect transfer taxation. It briefly introduces the famous India Vodafone tax case and different indirect transfer tax policies adopted by countries currently. There are systematic reasons for whether a country taxes indirect transfers, which is explained by a comparison of China and US. There are many enforcement difficulties in indirect transfer taxation practice, which influences countries’ tax policy and should influence the design of taxing rules.The third part, from the perspective of improving taxpayer compliance, conducts a comparative study of legislation of indirect transfers taxation of six countries, and provides reference for improving China’s indirect transfer taxing rules. Then it proposes perfection suggestions according to the principle of improving taxpayer compliance, reducing tax cost and uncertainty for the look through approach: stipulating tax basis step-up in tax law; providing more clear rules for determining obligation to pay taxes; for countries with frequent indirect transfers, introducing mechanisms for taxpayers to determine tax obligation by themselves may be considered.The forth part at a concrete level analyzes and comments China’s indirect transfertaxing rules in two periods(e.g. Notice 698 and Notice 7). In light of China’s tax practice, the author further reflects and proposes perfection suggestions for China’s indirect transfer taxing rules: stipulating tax basis step-up in tax law; consistently treating taxable indirect transfers as sales of underlying target companies(thus allowing conforming adjustments in tax basis); improving the stipulations of withholding obligations. In addition, it proposes an assumption to consider constructing China’s indirect transfer taxation legislation in a source approach beyond the framework of GAAR by learning from India experience.