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  "Transparent Entity Taxation: Development in Central and East Asia"

International Taxation Conference
The Graduated School of Science in Taxation of
The University of Soeul

May 13, 2011


Topics:"Transparent Entity Taxation: Development in Central and East Asia"
May 13, 2011 Pm15:00-18:30
Conference Room of the Law School of University of Soeul
Sposor :
Tax Law Research institute of Univeristy of Soeul
The Law Research institute of University of Soeul

2011年5月13日,在首尔市立大学法学院学术会议厅召开了“东亚国家与地区透明实体(Transparent Entity)-合伙企业税制发展国际研讨会”,主办方是首尔市立大学法学院税法研究所和税务专门大学院税法研究所。来自韩国、俄罗斯、塔吉克斯坦和中国等国家的20多名国际税法学专家和律师参加了本次国际学术会议。大家针对合伙企业的国际税收避税与反避税问题进行了广泛地讨论。

“Research on The Taxation System of China's Transparent Entity -On the Basis of Analyzing the Pass-Through Taxation System of Partnership Enterprise in China"(英文 PPT)
The Summary of the conference speech

in recent years, we often hear or discuss a topic on the " The Integration of Northeast Asia Economy ", so from this point of view, I think it is necessary to strengthen exchanges more and more in the future in such areas of public finance and taxation Policies and legislations between China, South Korea and Japan.

This is because, in the Northeast Asian economic spheres, the transnational economic activities that are carried out by economic agents, such as Individuals or enterprises, are more and more frequently, so in these areas, the public finance and tax policies which were published by each country’s government, and laws that were enacted by each country’s legislature, are so not only have significant impact on their own economy, but also have a great impact to the taxpayers who have the cross-border economic activities, and also bring the problems like Increasing the tax burden for taxpayers and the fairness of the tax system.

In recent years, in china, many of investors like to use the form of partnership to do some small business, while many other foreign partnerships also invest in China with Chinese partner.? But on the other hand, there is not perfect yet on China's current tax system of partnership. So I think the theme of this conference has realistic significance, I hope to get some positive inspiration through this conference.
The theme of this International Tax Law Conference is about "fiscally transparent entity", I think this subject is very new actually to the Northeast Asian countries. My topic is “Research on The Taxation System of China's Transparent Entity”, the subtitle is that “On the Basis of Analyzing the Pass-Through Taxation System of Partnership Enterprise in China". Firstly, I would like to explain a concept in this subject with a brief statement.

In Here, I want to emphasize that actually the word of "transparent entity” is not a legal concept and also not clearly defined in some business and taxation law systems in China. Meanwhile, also I could not find a clear definition about this concept both in Japan and South Korea, Whether in legal studies, or in legislations and legal interpretations. In here, I would like to introduce the means "transparent entity” in the U.S. tax law and regulations.

We can see that the concept of "Transparent entity” is to be used frequently in IRC and the CFR in the United States, the means is interpreted in the CFR as follows. In here, we can see some characters of “transparent entity” like that “to separately take into account on a current basis the interest holder's respective share of the item of income paid to the entity, whether or not distributed to the interest holder, and the character and source of the item in the hands of the interest holder are determined as if such item were realized directly from the source from which realized by the entity”.

According to these means, I would like to try to define this concept with my understanding about the “fiscally transparent entity” like this.
Firstly, it is an entity (which is distinguished from individuals, or individual enterprise), while, such entity is determined as legal form by private law system (in other words, that is a form provided by business laws and other enterprise laws); ?secondly, the substance of "transparency" is stressed here that it is a actually technical means taxation law, through this technical means, an item of income received from entity is reflected directly in the calculation of income on the level of interest holder in order to achieve the tax purpose(in the other words is called “fiscally”). On this basis, I would like to introduce you the fundamental type of “Transparent Entity” in Chinese private law.
In China, there is only one type of legal form of partnership (including GP & LP) is used for the tax purpose on fiscally "transparent entities ".? This is because that the commercial law in China is not very developed, so there is not creating a more private legal form.

On the other hand, in The United States tax law system, the fiscally transparent entity is usually including limited liability partnership, the general partnership, limited liability company,? common investment trust, grantor trust etcetera.

On Japanese tax law study, the fiscally "transparent entities " is including? the “special purpose trust”, “special purpose companies”, “investment business limited partnership”, Japanese silent partnership( called ‘tokumei kumiai’) et cetera. Now I want to talk about my awareness of the issues that is relating to the maters of how to improve the tax law system of partnership enterprise in China.
I think there are two purposes in the private law for the creation of partnership legal form, the first is to promote the development of SME(Small and Medium Enterprises)in China, and the second is to create a vehicle of economic activities accord with the demands of the Chinese market economy.
And I think that the realistic meaning of designing “transparent entity “in the tax law system is for achieving the tax purpose. I think there are two tax purposes in here with my understanding; the first is in order to achieve fairness on tax law, and creating the equal tax environment between SME and other enterprises; the second is that the tax law system which is scheduled out for SME should be consistent with substance of economic activities.

Therefore, to be based on above thinking, inhere, my awareness of the issues is whether the Chinese current partnership enterprise income tax law system is in compliance with the private law purpose and tax law purpose or not?

To answer this question, I would like to interpret the characteristics of partnership enterprise in business law and tax law.?
Firstly, I would like to make a simple description on several forms of enterprise which have been created by modern Chinese organization law system, and this description will help us to know the partnership enterprise tax environment among the overall tax system in China.

There are mainly two types of legal form, one is created by civil law, it includes the public Institutions and social organizations, and they are non-profit organizations.
On the other hand, there are several enterprises which were designed for investors on profit purpose. It is also can be divided into two types.

One type is so called “The legal form of enterprise with Chinese Characteristic”(or we also call it as traditional classification, or as the classification under planned economy system? ) , it including state-owned enterprises, collectively-owned enterprise, private enterprises and Foreign-invested enterprises(such as Sino-foreign joint venture, Sino-foreign joint cooperative ventures, solely foreign-owned enterprises )

As to another type, I understand it as a “general sense of the classification” that is similar with the type of business organization law in many countries, it generally include Corporation, partnership, sole proprietorships and trust. These types of enterprise had been created after the implementation of a market economy in 1993.

In a word, these are main legal forms witch to be used by investors.? Meanwhile, these legal forms will burden the different tax liability according to their characteristics of private law which. Investors use these legal forms to engage in economic activities, and it will be imposed the enterprise income tax and individual income tax respectively when earned interest from their economic activities.

We have to solve the problem on the view of taxation law is that, to these legal form, and for tax purpose, we need to distinguish them, to conform which is "entity ", that is required to pay enterprise tax, and witch is "non-entity", that is required to pay individual income tax, and witch is “transparent entity", that is required to compose the tax with legal technical means to these transparent entities.

I want to emphasize in here that there are divided into three type such as "entity ", "non-entity" and "transparent entity", because the classification is directly connecting with my conclusions.
Here, we take a look at the existing tax framework, and to think about how a entity like partnership are recognized as fiscally "transparent entity "? And what is the basic structure of it?

In recent years, a subject of "Diversification of legal form" have been discussed in the Northeast Asian countries, the characters of diversification is that many new legal forms were created by private law, and the legal character of these forms have changed.

For example, like LLC, it has qualification as a legal person in private law form, but the economic substance is essentially a partnership; or like some very large scale partnerships, its private form is a partnership, but the economic substance is very close to the company. In this case, how to judge it according to the tax purposes? I think this is a very important issue.

In Japan and South Korea, legal personality is often used to determine whether an economic organization is a individual taxpayer or entity taxpayer. If an economic organization with legal personality, then it is treated as entity to pay tax at organization level, if it is not, it will be treated just as “non-entity” at individual level to pay income tax. Clearly, this classification method is based on a kind of theory of "dualism". There is also a same consideration and treatment in china.

Conclusion is that, in Chinese tax law system (including Japan and South Korea), the usual way to determine an economic organization that is whether a entity or not are based on private law form (legal personality), and is not based on its economic substance, so that it can be said that there is tax law criterion. So there is not a tax law form that was designed like “transparent entity” outside the private law form. It is for this reason, that there is no a concept of "transparent entity" in Chinese tax system, and also do not create some tax regulations for transparent entity.

Currently, a common practice in the tax system is to contrast a new legal form with enterprise income tax or personal income tax. The result is that this is not conducive to the development of SME, and to realize the fairness in tax burden. For this reason, taxation and international taxation in the country appeared on the use of private forms of tax avoidance phenomenon.

Conclusion: it is required to create tax system for” transparent entity” in tax law beside "entity " and "non-entity ", and should be designed tax regime for small business enterprises with its economic substance and economic nature.
May 13,2011
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