The Summary of the conference speech
First, let me express thanks to “Korea University School of law” and professor Park Jong-su for inviting me to attend this international tax conference, and also I am very honored to have some exchanges with scholars and experts on tax law in South Korea and who come from American today. I believed that I can get a lot of from symposium.
I received some comments from Kim, Jae-Sun, Ph.D. /? Kim, Jun-Suk, Tax Accountant /? Sean C. Hayes yesterday, I think these comments are useful to me to revise? my article and re-understanding of partnership taxation issues. In here, I would like to say thanks for giving me some useful suggestions. Thank you very much! Others, Because of my English is limited, so some words in translation of English version of my paper may not be correct, and English version is just the summary of Chinese version of my paper, so some issues may not be explained clearly, I am apologetic for this.
In addition, in recent years, I have been making the comparative law study on tax system and regulations, mostly, including the Regions in Northeast Asia, such as Taiwan district in China, Japan and South Korea. I am also interested in the topic on " 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.
The theme of this International Tax Law Conference is about ”Study of Fiscally "Transparent Entity" and its Anti-tax Shelter Systems－On the Basis of Issues on Special Allocations of Partnership Enterprise in China”. Because the issue of anti-tax shelter involves a wide range, so I just want to seize a point for analysis this problem. This point is about the problems of “special allocation of profit” in china’s partnership tax system. As a background of this point, in this article, I introduced the development process and the structure of partnership law and partnership tax system of China.
Since China's Partnership Enterprise Law was promulgated in 1997, many of investors like to use the form of partnership to do some small business in china, 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.
On the other hand, in recent years, in Japan and South Korea, a lot of legislators and researchers are very concerned about how to design the "partnership", there are some research results in Japan and South Korea, these research results are the main references when I write this article.
Firstly, I would like to explain the purpose of writing this article. Since the "Corporate Law of China" had been enacted in 1994, many large or medium-sized enterprises use the legal form of "Corporation" or the form of “limited liability companies “to do their business, Including many state-owned enterprises and private enterprises. In addition, the Chinese government also hopes to promote the development of SMEs (Small and Medium Enterprises), because we all know that development of SMEs can solve the problem of employment for more Chinese people, although the revenue from SMEs is only about 30% of total revenue for Chinese government.
So, how to promote the development of SMEs on tax policy or tax law? This is a problem deserving of study. This has reference to the issue of "transparent entities" of this article. On the other hand, another issue is related to that how to prevent the tax avoidance by using such “transparent entities”? So, there is a contradiction, namely, how to design a tax system to promote SMEs and to prevent the tax shelter by use of such system. I am concerned about the problem is how to resolve this conflict?
This is a big problem and need to argue with more detail. In here, I will give you a brief introduction around three aspects.First part is about my understanding on the definition of “transparent entity”.Second part is about the classification of entity and non-entity on Chinese tax law system.The third part is about tax issue of “special allocation of profits” of partnership.
In Here, especially 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”).
In here, I would like to explain why I have to study the concept of "transparent entity". With my understanding, I think this concept is very significant, because that the system of fiscally “transparent entity” can create a more "private law form" or "tax law form" for small business of china. Of course, the Chinese Government has made a lot of tax policies to help to promote the development of SMEs, but I think that the creation of the regulation of “transparent entity” is one of the ways. On other hand, “transparent entity” system will reduce the tax burden on small and medium enterprises, and will be beneficial to tax fairness and efficiency.
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
On second part, I would like to explain why there is no "transparent entity" concept in China’s tax law system?
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.
Therefore, some scholars in Japan believe that in addition to the classification of the distinction between legal person and non-legal person, there should have a third criterion meaning "transparent entity" criterion.
Through the comparative law study, we know that there are some basic principles on anti-tax shelter on the U.S. tax law and regulations, such as substantial business purpose, substance over form principles, proper reflection of income.
In addition to above-mentioned general principles, there are also some particular rules provided for some special acts of tax shelter, in this article, will discuss on “special allocations”.
In the current related partnership tax regulations of China, there is only one simple rule provided for the “special allocation”, namely “It shall not be stipulated in any partnership agreement that all profits will be distributed to some of the partners or that some partners will bear all losses”, but the problem is that this provision is not able to prevent tax shelter act sufficiently whether in the case of inbound that transaction are operated by foreign investors with legal form of partnership, nor in the case of outbound that internal investors do their transactions by using the legal form of partnership abroad.
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. For establishing a fair, neutral and simple tax system environment for the development of SME, it should be making the tax reform on partnership taxation according to the enterprise's substantial investment content, Economic substance and Legal characteristics. Meanwhile it should provide or clear the some general anti-tax shelter principles and particular rule on some special acts of tax shelter for responding the development of “diversification of legal form” and “complication of transaction form”.