handbook-tb

Wei Cuiof the Income Tax Act of India provided that “any share or interestin a company or entity registered or incorporated outside India shallbe deemed to be … situated in India, if the share or interest derives,directly or indirectly, its value substantially from the assets located inIndia.” Therefore, the transfer of such shares would result in the realizationof income accruing or arising in India and taxable to a non-residenttransferor. 84 In contrast, China determines the taxability of anindirect transfer on the basis of an ex post determination. Under therelevant administrative guidance, 85 in cases where “an offshore investormakes abusive uses of organizational forms or arrangements indirectlyto transfer the equity interest in a Chinese resident enterprise,and such arrangements are without a reasonable business purpose andentered into to avoid enterprise income tax obligations,” tax agenciesare authorized to “re-characterize an equity transfer according to itsbusiness substance, and disregard the existence of the offshore holdingcompany which is used for tax planning purposes.” That is to say, onlya tax authority can determine the taxability of an indirect transfer, andsuch determination is to be made explicitly on the basis of a finding oftax avoidance motives. The statutory basis of this determination hasbeen attributed to the GAAR in China’s Enterprise Income Tax Law. 86Using the GAAR to deal with potentially abusive indirect transfershas turned out to be unsatisfactory in China in many respects, forthe fundamental reason that indirect transfers of shares of Chinesecompanies occur too often. Many of the entities used in offshore84It has been proposed that “substantially” be defined to mean 50 percent or more of the total value of a company’s assets.85Often referred to as “Circular 698.” Guoshuihan [2009] No. 698, Noticeon Strengthening the Management of Enterprise Income Tax Collection onProceeds from Equity Transfers by Non-resident Enterprises (promulgatedby State Administration of Taxation, 2009) (China).86Enterprise Income Tax Law, Article 47 (2008) (China). The statutorylanguage provides: “Where an enterprise enters into [an] arrangement withoutreasonable commercial purpose and this results in a reduction of taxablegross income or taxable income, tax agencies shall have the authority to makeadjustments using appropriate methods.” An “arrangement without a reasonablecommercial purpose” has been defined as one “the primary purpose ofwhich is to reduce, avoid or defer tax payments.” See regulation on the Implementationof the Enterprise Income Tax Law, Article 120 (2008) (China).146