handbook-tb

Taxation of non-residents’ capital gains6.2.3 Multiple taxation and other implementation issuesAre governments justified in their indifference to these problems? Oneview is that the decision on how many layers of intermediate companiesare interposed between the domestic asset and ultimate investors is inthe control of the taxpayers, as are decisions to make dispositions atdifferent levels. If governments are wary of convoluted and opaque offshorestructures to begin with, they will have no motivation to go outof their way to make sure that tax is neutral with respect to the choiceof organizational structure in offshore corporate groups. 90 While thisargument is probably correct in itself, there is an important competingconsideration. As discussed in section 4 above, taxing foreignerson capital gains raises significant challenges for enforcement. If thetax on indirect transfers leads to arbitrary tax consequences becauseof unmitigated multiple taxation, taxpayers may respond not by simplifyingoffshore corporate structures, but by non-compliance andevasion. If a government wants to maintain the credibility of its antiavoidanceregime without committing indefinite resources to enforcement,it should try to maximize voluntary compliance. Rationalizingthe rules for taxing indirect transfers — including by mitigating themultiple taxation of the same economic gain — would seem to be onestrategy for increasing voluntary compliance.Notably, China’s policy for taxing indirect transfers, thoughproblematic in terms of adopting an approach of case-by-case determination,in fact suggests a solution to the problems characterizingthe existing SAARs. In China, indirect transfers become taxable onlyafter they have been determined by tax authorities to be, in economicsubstance, direct transfers. The layers of offshore holding companies,instead of creating separately and distinctly taxable assets underChinese law, must be disregarded. This implies that if the shares ofa Chinese company are treated as having been disposed of indirectlythrough the transfer of an offshore entity, the fact that the indirecttransfer has been subject to tax should be reflected by adjusting the tax90Advanced income tax systems tend to aim to be neutral with respectto such choices when the structures are domestic or “onshore,” adoptingspecial regimes such as corporate consolidation and disregarding intragrouptransactions.149