An acute queening move for China's taxation legal reform: issues and proposals

• Author: HU Tianlong
• Pages: 616-655

FRONTIERS OF LAW IN CHINA

VOL. 11 DECEMBER 2016 NO. 4

DOI 10.3868/s050-005-016-0038-8

FOCUS

DISCIPLINED APPROACHES FOR CONSTRUCTING A RULE OF LAW ORDER:

RECONSIDERATIONS REVISED

AN ACUTE QUEENING MOVE FOR CHINA’S TAXATION LEGAL REFORM: ISSUES

AND PROPOSALS

HU Tianlong ∗

Abstract China’s fiscal and taxation law reform is at a critical stage since Chinese

economy development needs to consider compromising interests and conflicts from all

sources, such as the social benefit network, real estate industry avidity, internationalizing

currencies, fostering a philanthropic culture, and growing as a leader in the world market.

These undertakings all demand a modern, handy fiscal and taxation law system. On the

other hand, after two decades of implementation of the 1994 tax sharing system, the

original initiative of strengthening centralized control might not keep pace with the

needs of balancing decentralization and local financing demands, in addition to the

troublesome taxpayers’ protection, tax judicature reform, and worsening environmental

irregularities. Admittedly, China’s fiscal and taxation law reform faces new challenges

and incentives. Rigorous international tax frameworks and multi-jurisdictional

cooperation drive China to respond as an international trade giant and a responsible

game player. Such international tax policy orientations create another layer of incentives

and necessity for China to fine-tune its domestic fiscal and taxation legal framework,

ranging from promotion of free trade zones, global sourcing practice and supply chain

management, renegotiation of outdated tax treaty articles, more active participation in

consequential overseas investments, to WTO Protocol compliance review, and

international tax dispute resolution. Therefore, this article argues that, no matter the

extent to which feasible, plausible or pragmatic proposals are presented, a top level

architecting and a serious pursuit to upgrade citizens’ livelihood must be prioritized in

∗ (胡天龙) S.J.D. in Tax Law and International Law, The University of Michigan Law School; Associate

Professor of Law, School of Law, Renmin University of China; Research Fellow, PRC Ministry of Education

National Center for Civil and Commercial Law, Renmin University of China; Research Fellow, International

Monetary Institute, Renmin University of China, Beijing 100872, China. Contact: hut@umich.edu

This article is supported by the Fundamental Research Funds for the Central Universities, and the

Research Funds of Renmin University of China (14XNJ002) and (14XNF007). All mistakes and omissions

are my responsibility.

2016] AN ACUTE QUEENING MOVE FOR CHINA’S TAXATION LEGAL REFORM: ISSUES AND PROPOS ALS 617

earnest.

Keywords tax law reform, rule of law, international tax, tax judicature

INTRODUCTION .................................................................................................................... 617

I. DEBATE ON THE STATU S QUO AND FLAWS EMBEDDED ........................................... 620

A. State and Local Budget Management and Transparency................................... 621

B. Tax Administration and Collection..................................................................... 624

C. The Transfer Payment System and Decentralization Hurdles............................ 625

II. PROPOSALS FOR REFORM PATHS FORWARD........................................................... 626

A. Promoting the Internationalization of Renminbi and Commitments to Innovative

Reform in Free Trade Areas ............................................................................... 627

B. Honoring a Comprehensive Carbon Tax System for Circumventing Worsened

Pollution ............................................................................................................. 628

C. Advocating a Philanthropic Culture and Lowering Income Disparity ...............630

D. Voicing China’s Position in Structuring International Tax Orders..................... 632

III. RESTORING CHINA’S TAX JUDICATURE SYSTEM REFORM .................................... 634

A. Rationales for Structuring a Competent Tax Judicature System...................... 635

B. Market Economy and Socialist Rule of Law Construction.............................. 636

C. Awareness of Taxpayers for Rights Protection................................................. 636

D. Tax Legislation Reform....................................................................................637

E. Challenges and Opportunities from New International Tax Orders................ 637

F. A Dedicated Component of China’s Judicature Reform ...................................638

G. Catering to the De-Administration Determinations......................................... 638

H. Debates on Status Quo of Chinese Tax Judicature Reform .............................639

1. The Competence of Judges Adjudicating Tax Disputes .............................. 639

2. The Launch of an Independent Tax Court System ......................................640

3. Judicial Review in the Context of Tax Judicature ....................................... 642

I. Proposals for Bettering China’s Tax Judicature ............................................... 643

J. Summarizing Remarks ......................................................................................646

IV. TRANSFER PRICING: A NEW OUTREACH FOR INTERNATIONAL TAX ORDER AND

GLOBAL SOURCING................................................................................................. 648

A. International Tax Policy Goals .......................................................................... 649

B. Management of Transfer Pricing Relating to Global Sourcing Practice........... 651

C. Transfer Pricing for Intra-Group Services ........................................................ 653

CONCLUSION........................................................................................................................ 655

INTRODUCTION

China has risen as a vital global advancement engine and vibrant player over the past

618 FRONTIERS OF LAW IN CHINA [Vol. 11: 616

three decades.1 An outgrowth of such great economic expansion is China’s progressively

increasing change from being a passive passenger to an initiator of discourse and

negotiation in various international frontiers, such as China’s persistent determination to

modernize its domestic tax policies and streamline international tax outreach. The

Decision on Major Issues Concerning Comprehensively Deepening Reforms (hereinafter

“The Decision”) adopted at the Third Plenary Session of the 18th Central Committee of

the Communist Party of China (CPC) held in November 20132 delineated a detailed

strategy for reforming China’s fiscal and tax system as “an important guarantee of State

governance” to further modernize the economy and construct a “rule of law” order.3 A

few detailed measures on fiscal and tax reform were released thereafter.4

China has achieved rigorous advancement in fiscal and tax reform over the past three

decades, especially after China’s major tax system overhaul in 1994 and its entry into the

World Trade Organization (WTO) in 2001. Currently China displays an unparalleled

commission and opportunity for economic and social growth, by and through factoring in

social welfare,5 political stability, urbanization proposals, and citizens’ well-being. This

article argues that China can attain the fiscal and tax system reform goals designed in The

Decision and the rule of law construction from the top-down design perspective, which

requires assurances from China’s top fiscal leaders on the details. The Politburo of the

CPC Central Committee has proposed and approved a national construction for

solidifying fiscal and tax reforms in 2015, which itemized reform priorities and tasks and

designated the end of 2016 as a tentative deadline to complete key tasks in terms of

1 Articles and reviews on Chinese economic development are voluminous, see, for example, China

Economic Update–June 2014, available at http://www.worldbank.org/en/country/china/publication/china-

economic-update-june-2014 (last visited Jun. 30, 2016) commenting that Chinese economic development has

been lagging a bit for the past three fiscal years, however, the growth rate still kept at 7.7% in 2013 and 7.5%

for the first half of 2014. For a general discussion about progress of Chinese economic development, see

generally, ZHU Xiaodong, Understanding China’s Growth: Past, Present, and Future, 26(4) Journal of

Economic Perspectives, 103–124 (2012) available at https://www.aeaweb.org/articles.php?doi=10.1257/

jep.26.4.103 (last visited Jun. 30, 2016).

2 YANG Zhiyong, Prospects for Tax Reform in China Following the 18th CPC National Congress, 3

China Finance and Economic Review, (2015), introducing general guidelines on Chinese fiscal and tax policy

and relevant support, available at http://xueshu.baidu.com/s?wd=paperuri%3A%28c9b59a2bca3dfdcd

149dd23996c85b76%29&filter=sc_long_sign&tn=SE_xueshusource_2kduw22v&sc_vurl=http%3A%2F%2F

link.springer.com%2Farticle%2F10.1186%2Fs40589-015-0022-7&ie=utf-8 (last visited Jun. 30, 2016).

3 For general introduction and background of China’s construction of the rule of law order, see generally

in Randall Peerenboom, China’s Long March Toward Rule of Law, available at http://catdir.loc.gov/catdir/

samples/cam033/2002073483.pdf (last visited Jun. 30, 2016).

4 See Fitch, China Local Government Bond Law to Improve Budget Transparency, available at

http://www.reuters.com/article/fitch-china-local-govt-bond-law-to-impro-idUSFit74121920140904 (last

visited Jun. 30, 2016).

5 See generally in Leung and Xu, China’s Social Welfare: The Third Turning Point, Polity Apr. 2015,

discussing China’s social challenges ahead, including demographic shift, residential migration, and corrosive

inequalities, and outline the emerging forms of social security protection in urban and rural areas,

community-based social care services, non-governmental organizations and the social work profession.