Tax Information Exchange and China's Countermeasures

• Author: Tianjian Ouyang
• Position: Associate Research Fellow at the School of Economics of East China University of Political Science and Law
• Pages: 40-56

40

Tax Information Exchange and China’s Countermeasures

Tianjian Ouyang1

Abstract: In the context of global economic integration, the Tax Information Exchange system has

developed gradually; especially the establishment of the automatic exchange mechanism for tax

information is a milestone in international tax cooperation. In this development process, the OECD, the

EU and the US troika are the main driving forces. The core connotation lies in the exchange of financial

account information. In the era of big data, massive intelligence is automatically exchanged, and data

collection is used to find the collection and management clues which had become the main mode of

exchange. For China, as a responsible big country, is actively participating in the Tax Information

Exchange system and perfecting the domestic laws. However, we must be soberly aware of the hidden

concerns behind the Tax Information Exchange system for China’s status of being a developing country

has not yet changed. Therefore, it is necessary to recognize the dual status of the investment country and

the country under investment in China, and actively participate in the formulation of rules and enhance

international the right to speak, and through the top-level design, to prevent the “capital escape” caused

by the exchange of information, but also to prevent unfair tax treatment for the enterprises going abroad

because of the exchange of information, and actively strengthen the revision of domestic laws to ensure

the two Connect.

Key words: Tax Information Exchange; International Development; China’s Response;

Development Path.

For a long time, the widespread tax havens have caused the phenomenon of changing the status of

tax residents to evade tax obligations, which has provoked challenges for tax authorities in various

countries. In this “cat and mouse game” of tax avoidance and anti-avoidance, the tax authorities of

various countries have gradually gained the upper hand with the breakthrough of Tax Information

Exchange.2 At the G20 Hangzhou Summit in 2016, the leaders of participating countries called in the

communiqué that “all relevant countries that have not yet committed to adopting the standards for

automatic exchange of tax information, including all financial centers and jurisdictions, should make

commitments as soon as possible that standards for automatic exchange of information should be

implemented and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters

should be signed and ratified no later than 2018”.3 This appeal acted as a catalyst in the development of

tax information exchange, worldwide.4 For example, Article 5 of the Convention states that, “At the

request of the applicant State, the requested State shall provide the applicant State with any i nformation

referred to in Article 4 which concerns particular persons or transactions.” This article aims to analyze

the necessity of Tax Information Exchange and the trend of world tax information exchange, to illustrate

the challenges faced by China and the countermeasures under this wave based on China’s practice, and

to revamp China’s future role in the international Tax Information Exchange genealogy.

1 Tianjian Ouyang, Associate Research Fellow at the School of Economics of East China University of Political

Science and Law. This paper is supported by “Chenguang Program” from Shanghai Education Development

Foundation and Shanghai Municipal Education Commission (No. 19CG60).

2 See Terr Leonard B. etc, Resolving International Tax Disputes: APAs, Mutual Agreement Procedures, and Arbitration,

29 Tax Management International Journal 24, 55 (2012).

3 See Yue Peng, Personal Data Protection Issues on the Automatic Exchange of Tax Information, 36 Science of Law

156, 168 (2017).

4 See Renren Zhou, The Logic of Reform, CITIC Press, p.30 (2013).

41

1. Institutional Implications of Tax Information Exchange

As early as a hundred years ago, scholars made speculations about global Tax Information

Exchange.5 The reason why Tax Information Exchange has been a focus in international tax

cooperation since the beginning of the century is that it is an important way to effectively curb tax

avoidance.

(a) Institutional Arbitrage: Negative Effects of Information Isolation

Statistics show that in 2016 alone, OECD countries lost $52.6 billion in tax avoidance and

arbitrage.6 This has had a great impact on all major economies in the world.7 However, tax competition

and institutional arbitrage are unavoidable. This is fundamentally caused by the inconsistency of the tax

system. Taxation is the externalization of a country’s fiscal and legal system and even ideology. As

explained by the American economist Douglass North, international taxation consists of a multi-layer

structure from recessive to explicit,8 each layer of taxation is a reflection of the comprehensive national

conditions.9 In other words, as long as different countries have inconsistence or inconsistencies in the

layers, there will be gaps between systems and arbitrage space will be created for international tax

avoidance. Although international organizations such as the Organization for Economic Co-operation

and Development (OECD) have always called for coordinated reform and flat development of the tax

system in countries around the world. However, these institutional differences, rooted in the political and

economic system of a country, cannot be eliminated. Tax havens, therefore, using the lowland effect in

their taxation system, attracts a large number of taxpayers to evade their tax obligations by means of

changing the status of tax residents.

“Sunlight is the powerful disinfectant”. Tax Information Exchange can be an effective prescription

for eliminating harmful international tax competition and cracking down these tax havens. In the

European Union’s summary of certain features of tax havens, it is specifically mentioned that “lack of

effective exchange of relevant information with other governments on their taxpayers, minimal or no

disclosure on financial dealings and ownership of assets”.10 Thus, after the tax authorities of a country

have fully grasped the information that taxpayers of the country are engaged in commercial activities in

tax havens, they can use domestic laws to recover taxes from these taxpayers. Under global economic

integration drive, it is evidently very expensive to collect tax information by applying the strength of one

country alone. The core of Tax Information Exchange is to enable tax officials of various countries to

understand and verify the tax-related activities of taxpayers and to lay down the scope of these activities

in time, through an effective Tax Information Exchange network.11 The establishment of the Tax

Information Exchange mechanism would enable tax departments to effectively control the economic behavior

5 See Vito Tanzi, Globalization, Technological Development, and the Work of Fiscal Termites, 26 Brook International

Law Review 1261, 1284 (2015).

6 See OECD, Consumption Tax Trend 2016, OECD Publishing, p.19 (2007).

7 See Green Robert A, International tax dispute resolution: Breaking the impasse, 27 International Tax Review 58, 59

(2012).

8 See Douglass C. North, Institutions, 17 The Journal of Economic Perspectives 30, 73 (1991).

9 See Michelle Bertolini & Pamela Weaver, Mandatory Arbitration within Tax Treaties: A Need for a Coherent

International Standard, 35 The ATA Journal 131, 212 (2013).

10 See Listing of tax havens by the EU, http://www.europarl.europa.eu/cmsdata/147404/7%20-%2001%20EPRS-

Briefing-621872-Listing-tax-havens-by-the-EU-FINAL.PDF (accessed on October 31, 2018).

11 See Huishu Fu, Study of Legal Issues on Tax Information Exchange System, Masses’ Publishing House, p.31 (2011).