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Abstract:
Analogous with the concept of a US "trade or business" in US federal income tax law, the concept of "establishment" under Chinese tax law determines the boundary between net-income and gross-income taxation of inbound investments. As central as the concept is, it has received surprisingly little interpretation. As China increasingly opens to foreign portfolio investment and makes new non-corporate business forms available to foreigners, the term is urgently in need of clarification.

This Article describes the recent regulatory and commercial developments in China that may rekindle interest in elaborating the meaning of "establishment." It then discusses the interpretations that have been given to the concept under existing law and attempts to identify the policy issues that these interpretations implicitly touch on but fail to explicitly confront. Finally, the Article looks at the overall tax policy stance towards foreign portfolio investment that may reasonably be attributed to China.

China's large surpluses in current and capital accounts and currency reserves make it doubtful that China will follow the US model for taxing foreign investment in the near term. Nonetheless, the government would be well advised to adopt an interpretation that permits foreign portfolio investment already identified as beneficial for China.

Chinese taxation, permanent establishment, Enterprise Income Tax

Abstract:
China's recent VAT reform also triggered changes to the business tax (BT), which is a VAT-substitute applied to services and certain other sectors. The most important among these changes is that foreign providers of service to Chinese customers are now subject to the BT even if the service is performed abroad. If the BT is thought of as a consumption-type tax, it's natural to interpret this change as a switch from origin- to destination-based taxation. This report summarizes the mixed practice of the destination and origin principles under the current Chinese VAT/BT regimes, evaluates the economic effect of the partial switch to the destination principle in taxing cross-border services, and describes likely future developments in the direction of destination-based taxation.

Chinese tax policy, Chinese Business Tax, cross-border services, destination principle, origin principle, Chinese VAT

Abstract:
To implement the foreign tax credit (FTC) provisions under the Enterprise Income Tax Law, Chinese tax policymakers are currently drafting detailed regulations on the computation of foreign source income and FTC limitations. These rules are of special interest given the dramatic increase in recent years in overseas acquisitions by Chinese firms. After identifying some of the most important policy issues facing the design of FTC rules in China, the article focuses on how limits may be imposed on aggregating profits and losses across foreign and domestic operations. It is argued that (i) Chinese tax authorities have so far adopted rules that substantially deviate from what principles of equity and economic efficiency recommend, and (ii) the government's sacrifice of neutrality in the pursuit of revenue may nonetheless be understandable, in light of some current features of Chinese foreign acquisitions.

Chinese tax policy, outbound taxation, foreign tax credit, limitation on losses, state-owned enterprises, Enterprise Income Tax

Abstract:
This paper develops a theoretical framework for analyzing the corporate income taxation of state-owner enterprises (SOEs). SOEs are subject to income taxation in many countries, presenting a puzzle as to why a government would tax its SOEs in lieu of simply requiring distributions. I suggest that for SOEs and private firms alike, divergent interests between managers and shareholders imply that ensuring optimal payout policy is not costless. To the extent that the solutions for mitigating this agency problem in the private firm context cannot be adequately implemented for SOEs, taxing SOEs constitutes a mechanism for forcing distributions. This explanation of SOE taxation implies that SOEs may be sensitive to the income tax, contrary to the supposition of some economists and legal scholars. Although SOEs may be less tax-sensitive than private firms in certain circumstances, and although they can be made less tax-sensitive if the government shareholder gives SOE managers “credit” for tax paid, these depend on contingent factors. I discuss these factors by borrowing elements of the framework developed by Chetty and Saez (2007) for analyzing the incentives of managers with respect to dividend payout. Moreover, I present non-quantitative empirical evidence from China suggests that SOEs may be rather tax-sensitive, which means that forcing distributions from them through the income tax may inflict tax distortions on the public sector.

Abstract:
At a superficial glance, Internal Revenue Code Section 892 appears to favor sovereign wealth funds (SWFs) over foreign private investors by exempting the former from tax on a significant range of US investments. This has recently led to calls for its abolition. Several authors, however, have challenged this view by pointing out that the impact of US tax on the relative competitiveness of SWFs and private investors should be analyzed in terms of the investors’ comparative, not absolute, advantage. And such analysis hinges on whether foreign private investors are taxed by their home countries on a worldwide basis, as well as on how SWFs are taxed in other countries where they invest. In support of these challenges, I discuss two hitherto under-noticed facts: the prevalence of the practice of worldwide taxation among countries generating the most investments into the US, and the fact that SWFs themselves may be taxed at home. Both buttress the conclusion that current US tax law is unlikely to have disadvantaged private investors. Moreover, the institutional characteristics SWFs imply that they lie in between foreign government pension funds and commercial state-owned enterprises. Changing current US tax law would unjustifiably hurt the former group of foreign investors, while having no policy effect on the latter, more controversial group of investors.

sovereign wealth funds, Section 892, tax and competitiveness

Abstract:
China's revised Partnership Law requires the government to tax partners but not partnerships. Previous partnership tax rules applied only to partnerships with individual partners, and suffered from major flaws, the most important of which is that the character of income received by a partnership is not completely preserved when allocated to the partners, with the result that individual partners are overtaxed on both labor and investment income. In other words, there was no true flow-through taxation. The paper recommends improving the flow-through treatment of income, but argues that because Chinese partnerships are unlikely to be prepared in the short-term to maintain capital accounts, the flow-through treatment of losses should be postponed. In addition, partnership tax accounting should begin deploying the concept of outside basis.

Chinese taxation, partnership tax

Abstract:
The Spratlys are a scattered group of islands in the South China Sea over which China, the Philippines, Vietnam, Malaysia, and Brunei have made conflicting jurisdictional claims. Although there has been significant academic discussion of this dispute, the Author argues that much of it is hampered by a discourse obsessed with the regional balance of power and security-related strategies that are only tenuously related to each nation's specific legal claims in the Spratlys. In this Article, the Author suggests that a more productive approach to the Spratly disputes is one focused on finding a solution that is fair to all the parties. The Article then examines several distinct substantive notions of fairness potentially applicable to the Spratly disputes and applies these notions to various existing proposed solutions, ultimately rejecting proposals that call for an allocation of rights in the Spratlys. Finally, the Author proposes that a multilateral management authority might satisfy each party's interest in fairness, at least in terms of participation in the ongoing process of allocation.

Spratlys, South China Sea, Multilateral Management, Adjusted-Winner Procedure

Abstract:
The Administrative Licensing Law (xingzheng xuke fa) will constitute a major addition to Chinese administrative law, and the rhetoric surrounding its drafting promises path-breaking reform of the Chinese regulatory state. This report critically assesses that promise by chronicling the actual course of shenpi (licensing) reform carried out in Shenzhen in 2001. Shenpi reform derives its novelty from questioning the rationale of regulatory policies and not just the procedures by which they are carried out. In Shenzhen, however, the reform revolved around an effort to achieve quantitative reduction in the number of shenpi procedures, which could reflect either changes in the substance of policies or mere success in cutting red tape. Close examination reveals that Shenzhen's reform was a combination of house cleaning against errant rule-making and an attempt to further increase bureaucratic efficiency, whereas little was accomplished in policy reorientation. A key difficulty in overhauling regulatory policies in China is the extremely insular policymaking process, where policy development falls entirely into the hands of specialised agencies. Not only is legislative and judicial oversight over agency rule-making absent, Shenzhen's experience also suggests that accountability has been difficult to establish even within the executive branch. This is due both to the weakness of internal monitoring institutions and the limited concept of accountability the government employs. The report concludes that incremental reform is possible to allow greater input into the policymaking process and to impose greater accountability on that process, even if robust legislative and judicial supervision is not politically or institutionally feasible in the near future.