Uncertainty and Possibilities in Taxation of Australian Investment in China: Profit Distributions and Payments to Group Members

Abstract

This paper considers the Australian and Chinese taxation of Australian investment into China with a focus on profit distributions and inter-group transactions. In doing this it identifies that there is significant uncertainty in relation to taxation outcomes in the area and that this would be expected to cause major compliance costs. The uncertainty can be understood at two levels. First it is the product of Australian tax complexity brought about by an extensive law that results in unanticipated outcomes when it is not carefully reviewed in relation to multiple taxpayer levels and over time. Second, it is the product of a Chinese law so lacking in detailed rules of application and reliable ancillary information that it is difficult to know how it applies to numerous transactions. The combination of these two levels of complexity mean(s) that a failure to engage in very detailed consideration of the law will result in unexpected and highly undesirable taxation outcomes such as double taxation. The expense associated with the necessary consideration and planning would be expected to constitute a major obstacle to investment by many Australian investors into China. At the same time the analysis shows that when significant planning is undertaken, opportunities can arise to minimize tax arguably below that which would be expected by legislators. Finally, the analysis indicates that it is very difficult to ascertain exactly what the ‘correct’ amount of tax is for Australian investment into China. The context necessitates complex planning for a reasonable outcome yet complex planning can result in the payment of minimal taxation. It is difficult to see this as efficient or equitable.