Tax Avoidance in Family Related Transactions and China’s Anti Avoidance Measures for Purpose of Individual Income Tax

Abstract

In 2018, China started to implement the comprehensive income system for the first time in its new Individual Income Tax Law (hereinafter referred to as "IIT"), in order to reform the old scheduled income system which has been enacted since 1980 and promote tax equality. However, the tax unit of its individual income tax  is only the person rather than the family, so the risks of tax abuse like income shifting in a family to avoid the progressive rate rise in this filed, which can be witnessed in the tax practice of many developed countries, such as United States, United Kingdom, Australia, New Zealand, Germany, etc. More importantly, this kind of tax abuse is usually manipulated by family members, causing the problem about how those family related transactions should be combated. On one hand, many tax-free provisions have ever been set for families in the system of China’s individual income tax, reflecting a strong value to protect the family ethics in such a Confucian-influenced country. On the other hand, there are new but vague anti-avoidance rules added in its Individual Income Tax Law 2018, including the special rules against the transactions between related parties and the general anti-avoidance rule. With the deeper reform of direct tax in China, the concept of family plays an increasing role in its tax system. How can China coordinate between the object of anti-abuse made by family members and the value to protect family ethics? What can China learn from the experiences of western countries’ legislations to modify its current anti-avoidance rules? Is it necessary for China to introduce the joint-return system now? This article will make some suggestions to respond to the above questions.