Anti-Tax Avoidance Measures under VIE Structure: A China’s Perspective

Abstract

The sudden bankruptcy of the famous energy giant Enron reflected a key issue that financial information reflected in financial statements is to some extent distorted if the control of a company is measured only by voting rights, as the parent company’s financial statements ignore the other companies that the enterprise actually controls through agreements. As a result, the Financial Accounting Standards Board (FASB) developed FIN 46, which requires special purpose entities (SPE) to consolidate their financial statements into the parent company’s financial statements and also has become the basis for VIE structures. China’s capital market has always been very restrictive in terms of financing, which has led companies in the Internet industry and other asset-light companies that require large amounts of capital for upfront development to seek overseas financing through the VIE structure. In addition, the Chinese government also restricts foreign investment in certain specific industries, such as the Internet industry, mining industry, etc., due to national security, data security and other considerations, which makes foreign investors who want to invest Chinese companies in the industries in the Special Administrative Measures (Negative List) for the Access of Foreign Investment in Pilot Free Trade Zones (2021) or vice versa have to go through the VIE structure. However, the characteristics of VIE structure also determine that there are various means for international tax avoidance among VIE companies, resulting in tax base erosion in China. This paper discusses in detail the tax avoidance methods of VIE companies and the possible countermeasures.

Keywords

• vie structure
• international tax avoidance
• tax haven