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| Project Details |
| Funding Scheme : | Early Career Scheme | ||||||||||||||||
| Project Number : | 24611921 | ||||||||||||||||
| Project Title(English) : | Taxation of the digitalised economy in China: challenges and proposals | ||||||||||||||||
| Project Title(Chinese) : | 中國經濟數字化面臨的稅收問題：挑戰與應對 | ||||||||||||||||
| Principal Investigator(English) : | Prof Wang, Jingyi | ||||||||||||||||
| Principal Investigator(Chinese) : | |||||||||||||||||
| Department : | Faculty of Law | ||||||||||||||||
| Institution : | The Chinese University of Hong Kong | ||||||||||||||||
| E-mail Address : | jingyi.wang@cuhk.edu.hk | ||||||||||||||||
| Tel : | |||||||||||||||||
| Co - Investigator(s) : |
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| Panel : | Humanities, Social Sciences | ||||||||||||||||
| Subject Area : | Social and Behavioural Sciences | ||||||||||||||||
| Exercise Year : | 2021 / 22 | ||||||||||||||||
| Fund Approved : | 424,000 | ||||||||||||||||
| Project Status : | Completed | ||||||||||||||||
| Completion Date : | 30-6-2024 | ||||||||||||||||
| Project Objectives : |
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| Abstract as per original application (English/Chinese): |
The development of information and communications technology (ICT) has significantly changed how business is conducted. China has also undergone rapid digitalisation of its various economic sectors, but has not enacted any special digital tax rules in this respect. This research will attempt to identify a suitable taxation policy from the perspective of China. Digitalisation expands the reach of business operations far beyond national boundaries. Nevertheless, both digitalisation and globalisation confront national tax authorities with significant challenges. In regard to international taxation in particular, these challenges have been overwhelming, because the allocation of taxing rights on cross-border economic activity relies on an explicit physical connection between the taxable subject and the taxing jurisdiction. The difficulty of properly taxing multinational enterprises (MNEs) has been exacerbated by the increasingly digitalised economy. International organisations and individual states have therefore been forced to take action.
The first part of the project will examine the current tax regime in relation to the digitalised economy, in particular cross-border businesses based in China from two perspectives, namely inbound and outbound digitalised economic activity. The business models reviewed include China-based enterprises investing in domestic and overseas e-commerce markets and foreign enterprises doing business in and with China. This indicates that the challenges in regard to taxation could be manifold, involving direct taxation (individual and enterprise income taxation) and indirect taxation (value-added tax, excise tax and so on). The goal is to establish what challenges the Chinese tax authorities face when attempting to tax digitalised economic activity.
The second part of the research will use comparative legal analysis to investigate the special tax rules or proposals that have been adopted or suggested by international and regional organisations and individual jurisdictions to tackle the tax challenges posed by the digitalised economy. The comparison will focus on jurisdictions that share similarities with China in terms of the development level of the digitalised business sector. The analysis will consider the specific economic and taxation situation in the examined jurisdictions to analyse their perceived issues and countermeasures.
Using the findings of the first two parts, the third part will consider how China could most efficiently and effectively tax the digitalised economy. The research aims to propose a suitable plan for the government to properly exercise its taxing power, at the same time complying with relevant international treaty obligations as well as maintaining the vitality of the domestic market and competitiveness of the digitalised industry.
現代社會信息和通信技術的發展極大地改變了商業的運作模式。中國經濟的各行各業也經歷了快速數字化發展，但尚未針對經濟數字化製定任何特殊的稅收規則。本研究將嘗試從中國的角度出發探討相應的稅收政策。經濟的數字化使得商業運營的範圍不再受到國界或地理位置的限制。然而，經濟的數字化和全球化都為各個國家的稅務機關帶來重大挑戰。特別是在國際稅收的管理方面，這些挑戰是巨大的，因為跨境經濟活動的徵稅權的傳統分配方式依賴應稅主體和稅收管轄區之間的明確實體性的聯繫。而日益數字化的經濟加劇了對跨國企業適當徵稅的困難。因此，在國際組織和不同國家的層面都提出了新的應對方法。該研究項目的第一部分將從兩個角度，即對內和對外數字化經濟活動，審查與數字化經濟相關的現行的中國稅收制度。待研究的商業模式包括投資國內外電子商務市場的中國企業和在中國做生意的外國企業。這意味著數字經濟化對稅收方面的挑戰可能是多方面的，包括直接稅收（個人和企業所得稅）和間接稅收（增值稅、消費稅等）的問題。這一部分的研究目標是確定中國稅務機關在嘗試對數字化經濟活動徵稅時面臨哪些挑戰。該研究的第二部分將使用比較法律分析的方法來研究國際和區域組織以及不同國家和地區在應對數字化經濟帶來的稅收挑戰時，已採用或建議的特殊稅收規則。這一部分的比較研究將側重於在數字化經濟的發展水平方面與中國相當的國家或地區。該研究的第三部分將基於前兩部分的研究結果，探討中國如何有效地對數字化經濟進行徵稅管理。該研究旨在為政府建議適當的稅收政策和規則，一方面有利於稅務機關適當行使稅收權力，同時可以使中國遵守相關國際條約義務，以及保持國內市場的活力和數字化產業的競爭力。 |
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| Realisation of objectives: | The research objectives have been achieved in writing four papers which examine different aspects of the project. The focus of the research project is to address tax challenges brought about by the digitalised economy. The OECD/G20 Inclusive Framework’s BEPS 2.0 initiative plays an important role in shaping and influencing countries’ response to the tax challenges posed by the digitalisation of the economy. The PI examines the proposals put forward by both Pillar One and Pillar two and considers their effectiveness in dealing with the digital economy’s unique challenges. Firstly, the PI’s article "A New Pillar to Address Tax Challenges Arising from Digitalisation of the Economy: Consensus-based Digital Services Taxes?" published in the Florida Tax Review achieves the research objective of conducting comparative and critical analysis of multilateral and unilateral measures for addressing digital taxation challenges. The examination of digitalized business models in this article demonstrates that the lack of physical connection between a seller and the market jurisdiction does not change the trading relationship between a digitalized business and customers located in the market. It is the trading relationship, not mere user participation, that justifies the taxing rights of market jurisdictions. The physical connection required by the PE concept is used to prove a significant economic bond with or in the source state. Due to the development of information and communications technology, this significant economic bond can be established without a physical presence. Applying Vogel’s two factors of taxation in the source state to understand the taxation of the digitalized economy, it is rational for the OECD to work on new nexus and sourcing rules for pinning down the source of income earned by remote sellers in the market jurisdictions. Although Pillar One has received wide endorsement within the Inclusive Framework coordinated by the OECD/G20, this article discusses the concerns about and hurdles faced by the implementation of Pillar One by many low- and middle- income countries in particular. Notably, many unilateral digital taxes have been enacted or proposed by individual jurisdictions both inside and outside of the Inclusive Framework. DSTs have started to contribute money to state coffers. The complexity and controversy of Pillar One, compared with relatively easy and efficient DSTs, drive away jurisdictions under fiscal pressure. This article suggests reconsidering the role of Pillar One by accepting the reality of DSTs given the common purpose shared by Pillar One and DSTs. Instead of struggling with the technical details of Pillar One and Amount A, streamlining DSTs in different jurisdictions may be a more feasible solution. The OECD could continue to coordinate the collection of DSTs by individual jurisdictions by providing guidance on how DSTs should be collected to protect states’ taxing rights and prevent double taxation. Second, in respect of the influence of Pillar Two, the PI’s collaboration with Noam Noked in the Journal of International Economic Law (2024) examines to what extent the existing Chinese enterprise income tax rules are effective in taxing China-based multinationals. First, it is the first publication to systematically analyse the reported tax residence positions of Chinese MNEs with tax-haven-incorporated parent companies. We analyse the tax residence positions of the largest 79 Chinese MNEs with tax-haven-incorporated parent companies traded on major US stock exchanges. We examine the relevant disclosures in the annual reports of the companies in our sample. We find that all these companies reported that they are not REs for Chinese tax purposes. Companies reported that they are not REs even when most or nearly all of their operations and senior management were located in China. Many companies’ disclosures indicate that their non-RE status affords substantial tax savings for the MNEs and their non-resident shareholders. Secondly, this article analyses the expected impact of the global minimum tax reform on such MNEs. The non-RE status of the ultimate parent entities (UPEs) of the relevant Chinese MNEs will affect how the global minimum tax applies to these MNEs’ offshore entities. Our research reveals that the Chinese tax system enables Chinese MNEs to reduce their tax exposure at the corporate and shareholder levels by adopting a structure with a tax-haven-incorporated parent company that takes the position that it is not an RE, and the effect of the global minimum tax on these tax advantages may be limited. Beyond the implications for the Chinese tax system, these tax advantages could impact the relevant MNEs’ international competitiveness. Thirdly, apart from addressing the challenges of taxing e-commerce businesses, the PI also conducted research in relation to the unique challenges posed by the advent of Web 3.0. The PI examines how crytopcurrencies should be properly taxed. The cryptocurrencies that are an integrated part of blockchains have led to creating enormous value and wealth that attract increasing attention from investors and governments. The sophistication and anonymity of crypto assets create significant challenges for tax administrations as the current tax rules and guidelines in relation to them are either too broad or too complicated. The PI proposes a simplified tax regime that would significantly reduce compliance and administration costs when taxing cryptocurrency for which the first taxable event occurs at the moment when crypto assets are converted to fiat currency or other real-world goods or services. Lastly, the PI is working on a fourth article (Regional inequality in taxing e-commerce in China: a domestic Pillar one in need?) which explores how to deal with the regional inequality in taxing e-commerce in China, which is a result of unbalanced development and location of e-commerce in different provinces in China. This mismatch between places of money-making and tax collection exists not only internationally, but also within one country with a decentralized tax and fiscal system, like China. One issue underexplored is the unequal allocation of e-commerce-related tax revenue among different regions within China. This article will examine the regional disparity of tax collection in relation to e-commerce in China and proposes measures to relieve regional inequality. | ||||||||||||||||
| Summary of objectives addressed: |
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| Research Outcome | |||||||||||||||||
| Major findings and research outcome: | 1. A New Pillar to Address Tax Challenges Arising from Digitalisation of the Economy: Consensus-based Digital Services Taxes? Although Pillar One has received wide attention within the Inclusive Framework coordinated by the OECD/G20, this article discusses the concerns about and hurdles faced by the implementation of Pillar One by many low- and middle- income countries in particular. Notably, many unilateral digital taxes have been enacted or proposed by individual jurisdictions both inside and outside of the Inclusive Framework. This article suggests reconsidering the role of Pillar One by accepting the reality of DSTs given the common purpose shared by Pillar One and DSTs. Instead of struggling with the technical details of Pillar One and Amount A, streamlining DSTs in different jurisdictions may be a more feasible solution. The OECD could continue to coordinate the collection of DSTs by individual jurisdictions by providing guidance on how DSTs should be collected to protect states’ taxing rights and prevent double taxation. 2. Noam Noked and Jingyi Wang, “Chinese Companies in Tax Havens” This article analyses two issues affecting the tax advantages of offshore structures used by many Chinese MNEs. First, this article examines the relevant disclosures in the annual reports filed by the largest 79 Chinese MNEs with tax-haven-incorporated parents traded on major US stock exchanges. It finds that all these companies take the position that they are not resident enterprises (REs) in China. Second, this article evaluates the expected implications of the global minimum tax reform for such MNEs. This article reveals that despite the potential application of the global minimum tax, substantial advantages of the non-RE status will likely remain because the global minimum tax does not apply to certain excluded profits, shareholder-level profits, and out-of-scope MNEs. 3. Jingyi Wang, “A Simplified Tax Regime for Taxing Cryptocurrencies” The cryptocurrencies that are an integrated part of blockchains have led to creating enormous value and wealth that attract increasing attention from investors and governments. The sophistication and anonymity of crypto assets create significant challenges for tax administrations as the current tax rules and guidelines in relation to them are either too broad or too complicated. This article proposes a simplified tax regime that would significantly reduce compliance and administration costs when taxing cryptocurrency for which the first taxable event occurs at the moment when crypto assets are converted to fiat currency or other real-world goods or services. | ||||||||||||||||
| Potential for further development of the research and the proposed course of action: |
The PI has previously conducted research on cryptocurrency taxation, mainly focusing on how to tax cryptoassets efficiently. The advent of Web 3.0, driven by the increasing adoption of blockchain technology, has introduced many new types of virtual assets and novel methods for trading and transactions. Therefore, the PI plans to extend this research to investigate the taxation of various virtual assets and their associated transactions, including Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi) protocols. The PI plans to investigate how virtual assets could be effectively taxed by taking into account of the development of related information reporting and disclosure frameworks. In particular, the PI aims to answer the question how the existing tax jurisdiction based on residence and source could effectively tackle the challenges posed by the anonymous nature of virtual currencies. | ||||||||||||||||
| Layman's Summary of Completion Report: | The digitalized economy has expanded the reach of both businesses and customers beyond national boundaries. However, it also creates significant challenges for government administration based on national boundaries and physical connection with their citizens. This research project identifies and addresses the challenges posed by the digitalized economy in various aspects. It discusses the mismatch between places of value creation and tax collection by critically examining the OECD/G20 Inclusive Framework’s Pillar One initiative and proposes a more pragmatic alternative: coordinated, consensus-based digital services taxes among jurisdictions. The project conducts research on tax challenges posed by the advent of Web 3.0 by examining how to tax cryptocurrencies effectively. Additionally, a collaboration enabled by the project explores how Chinese technology multinational enterprises leverage non-resident tax status to gain systemic advantages, while analyzing the potential impact of Pillar Two global minimum tax reforms on these structures from China’s perspective. The outcomes of the research project are not only valuable for academic discussion but also practical for policymakers in designing effective rules for taxing the digitalized economy. | ||||||||||||||||
| Research Output | |||||||||||||||||
| Peer-reviewed journal publication(s) arising directly from this research project : (* denotes the corresponding author) |
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| Recognized international conference(s) in which paper(s) related to this research project was/were delivered : |
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| Other impact (e.g. award of patents or prizes, collaboration with other research institutions, technology transfer, etc.): |
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| Realisation of the education plan: | |||||||||||||||||
| SCREEN ID: SCRRM00542 |