Is China Creating A New Business Order? Rationalizing China's Extraterritorial Attempt to Expand the Veil-Piercing Doctrine

Northwestern Journal of International Law & Business, Nov 2015

Shen, Wei, Watters, Casey

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Is China Creating A New Business Order? Rationalizing China's Extraterritorial Attempt to Expand the Veil-Piercing Doctrine

China's Extraterritorial Veil-Piercing Attempt Is China Creating A New Business Order? Rationalizing China's Extraterritorial Attempt to Expand the Veil-Piercing Doctrine 0 Thi s Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons 1 Wei Shen and Casey Watters, Is China Creating A New Business Order? Rationalizing China's Extraterritorial Attempt to Expand the Veil- Piercing Doctrine , 35 Nw. J. Int'l L. & Bus. 469, 2015 - Copyright 2015 by Northwestern University School of Law Northwestern Journal of International Law & Business Printed in U.S.A. Vol. 35, No. 3 Is China Creating A New Business Order? Rationalizing China’s Extraterritorial Attempt to Expand the Veil-Piercing Doctrine Wei Shen* & Casey Watters** Abstract: Countries are increasingly using tax policy as an instrument to navigate through the recent global financial difficulties, and China is no exception. In an effort to avoid the loss of tax revenue resulting from the utilization of foreign holding companies, the Chinese tax authority issued Circular 698 granting itself the authority to tax transactions between foreign entities taking place outside of China if the transactions effectively transfer interest in a domestic enterprise. The phrase “denying the existence of an offshore holding company which is used for tax planning purposes” in Circular 698 appears to share similarities with the veil-piercing doctrine, a long established doctrine of corporate law existing independent of tax regulations, which disregards the separate legal personality of a company. This article addresses the legitimacy and policy objectives behind Circular 698 and its implementation, and the article compares the Chinese policy to the application of a similar policy in India. The article then examines how the expansive and extraterritorial veil-piercing scenario created by Circular 698 compares with traditional veil-piercing justifications and the three veil-piercing scenarios listed in China’s Company Law. The article interprets Circular 698 in a global context, which underscores the legitimacy of Circular 698 and suggests how foreign experiences can improve the enforcement mechanism for Circular 698. By drawing a global picture this article also enhances the proposition that there is a need to have a uniform approach to dealing with the loopholes that Circular 698 tries to fill at the global level. * KoGuan Chair Professor of Law, Shanghai Jiao Tong University KoGuan Law School; PhD (London School of Economics); LLM (Cambridge); LLM (Michigan); LLM & LLB (East China University of Politics and Law); Attorney-at-Law, New York, FHKIArb. ** Attorney-at-Law, California; JD (University of California, Hastings College of the Law); Adjunct Lecturer, Shanghai Jiao Tong University KoGuan Law School.The authors thank valuable comments made by Roberta Romano, Henry Hansmann, Aaron Joslin, Frank Upham, Jacques DeLisle, Marshall W. Meyer, Erica Gorga, Jamie Horsley, Robert Williams, Leonard P. Goldberger, Iris H.Y. Chiu, Natalya Shnitser, and the participants of the workshop held at Columbia Law School on October 16, 2013, the New York University–Shanghai Jiao Tong University Joint Conference: “Business Beyond Borders: Law, Firms and Markets in the US and China” held at Westin Hotel on January 17 and 18 in Shanghai, the workshop held at Yale Law School on February 19, 2014, the workshop held at the University of Pennsylvania Law School on March 26, 2014, and the workshop held at the New York University School of Law on April 14, 2014. The authors thank Xu Mengshan, Zhang Jieying and Yang Lilong for their research assistance on data collection. Errors and omissions remain with the authors. The authors thank China’s National Social Sciences Foundation for a research grant (Project No.: 15BFX100). 698.................................................................................................. 509 A. Circular 698 and Ramsay Principle: A Comparative Approach................................................................................. 509 1. Policies Underlying the Ramsay Principle.......................... 509 2. The Aftermath of the Ramsay Principle ............................. 512 B. Circular 698 and the Ramsay Principle ..................................... 512 C. Vodafone Case in India.............................................................. 513 D. The Ramsay Principle and Circular 698: Policy Concerns ....... 517 V. A New Global Tax Order? – “Rationalizing” Circular 698 from an International Dimension................................................................. 519 A. Round-Trip Investment Model ............................................... 520 B. Regulatory Measures to the “Round-trip Investment” Model... 530 1. Foreign Exchange Control Rules in 2005 ........................... 530 2. Mergers and Acquisitions Rules in 2006 ............................ 532 3. Tax Notice 82 in 2009......................................................... 533 4. National Security Review Rules in 2011 ............................ 535 C. Global Emphasis on Increased Tax Revenue and Anti Avoidance ............................................................................... 540 1. European Approach to Cracking Down on Aggressive Tax Planning ..................................................................... 544 2. The United States Approach ............................................... 546 3. The G8, G20 and OECD – Global Tax Reform.................. 551 Conclusion ................................................................................................ 554 INTRODUCTION In an effort to avoid the loss of tax revenue resulting from the utilization of foreign holding companies, the General Administration of Taxation, China’s tax authority, issued the Circular on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-Resident Enterprises (Circular 698) on December 10, 2009, granting itself the authority to tax transactions between foreign entities taking place outside of China if the transaction effectively transfers interest in a domestic enterprise. The phrase “denying the existence of an offshore holding company which is used for tax planning purposes” in Circular 698 appears to share similarities with the veil-piercing doctrine, a long established doctrine of corporate law existing independent of tax regulations, which disregards the separate legal personality of a company and limited liability of shareholders. This article addresses the legitimacy and policy objectives behind Circular 698 as well as its implementation. It questions the General Administration of Taxation’s authority to issue Circular 698 and its alignment with the policy objectives underlying veil piercing. With the recent creation of Circular 698, the cases utilizing the Circular are limited, but the article examines several Chinese cases and looks to the Vodafone case in India for a comparative study of India’s application of a similar policy based on the common law veil-piercing doctrine. Compared to the three veil-piercing scenarios listed in the Chinese Company Law, Circular 698 tries to pierce the corporate veil in a more expansive and extraterritorial manner. This raises many questions including: Does the scenario specified in Circular 698 justify veil piercing? If so, does the General Administration of Taxation have the authority to establish the new rules? What investment techniques inspired the creation of Circular 698? This article attempts to look into these questions. The rest of the article proceeds as follows. Part 1 offers a brief introduction of key rules created by Circular 698 and tries to understand Circular 698 by looking into its connection with the conventional veil-piercing doctrine. To this end, the section includes a brief introduction to the common law veil-piercing doctrine. The analysis of the legitimacy of Circular 698 appears in Part 2, after which Part 3 looks at the Chinese adoption of the veil-piercing doctrine and examines specific instances of Circular 698’s application resulting in piercing of the corporate veil. Then Part 4 looks into possible ways of improving Circular 698 by reference to the Ramsay principle and related doctrines developed in other jurisdictions. Part 5 examines the rationality of Circular 698’s attempt at expanding the veil-piercing doctrine from a global perspective. First, the section examines the Chinese foreign investment structures and incentives that lead to a loss of Chinese tax revenue. Second, the section addresses the global emphasis on increased tax revenue and anti-avoidance. A conclusion follows in the end, framing the discussion in terms of the rule of law and changes resulting from the need for fair tax policies involving international investments. I. CIRCULAR 698 AND ITS IMPLICATIONS FOR THE VEILPIERCING DOCTRINE A. Circular 698: Scope and Application The PRC Enterprise Income Tax Law provides that: Non-resident enterprises that have set up institutions or premises in China shall pay enterprise income tax in relation to the income originating from China obtained by their institutions or establishments, and the income incurred outside China if there is an actual relationship with the institutions or establishments set up by such enterprises. Where non-resident enterprises that have not set up institutions or establishments in China, or where institutions or establishments are set up but there is no actual relationship with the income obtained by the institutions or establishments set up by such enterprises, they shall pay enterprise income tax in relation to the income originating from China.1 On their face, these provisions indicate that the non-resident enterprises with or without establishment in China shall pay enterprise income tax for their income generated inside China. Article 7 of the Implementing Rules of the Enterprise Income Tax Law prescribes the principle of taxing the income generated from inside China.2 In terms of equity, according to 1 Zhonghua Renmin Gongheguo Qiye Suodeshui Fa (中华人民共和国企业所得税法) [Enterprise Income Tax Law] (promulgated by the Nat’l People’s Cong., Mar. 16, 2007, effective Jan. 1, 2008) LAWINFOCHINA (last visited Sept. 13, 2013) at art. 3(2) & 3(3), display.aspx?id=5910&lib=law# [hereinafter PRC Enterprise Income Tax Law] (China). 2 Zhonghua Renmin Gongheguo Qiye Suodeshui Fa Shishi Tiaoli (中华人民共和国企业所得税法 实施条例) [Regulation on the Implementation of the Enterprise Income Tax Law] (promulgated by Order of State Council No. 512, Nov. 28, 2007, effective Jan. 1, 2008) LAWINFOCHINA (last visited Sept 13, 2013), (China). Article 7 of the Regulation provides that: (3) With regard to income from the transfer of property, the income from the transfer of real property shall be determined according to the place where such real property is situated, while the income from the transfer of personal property shall be determined according to the place where the enterprise or institution of that transfers the property is located; (4) the income from the transfer of equity investment assets shall be determined according to the place where the invested enterprise is located. Item 4 of this article, if the equity transferred is in a Chinese company, then the income generated out of the transfer is regarded as the income generated from inside China, and the transferor shall pay enterprise income tax in China.3 To illustrate this rule, assume a transaction in which a US Company A transfers its owned equity of Company B in the British Virgin Islands to a German company D. If Company B is the holding company of Company A that holds equity in Company C in China, Company A can transfer the equity of the Chinese Company C by transferring the equity of Company B to Company D. This equity deal has nothing to do with China. Accordingly, A does not need to pay Chinese tax. In the above case, consider whether the income obtained by the nonresident enterprise (Company A) from transferring equity in a Chinese resident enterprise (Company C) indirectly through the transfer of equity in an offshore holding company (Company B) should be regarded as the income originating from China and, if so, does it trigger an enterprise income tax in China? According to Circular 698, Company A needs to pay Chinese tax for its transfer of equity in the holding company to Company D, even though the transaction is a pure offshore transaction. Circular 698 effectively subjects the transfer of equity between two non-resident enterprises to Chinese tax law. In Circular 698, the non-resident enterprise which indirectly transfers the Chinese resident enterprise is termed the “foreign investor” (actual controlling party), and the holding company put in place between the foreign investor and the resident enterprise is labeled the “offshore holding company.”4 For the purpose of discussion, the cases in Circular 698 referred to later follow the above hypothetical example. In the above hypothetical case, Company A is the foreign investor (actual controlling party), Company B is the offshore holding company and Company C is the Chinese resident enterprise. Article 5 of Circular 698 further provides that: when the actual tax liability in the country (region) where the overseas holding company being transferred is located is less than 12.5%, or the aforementioned country (region) does not tax foreign-sourced income,5 the foreign investor’s indirect transfer of the Chinese resident enterprise’s equity shall be examined by the Chinese tax authority. It also provides the materials the foreign investor needs to submit to the Chinese tax authority.6 4 Guojia Shuiwu Zongju Guanyu Jiaqiang Fei Jumin Qiye Guquan Zhuanrang Suode Zhengshou Qiye Suodeshui Guanli de Tongzhi Guoshui Han [2009] 698 Hao (国家税务总局关于加强非居民企业 股权转让所得企业所得税管理的通知, 国税函[2009] 69 号)[Notice of the State Administration of Taxation on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises (Circular No. 698)], (promulgated by the State Administration of Taxation, Dec. 10, 2009) at art. 5 & 6 [hereinafter Circular 698] (China). 5 The term “does not tax foreign-sourced income” may be interpreted to apply if the offshore intermediary jurisdiction does not tax foreign-sourced income. On March 28, 2011, China’s State Administration of Taxation issued the Announcement Regarding Several Issues on the Administration of Nonresident Enterprise Income Tax (Announcement No. 24) to clarify certain terms in Circular 698. Announcement No. 24 now clarifies that this term would apply only if foreign-sourced gains on the share transfer transaction are not taxed in the intermediary holding jurisdiction. It does not cover scenarios whereby the offshore intermediary jurisdiction does not impose tax on other types of foreign-sourced income such as dividends and interest. Although Announcement No. 24 is a great attempt to clarify the term, ambiguity still exists. For example, in some jurisdictions the capital gains are not taxed by virtue of reasons such as concessions or participation exemption. It is not clear whether these jurisdictions are caught by Circular 698. The purpose of Announcement No. 24 (see infra note 69) is to introduce some clarity to the application and interpretation of Circular 698, thereby streamlining administrative procedures and reducing the administrative burden of non-resident enterprises. 6 Circular 698, Article 5 reads: In case the actual tax burden of the country (region) where one equity-transferred overseas holding company is domiciled is lower than 12.5% or no tax is levied on the income of its overseas residents while an overseas investor (actual controller) indirectly transfers the equity of a Chinese resident enterprise, it should within 30 days upon the signing of the equity transfer contract provide to the competent taxation administration where an equity-transferred Chinese resident enterprise is domiciled the following documents: (1) Equity transfer contract or agreement; (2) Relations of an overseas investor and its transferred overseas holding company in capital, business and purchase and sale; (3) Statuses of production and operation, personnel, finance and properties of the overseas holding company with equity transferred by an overseas investor; (4) Ties of the overseas holding company with equity transferred by an overseas investor and a Chinese resident enterprise in capital, business and purchase and sale; Northwestern Journal of International Law & Business Under Circular 698, the tax authority has the power to deny the corporate veil of the offshore holding company used for tax-planning purposes if, after reviewing the above required materials, the tax authority finds that Company A’s indirect transfer of equity in Company C constitutes an abuse of the corporate form, and certain tax liabilities are thus avoided without a reasonable business purpose.7 In other words, the Chinese tax authority will ignore Company B’s corporate form and regard the transaction as Company A’s direct transfer of equity in Company C to Company D, and the proceeds generated from the transfer are deemed to be “the income originating from China,” thereby achieving the purpose of levying the Chinese enterprise income tax on Company A. B. Circular 698 and the Veil-Piercing Doctrine The principles that the corporation has an independent personality as a legal entity and that the corporation’s stockholders only assume limited liability are the cornerstones of modern corporation law. However, each principle has exceptions. In very special circumstances, such as the fraudulent act of taking advantage of the corporation’s independent legal personality, the common law8 doctrine of piercing the corporate veil allows the court to achieve fairness by denying the legal entity’s independent personality or (5) Explanations for reasonable commercial purpose of the establishment of an equitytransferred overseas holding company by an overseas investor; and (6) Other related documents required by the taxation administration. The term “actual tax burden” (or “effective tax burden”) is further clarified by Announcement No. 24, which explains that the terminology refers to the effective tax burden imposed on the gains on the share transfer transaction per se. It seems that as long as the gain is taxed at a rate of not lower than 12.5% in the intermediary holding jurisdiction, the transferor would not be required to report under Circular 698. Article 2 of Announcement No. 24 also states that the transfer of listed shares in Chinese resident enterprises bought and sold over a public securities market are not subject to Circular 698. This seems to suggest that the cases whereby a non-resident enterprise purchases and sells such listed shares in Chinese resident enterprises via over-the-counter trade sales and private placements are covered by Circular 698. 7 Circular 698, Article 6 provides that: In case an overseas investor (actual controller) makes indirect transfer of the equity of a Chinese resident enterprise in the forms including abusing organization without reasonable commercial purpose to dodge the obligation of paying enterprise income tax, the competent taxation administration may reconfirm the quality of the equity transfer trading in accordance with the economic substance after reporting to the State Administration of Taxation for the examination and approval to negate the existence of the overseas holding company serving as taxpayer. 8 Here, common law refers to judge made law in countries using the British legal system. As discussed later in the article, the veil-piercing doctrine originated from the courts. depriving the corporation stockholders of limited liability protection.9 It was not until 2005 that China began formally introducing the concept of piercing the corporate veil into the Company Law of the People’s Republic of China (2005). At present, the application of the doctrine of piercing the corporate veil is limited to the following scenarios: a) where a shareholder abuses his privileges of incorporation as a shareholder and causes loss to the company or other shareholders, he may be liable in damages;10 b) where any of the shareholders of a company evades debts by abusing the company’s independent status as a legal person or shareholders’ limited liability, thus seriously damaging the interests of any creditor of the company, the shareholder shall be held jointly liable for the debts of the company;11 c) in a one-shareholder limited liability company, if the assets of the company and the single shareholder are integrated and indivisible, then he and the company will be jointly liable for the debts of the company;12 or d) where a controlling shareholder, de facto controller, director, supervisor or senior officer uses his relationship to damage the interests of the company causing it loss, he may be liable in damages to the company.13 However, Chinese courts have not developed clear judicial guidance in applying these principles in real cases. Compared to their counterparts in common law jurisdictions, judicial opinions in this regard are far less clear.14 The General Administration of Taxation stepped in at the end of 2009 by issuing Circular 698, which appeared to create a new regime in which the corporate veil can be pierced outside the conventional veil-piercing framework under the Company Law. The relevant rule under Circular 698 is that where a foreign investor transfers the equity in a Chinese resident en Northwestern Journal of International Law & Business terprise indirectly so as to avoid paying the enterprise income tax on its income generated from China through setting up an offshore holding company, the Chinese tax authority can ignore the existence of the offshore holding company and deem it as a direct transfer of the equity in the Chinese resident enterprise by the foreign investor. As a result, a capital gain tax (in the form of the enterprise income tax under Chinese tax law) would be levied on such a transaction. The veil-piercing doctrine originated in the leading case of Salomon v. Salomon & Co. Ltd decided by the House of Lords in England in 1897.15 The case laid down the cornerstone of modern company law due to its role in the establishment of the two most important principles: (i) the shareholders only assume limited liability for the company to the extent of the contributed capital; and (ii) the company is an independent legal person from its shareholders. However, the courts also foreshadowed exceptions to these two principles—the principle of lifting the veil of the corporation: whether Salomon Co. had been fraudulently used to avoid Salomon’s liability, which implied that the shareholder’s fraud may constitute an exceptional ground not to apply the two principles above.16 Later, in order to prevent the shareholders of the company from abusing the principle of independent legal personality, the court gradually drew the boundaries of various exceptional circumstances in which the principles of shareholders’ limited liability and the corporation’s independent legal personality are not applicable. The case law jurisprudence formed the so-called veil-piercing doctrine. At present, in common law countries, the circumstances justifying lifting the veil of the corporation include: avoiding legal obligations, fraud, agency, and single economic unit.17 These concepts are addressed in greater detail in the next section. Not only does the new veil-piercing doctrine established by Circular 698 fall outside the conventional company law’s veil-piercing rule, but Circular 698 constitutes a regulatory measure based on tax law instead of company law. Circular 698’s consequences to corporate law may be the inadvertent result of an overzealous tax authority. Irrespective of the intended scope of Circular 698, its impact could be far reaching even though there are still limited cases with which to predict its application. The following subsection introduces the common law veil-piercing doctrine to provide the necessary foundation in analyzing the impact of Circular 698 and its legitimacy as a basis for disregarding limited liability protection—an issue discussed in detail in part two. 15 Salomon v. Salomon & Co. Ltd [1897] AC 22 (HL). 16 KAREN VANDEKERCKHOVE, PIERCING THE CORPORATE VEIL 71 (2007). 17 JULIE CASSIDY, CORPORATIONS LAW, TEXT AND ESSENTIAL CASES 56-64 (2d ed. 2008). C. Overview of the Common Law Veil-Piercing Doctrine As mentioned above, the common law veil-piercing doctrine originated in the 1898 landmark British case of Salomon v. Salomon & Co. in response to the Companies Act of 1862, the law that first authorized limited liability for corporations.18 In examining the policies behind veil piercing, it is important to consider the doctrine’s origins and its modern variations. As veil-piercing is a common law doctrine, the analysis will include the United Kingdom, the source of the common law system, and the United States, the world’s largest economy. 1. Modern British Approach to Piercing the Corporate Veil Although the common law doctrine of piercing the corporate veil originated in the United Kingdom, the doctrine is rarely utilized by U.K. courts. In fact, the doctrine is arguably limited to situations where fraud exists. In the opinion of the House of Lords in Woolfson v. Strathclyde Regional Council, Lord Keith stated a corporate veil could only be pierced “where special circumstances exist indicating that [use of the corporation] is a mere façade concealing the true facts”.19 The fraud requirement was reaffirmed in 2013 when the Supreme Court addressed whether the veil-piercing doctrine is available in the United Kingdom.20 In VTB Capital Plc v. Nutritek International Corp, the Court noted the many expressions used by British courts to describe the “façade” requirement from the House of Lords. These include “the true facts,” “sham,” “mask,” “cloak,” “device,” and “puppet”.21 The Court went on to note that most cases where the court pierces the corporate veil are cases where the defendant shareholder(s) could be held liable through agency or another theory.22 The court also makes it clear that the concept of façade should not be mistaken with the concept of ensuring the moral outcome. As such, it can be reasoned that the main goal of the veil-piercing doctrine in the United Kingdom is to avoid fraud, not merely to protect investors. The veil-piercing theory is used more commonly in the United States and is one of the most commonly litigated issues of corporate law23 making an analysis of the common approaches in the United States useful to the policy analysis. 18 Salomon v Salomon & Co. Ltd, [1897] AC 22 (HL) 19 Woolfson v. Strathclyde Regional Council, [1978] AC 90 (HL) 96 . 20 VTB Capital Plc v. Nutritck Int’l Corp. [2013] UKSC 5, 125. 21 Id. 22 Id. 23 Chao Xi, Piercing the Corporate Veil in China: How Did We Get There? 5 J. BUS. L. 413, 413 (2011). Northwestern Journal of International Law & Business 2. The American Approach to the Veil-Piercing Doctrine For the purpose of examining the policies underlying the veil-piercing doctrine, this section will address the doctrine using a general approach because, in the United States, corporate law is created on the state level with laws being applied according to the state of incorporation. This system results in inconsistent application between the states. The standards for piercing the corporate veil have been broken down into three elements: (1) Domination and Control, (2) Fraud and Misuse of Corporate Form, and (3) Causation.24 This sub-section will adopt this three-pronged structure to examine the policies underlying the first two elements, which basically divides the grounds for the veil-piercing cases into two categories.25 3. Domination and Control The issue of domination and control is essential in demonstrating that a company cannot be viewed as a separate legal entity from the parent. It is difficult to prove, and many forms of evidence can be used to establish domination. The element of domination and control can be further broken down into five factors that the court can weigh in order to determine the existence of domination and control. These factors include corporate formalities, adequate capitalization, intercompany transactions and commingling of assets, overlap in officers and directors and other miscellaneous factors.26 This is in contrast to Circular 698, which merely requires an economic gain and an abusive intention, not control.27 (a) Corporate Formalities. In determining whether there has been domination and control of the corporation by a shareholder, the court often looks to formalities such as maintaining separate books, utilizing independent auditors and directors, and holding separate board meetings.28 The failure to adhere to corporate formalities alone is not enough to establish domination and control since the basic corporate principle still can be achieved without strict compliance with corporate formalities.29 Furthermore, corporate formalities can be met while domination and control exists. For instance, the same directors can 24 Douglas G. Smith, Piercing the Corporate Veil in Regul ated Industries, 2008 BYU L. REV. 1165, 1165 (2008). 25 Causation is a fundamental element of most causes of action but offers little value to the policy analysis. 26 Smith, supra note 24, at 1165. 27 See Circular 698, supra note 4. 28 Smith, supra note 24, at 1173. 29 Id. serve on the boards of a parent company and subsidiary without establishing domination and control because the directors owe separate fiduciary duties to the parent and subsidiary. While technically in compliance with corporate formalities, the dual role of the directors provides an opportunity for domination and control. Although utilizing the same directors does not establish domination and control in the legal sense, which may require “improper control or manipulation,”30 it does demonstrate absolute control in the literal sense. It therefore follows logically that actual domination and control is not the issue, but the use of fraud while control exists. Analyzing the elements in this way blurs the line between the first element, control and domination, and the second, fraud or misuse. This blurring of the lines may contribute to the inconsistent application of the veil-piercing doctrine and jurisdictional variations. (b) Adequate Capitalization31 Courts often lend greater credence to the issue of adequate capitalization than other factors. In the United States, corporations do not have a registered capital requirement. This implies that limited liability protection should exist even without capitalization of the newly formed corporation. However, the courts have utilized undercapitalization as a basis for disallowing limited liability protection under special circumstances. The amount of capitalization depends on the type of business and the degree of risk foreseeable at the time of incorporation of the company. When a plaintiff is harmed and petitions the court to pierce the veil, the court cannot simply look to actual harm in determining the adequacy of capitalization or every corporation failing to pay its debts would fail the inquiry. The Seventh Circuit noted that allocating liability whenever a corporation’s capital fell below an adequate level would harm creditors by imposing needless forced sales. 32 To fail the capitalization requirement, the amount of capitalization must be “illusory or trifling compared with the business to be done and the risks of loss.”33 30 Id. at 1174. 31 Adequate capitalization is a factor in determining whether adequate domination and control exists to permit piercing the corporate veil. It is distinct from the “thin capitalization rule” which helps determine the deductibility of interest for corporate tax purposes. 32 Smith, supra note 24, at 1176 (citing Secon Serv. Sys., Inc. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 416 (7th Cir. 1988)). 33 Id. at 1174 (citing WILLIAM MEADE FLETCHER, 1 FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 41.33 (perm. ed. 2006)). Northwestern Journal of International Law & Business (c) Intercompany Transactions and Commingling of Assets Both in the cases of parent-subsidiary relationships and of shareholders with closely held corporations, transactions between the shareholder and corporation are commonplace. However, the commingling of assets implies a lack of separation between the corporation and shareholder. Without the separation, limited liability protection loses its justification because it is predicated on the corporation’s status as an independent legal person with separate finances.34 (d) Overlap in Officers and Directors As previously discussed, the overlap of officers and directors between a parent and subsidiary is not inherently improper. However, it can be used as evidence of domination and control because utilization of the same officers or directors gives the parent an opportunity to control the subsidiary. Therefore, use of the same directors can facilitate the establishment of control, but it is neither necessarily nor sufficient. That being said, it may be extremely difficult to establish domination and control without overlap of officers or directors.35 (e) Other Miscellaneous Factors The court may look to a variety of factors as evidence of domination and control. Although the court is free to examine any factors that may suggest domination by the shareholder or parent company, two predominant factors include joint filings of and the sharing of locations by the parent and subsidiary. Both companies consolidating their filings with the Securities and Exchange Commission or the Internal Revenue Service can provide evidence of domination. However, like the other factors, this is not dispositive because it is common and legitimate for a parent and subsidiary to consolidate their annual reports and tax filings.36 In regards to location, if the parent and subsidiary share an office it may lead the court to question the independence of the entities. However, sharing office space is not illegal and is a legitimate method to save costs. As a result, the court will weigh miscellaneous factors to determine where domination and control exists.37 In determining if there is domination and control, the court is looking to see if the shareholder exercises control over the corporation to the extent the corporation cannot be said to act as an independent legal person.38 However, the courts are concerned not merely with control, but with the legitimacy of the control. Thus, it seems that the policy behind the first element is to ensure the purposes of limited liability are met by guaranteeing the corporation operates as an independent legal person and ensuring that any control is not improper. 4. Fraud and Misuse of Corporate Form Shareholder fraud or misuse must be established prior to the court lifting the corporate veil. Lack of independence alone is insufficient to establish shareholder liability. Instead, the plaintiff must prove the corporation is a “sham” used for “no other purpose than as a vehicle for fraud.”39 The mere “use of the corporate form to avoid liability is insufficient to warrant piercing the veil.”40 As such, merely seeking to avoid tax liability, as is the subject of Circular 698, is insufficient to pierce the veil. Even so, utilizing benefits of international legal structures is not tantamount to a sham. This element ensures that only shareholders abusing the corporate form to engage in fraudulent behavior lose limited liability protection, demonstrating a policy objective of avoiding fraud. An examination of the first two factors demonstrates policy objectives of requiring a corporation to act as an independent legal person within the intended scope of corporation statutes and to prevent fraud. Therefore, the policy objectives behind veil piercing can be summarized as (1) preventing the abuse of the corporate form contrary to the intentions of corporations law, (2) preventing fraud or intentional misuse of the corporate form in order to (3) prevent harm—especially harm to involuntary creditors or third parties in tort cases. Circular 698 lacks the aforementioned “law” objectives and simply seeks to collect tax revenue without regard to the purposes behind the corporate form. Although Circular 698 is inconsistent with the conventional veilpiercing doctrine, a complete analysis of its justifications and impact requires addressing the legitimacy of Circular 698 both in regards to the authority of the General Administration of Taxation to promulgate Circular 698 and its legitimacy as a new veil-piercing doctrine under the Chinese company law regime. To this end, the next section focuses on the legitimacy of Circular 698. Northwestern Journal of International Law & Business II. LEGITIMACY OF CIRCULAR 698 In assessing the legitimacy of Circular 698, this section begins with an introduction to the history and importance of limited liability for a foundational understanding of the veil-piercing doctrine. It continues with a review of the established grounds for lifting the corporate veil and contrasting the objectives behind these grounds with those of Circular 698. The section concludes with a discussion of the General Administration of Taxation’s power to issue rules, such as Circular 698, that effectively bypass the sole authority of the People’s Congress to regulate fundamental economic and foreign trade systems. A. Why Are Corporations Provided Limited Liability Protection? The concept of the corporation dates back to the Roman Empire where professional colleges called corpora existed to support the existing institutions of religion, education, and government.41 The later Christian emperors disbanded most pagan corpora but tolerated some that served key economic interests.42 With the eventual collapse of the Roman Empire, the corporate form nearly disappeared.43 Most early businesses in England were sole proprietorships and other entities that lacked limited liability, which was not available until 1855 with the passage of the Limited Liability Act. The first corporations were specially chartered by the sovereign44 and it was not until the Companies Act of 1862 the corporate form became available to common business enterprises.45 Around this time, many US states adopted statutes providing for limited liability. These statutes protected shareholders from liability beyond their investment in the limited liability business entity, usually a corporation. Originally, the corporate form was limited to large entities with multiple shareholders, but by the early 1900’s, this changed to allow increased investment as the industrial revolution came into full swing. Due to state regulation of limited liability, the process was piecemeal, with New Hampshire granting limited liability for manufacturing companies in 1816 and New York passing the Limited Partnership Act of 1822.46 The benefits of limited liability have resulted in a great deal of praise, with limited liability even being called the “greatest single discovery of modern times.”47 The fundamental arguments supporting limited liability are economic in nature. Corporations have been described as a “nexus of contracts organizing the relationship between various actors in an enterprise,”48 and limited liability a corporation’s most important feature.49 Limited liability protection extends to all shareholders and allows them to invest whilst secure in the knowledge their other assets are safe from efforts to collect against corporate liabilities.50 Prior to the advent of limited liability, wealthy investors shouldered significant risk when making an investment. Not only could the investor lose their personal fortunes, but the wealthiest investors would be the target of collection attempts by the company’s creditors. This structure limited the motivation to invest and created a disincentive to diversifying investments because investing even a small amount could cause the investor to lose his great fortune. In order to protect their investments and wealth, investors need to research the company and monitor its operation to avoid risk. Those with some capital to invest but unable to afford the monitoring costs may avoid investment altogether.51 There would be no venture capital markets and the concept of angel investors would be non-existent without limited liability protection. The initial investigation and monitoring costs could be prohibitive to many potential wealthy investors and cut into potential returns, thereby eliminating the incentive to invest. The established arguments in favor of limited liability include decreased monitoring costs, free transferability of shares, market efficiency, diversification of investments and incentive to invest in riskier projects.52 All five factors relate to an incentive to increase investments that will benefit the society as a whole through the promotion of economic growth. Decreased monitoring costs allow investment in more projects and permit the less wealthy to invest. Free transferability of shares allows for short-term investment and the involvement of new investors. Diversification allows for smaller projects to receive funding thereby encouraging entrepreneurism and innovation. Limited liability allows for the funding of important but risky projects that may not otherwise have an opportunity to raise sufficient 46 Figueroa, supra note 41, at 703. 47 Roger E. Meiners et al., Piercing the Veil of Limited Liability, 4 DEL. J. CORP. L. 351, 356 (1979) (quoting the President of Columbia University). 48 Morrissey, supra at 537 (citing Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and Corporation, 52 U. CHI. L. REV. 89 (1985)). 49 Figueroa, supra note 41, at 705. 50 Id. 51 Id. at 706. Describes the lower monitoring cost benefit of limited liability as the “democratic argument” because it encourages individuals with less wealth to invest. 52 Id. Northwestern Journal of International Law & Business capital. Limited liability also supports investment and market efficiency through reducing creditor costs. When a creditor enters into a relationship with a corporation it only needs to examine the assets and debts of the corporation. Without limited liability, the creditor would need to examine the financial situations of shareholders to determine the likelihood of repayment. The main argument against limited liability is that creditors and society shoulder the risk of non-payment of corporate liabilities. This externalization of cost places a burden on society and may harm innocent parties. The counter view is that limited liability “constitutes a subsidy aimed at fostering investment.”53 Voluntary creditors know the risk of non-payment when they enter into agreements. Besides, they are protected by the general rules of the contract law, and are always able to bargain better terms in voluntary transactions by imposing more stringent terms and conditions on the borrowing entity. Therefore, creditors can factor in the risk of nonpayment and increase the interest rates to match the risk.54 This allows limited liability to be characterized as a societal “subsidy” that promotes investment and economic growth.55 “Courts within the United States, in turn, have recognized the intimate connection between limited liability and the overall economic growth of the country, implying that the corporate limited liability form is a quintessential tool for the expansion of capitalism.”56 Bearing these general pros and cons in mind, the rest of this section looks into the legitimacy of Circular 698 mainly on two perspectives. First, is Circular 698 a specific application of the veil-piercing doctrine under the Company Law? Second, is the new rule of lifting the veil outlined by the tax authority in line with the PRC Legislation Law? B. Is Circular 698 a Specific Application of the Veil-Piercing Doctrine Under the Company Law? China formally introduced the veil-piercing doctrine into the Company Law in 2005.57 However, Chinese law only draws very narrow boundaries.58 Article 20(3) of the Company Law provides that: “Where any of the shareholders of a company evades debts by abusing the company’s independent status as a legal person or shareholders’ limited liability, thus seri53 Id. at 707. 54 Id. 55 Id. 56 Id. (citing Cathy S. Krendl & James R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Denv. L.J. 1, 8, 12–13 (1978) and JAMES D. COX ET AL., CORPORATIONS §§ 7.7, 7.11 (1995)) (internal citation omitted). 57 See PRC Company Law, supra note 10, at arts. 20(3), 64. 58 See generally Hui Huang, An Empirical Study on the Veil-piercing System in China, 1 CHINESE J. L. 10 (2012). ously damaging the interests of any creditor of the company, it shall be held jointly liable for the debts of the company.” Article 64 of the Company Law provides that if the assets of the company and the single shareholder are integrated and indivisible, then the shareholder and company will be jointly liable for the debts of the company. Article 18 of the second piece of judicial interpretation, that is, the Provisions of Certain Issues Concerning the Application of the Company Law, published by China’s Supreme People’s Court on May 12, 2008, effective as of May 19, 2008, covering a variety of issues related to the dissolution and liquidation of Chinese companies, provides the circumstances in which the shareholders and company are jointly liable for the debts in the bankruptcy proceeding.59 It appears clear that the scenario related to asset integration or company liquidation is different from the transactions Circular 698 is intended to address. Then, is Circular 698 a possible result of applying the veil-piercing doctrine under the Company Law? There are some stark differences between Article 20(3) of the Company Law and Circular 698. The Company Law does not give any specific example or define any way of abusing the corporate form. It is widely recognized that there are generally four categories of cases in which the corporate form can be deemed to be abused: a significant lack of corporate capital, confusing corporate personality, excessive control of the subsidiary by the parent company and avoidance of legal (i.e. contractual) obligations by the misuse of the company’s independent legal personality. 60 Among them, avoiding legal obligations by the use of the company’s independent legal personality usually refers to the case that the controlling shareholders abuse the legal personality of the new or existing company (in most cases subsidiaries or affiliated companies) to achieve the real purpose of avoiding legal obligations. Apparently, the underlying reason to pierce the veil in this case is that the shareholders may damage social and public interests and effectiveness of the law while complying with law in an artificial way.61 What the Company Law tries to address is Chinese entities or shareholders who abuse the legal personality rule. In other words, the veil will be pierced if a Chinese parent 59 Zuigao Renmin Fayuan Guanyu Shiyong Zhonghua Renmin Gongheguo Gongsi Fa Ruogan Wenti de Guiding (ed) (最高人民法院关于适用《中华人民共和国公司法》若干问题的规定 (二) ) [Provisions of the Supreme People’s Court on Some Issues about the Application of the Company Law of the People’s Republic of China (II)] (promulgated by the Supreme People’s Court May 12, 2008, effective May 19, 2008) , art. 8. 60 The four factors are often condensed or labeled differently but the underlying legal justifications remain the same. See generally, David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability (Wash. & Lee Legal Studies Paper No. 2006-08), 61 Xiaorui Li & Dongmie Li, Research on the Doctrine of Disregarding Corporate Personality in China: The Application of Article 20 of PRC Company Law in Judicial Practice, ADVANCED THEORY RESEARCH AND PRACTICE OF CORPORATE LAW 110–13 (Lanfang Liu ed., 2009). 4. National Security Review Rules in 2011 For the purpose of guiding foreign investors’ mergers and acquisitions of domestic enterprises and safeguarding national security, the General Office of the State Council issued the Notice on Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“State Council Circular 6”) on February 3, 2011.217 The national security regime focuses on foreign investors’ mergers and acquisitions of all types of enterprises such as military industry enterprises and their ancillary enterprises, the enterprises around key and sensitive military facilities and other units which have an impact on national defense security and which may result in foreign investors’ acquisition of actual control over enterprises connected to Chinese national security.218 New security review rules from MOFCOM,219 effective on September 1, 2011, clarify national security review procedures for foreign investments in Chinese companies and bar the use of arcane investment structures or techniques such as “multi-level reinvestment,” “nominee shareholders,” and “control by agreement” to evade China’s security review process. The relevant provision reads: Whether a merger or acquisition of a domestic enterprise by a foreign investor falls within the scope of merger and acquisition security review shall be determined on the basis of the substance and actual impact of the transaction. No foreign investor shall substantially evade the merger and acquisition security review in any form, including but not limited to proxy, trust, multi-level reinvestment, lease, loan, variable interest entities (agreement-based control) and offshore transaction.220 Although the rules are worded in a vague manner for application, they implicitly target the “round-trip investment” model and explicitly leave regulators with more discretionary powers. The term “multi-level reinvest Northwestern Journal of International Law & Business ment” is explicitly highlighted as a form used by foreign investors to evade the security review regime. It is clear that the “round-trip investment” model will be deemed as a domestic enterprise actually controlled by a foreign investor and thus will be subject to a security review. Both the State Council Circular and MOFCOM Rules have adopted a clearly restrictive approach to applying the security review rules to foreign investment projects, and signaled the authorities’ intention to place the “round-trip investment” model under deeper and heavier regulatory scrutiny and supervision. Nevertheless, given the vagueness of rules, the exact scope of implementation remains unclear. Most likely, the “round-trip investment” model will be subject to closer scrutiny in future transactions. A literal reading of the aforementioned rules and interpretations 221 shows it is becoming increasingly difficult, if not entirely impossible, for Chinese residents to take advantage of SPVs to inflow “round-tripping” investments or make public or private offerings in the overseas capital markets. These regulatory changes significantly tighten the regulatory environment for offshore restructurings transactions. The motives of MOFCOM, SAFE, the Taxation Bureau and other authorities appear to include preventing China’s high-quality assets from being listed overseas, to monitor the foreign currency flows and—probably more importantly—to secure domestic listings and tax revenues. Circular 75 and M&A Rules, together with other regulatory measures, are a revival of previous regulatory attempts to address the disguised FDI in the form of the “round-trip investment” model, either of which causes a huge loss to the national welfare. For instance, businessmen and top corrupt officials may use SPVs to transfer state-owned assets, launder corruption proceeds and avoid tax liabilities, as SPVs are easily packaged as shell companies without any substantial assets. 222 Where the SPVs, trust and 221 See Circular 75, supra note 195; M&A Rules, supra note 207; Guojia Waihui Guanli Ju Zonghe Si Guanyu Yinfa Guojia Waihui Guanli Ju Guanyu Jingnei Jumin Tongguo Jingwai Teshu Mudi Gongsi Rongzi Ji Fancheng Touzi Waihui Guanli Youguan Wenti De Tongshi Caozuo Guicheng de Tongzhi ( 国家外汇管理局综合司关于印发《国家外汇管理局关于境内居民通过境外特殊目的公司融资及返 程投资外汇管理有关问题的通知》操作规程的通知, 国家外汇管理局综合司文件, 汇综发 [2007]106 号) [Operating Procedures Regarding Issues Concerning Foreign Exchange Control on Financing and Round-trip Investment Through Offshore Special Purpose Companies by Domestic Residents (Circular 106)] (promulgated by the State Administration on Foreign Exchange (SAFE), effective May 27, 2007) [hereinafter Circular 106] (China); Tax Notice 82, supra note 213; National Security Review Rules, supra note 217; MOFCOM Rules, supra note 219. 222 Structuring pyramids of shell companies in various tax havens for aggressive tax evasion and avoidance is a common practice. In the context of the financial crisis, this common practice has been severely under attack. For instance, Google’s billions in revenue garnered every year by its sales force in the UK is not subject to local tax because of the technical closure of Google’s Dublin office. Philip Stephens, Why Google and Eric Schmidt Really Don’t Care About Tax, FIN. TIMES (May 29, 2013) , Amazon, Apple and other multinationals all have elaborate tax avoidance planning by relying on the use of shell companies. Vanessa Houlder, Apple Tax Probe Helps Drive to Build Consensus on Global Regime, FIN. TIMES bearer shares are used, the ultimate shareholders of the business may be covered or disguised well through various layers of corporate veils and cannot be easily tracked down. If the “round-trip” investment truly constitutes 25% to 50% of the total FDI into China,223 it exaggerates China’s foreign exchange reserves.224 This could increase the political pressure on China to re-evaluate the exchange rate between Renminbi and the US dollar.225 (May 23, 2013) , 223 Empirically, it is very difficult to quantify the amount of “round-trip” investments in a dollar value. See supra note 184 and accompanying text. 224 China’s foreign exchange reserves reached US $853.7 billion in February 2006, surpassing those of Japan to become the largest in the world, . 225 The Renminbi or Yuan, the Chinese currency, has been a high profile and long-running subject of controversy between China and its trade partners, especially the United States, the European Union and Japan. China has been accused of intentionally manipulating the Renminbi’s exchange rate to the US dollar to gain a competitive advantage and keep its exports artificially cheaper. The under-valued Renminbi, as often asserted, is the key reason for China’s growth in its unparalleled foreign exchange reserves and trade surpluses, as well as for global economic imbalances. As to how much the Renminbi is misaligned, there is substantial disagreement in various research, ranging from 1% to 56% undervaluation. See W.L. Chou & Y.C. Shih, The Equilibrium Exchange Rate of the Chinese Renminbi, 26 J. COMPARATIVE ECON.165, 174 (1998) (claiming that the Renminbi was about 10% undervalued at the beginning of the 1990s); Fred Bergsten, We Can Fight Fire with Fire on the Renminbi, FIN. TIMES (Oct. 4, 2010), (claiming that the Renminbi is still undervalued by at least 20% after its appreciation from 2005 to date); Morris Goldstein, Adjusting China’s Exchange Rate Policies 15 (Institute for Int’l Econ. Working Paper 04-1, 2004) (arguing that the Renminbi is undervalued by at least 15–25%); Ernest H. Preeg, Exchange Rate Manipulation to Gain an Unfair Competitive Advantage: The Case Against Japan and China in DOLLAR OVERVALUATION AND THE WORLD ECONOMY 267–84 (C. Fred Bergsten & John Williamson eds., 2003) (estimating that the Renminbi exchange rate undervaluation is about 40%). Also, there are proponents against the idea that China should alter its exchange rate. See Ronald McKinnon & Gunther Schnabl, China: A Stabilizing or Deflationary Influence in East Asia? The Problem of Conflicted Virtue (2003), credpr196.pdf. US lawmakers, led by Senators Charles Schumer and Leslie Graham, threatened to sanction China by imposing a 27.5% tariff on Chinese imports in order to pressure China to raise the value of the Renminbi. See US Lawmakers Turn up Yuan Heat, STANDARD (Hong Kong) (Jun. 13, 2007), _type=1&archive_d_str=20070613. The US House of Representatives passed legislation that would punish China for undervaluing its currency and damaging the competitiveness of US manufacturers and exporters. The US administration, however, preferred to pursue a policy of engagement with China with the view of persuading China to allow the Renminbi to strengthen while enhancing its own negotiating position by mounting congressional pressure. See James Politi, House to Hit Back on Renminbi, FIN. TIMES (Sept. 30, 2010), Meanwhile, the US administration also sought to organize a coalition within the framework of the G20. Alan Beattie, US-China Trade Ties: A Heated Exchange FIN. TIMES (Dec. 5, 2011), In October 2011, the U.S. Senate passed a bill that would allow the U.S. to levy retaliatory, across-the-board tariffs on Chinese imports according to estimates of currency misalignment. However, the Republican leaders opposed the move and resisted bringing a similar bill to a vote in the House of Representatives. Alan Beattie, Renminbi’s Threat to Dominant Dollar Grows, FIN. TIMES, Nov. 17, 2011, at 6. The Renminbi appreciated by 2.5% on July 21, 2005, when the Chinese government announced to re-peg Renminbi from the US dollar and allowed it to float within a band. China allowed Renminbi to appreciate to a 19-year high on October 13, 2012, against the US dollar, Northwestern Journal of International Law & Business An array of rules and circulars from MOFCOM, SAFE and the Taxation Bureau from 2005 to 2012, peaking with the of the State Council’s new national security review regime, are vivid examples of the tension between China’s regulatory concerns addressing high-quality domestic assets being drained overseas and the motivation of foreign investors to “vote with their feet” for an international standard regime in which the transaction can be organized in a highly automated and structured manner. It signals the regulatory body’s intention to, with a “responsive,” or “tit for tat” approach,226 integrate offshore transactions into the Chinese regulatory framework. Cirright before the US presidential election. On the other hand, the Renminbi, as it is said, only appreciated by over one-tenth on a trade-weighted basis even though it appreciated by one-fifth against the dollar in the past five years. While the currency is appreciating, the growth of China’s foreign currency reserves is flattening. Renminbi – Yuan Direction, FIN. TIMES (Oct. 14, 2012), Renminbi%20%E2%80%93%20yuan%20direction%20-%20FT.pdf. While appreciation of the Renminbi is an incremental and irreversible trend, the Chinese government has also been carrying on its promise to make the Renminbi exchange rate a volatile and two-way trade. The Renminbi is now allowed to float within a band, up or down 1% from a daily reference rate against the dollar that is set by the PBOC. Simon Rabinovitch, China Steers Renminbi Two-way Trade, FIN. TIMES (Oct. 26, 2012), Previously, the Renminbi only moved one way. Renminbi is better priced by the market after it was allowed to flow in a band. Enoch Yiu, London Pushes Ahead with Yuan Ambitions, South China Morning Post (Dec. 3, 2012), PBOC doubled the trading band to 1% on either side of the bank’s daily reference rate in April, 2012, and is expected to widen the band to 1.5 to 2% soon. A widened band can give traders greater leeway to push the yuan up or down. Jane Cai, PBOC Poised to Widen Trading Band of Yuan, S. CHINA MORNING POST (Apr. 24, 2013) , 1217839/trading-band-yuan-be-widened. A widened trading band will allow market forces to play a larger role as it will encourage two-way volatility and avoid the one-way bet on the Yuan strengthening. However, the widening of the band would not necessarily lead to a strengthening of the Yuan. Spot Yuan closed on June 4, 2013, at 6.1287 per dollar in Shanghai. It has been hitting 19-year highs frequently in the past few months and has strengthened about 1.7% against the dollar since April 2013. That has already suppressed the 1.03% appreciation for the whole of last year while capital unleashed by quantitative easing in developed countries flooded into China betting on robust economic growth and greater financial reforms. The Yuan could reach another key psychological level in 2014 to trade at 6 to the US dollar as the Chinese regulators seem included to ease the reins on the currency further. It is possible for spot dollar-yuan to fall below six figures. However, the yuan’s persistent appreciation is not supported by economic fundamentals. China’s trade surplus totaled US $43 billion in the first quarter of 2013 but the surplus adjusted for overstated exports to Hong Kong was only US $2.4 billion. With the current account surplus set to narrow and the growth of foreign direct investment likely to slow as the Chinese economy gears down, further gains in the Yuan should be quite limited. IMF, however, estimates the actual value of the Yuan was 4.214 to the dollar in 2012 , based on the purchasing power parity. Jane Cai, Yuan Heads for Key Level Against Dollar, S. CHINA MORNING POST (Jun. 5, 2013), The Yuan closed trading on 27 May 2013 at 6.12 to the dollar, 35% stronger than its June 2003 rate. The Yuan: The Cheapest Thing Going is Gone, ECONOMIST (Jun. 15, 2013)., china/21579488-after-enduring-decade-criticism-its-weakness-chinas-currency-now-looksuncomfortably. The latest surge in the Renminbi’s normal exchange rate is puzzling as it comes at a time of disappointing growth, falling inflation and flagging exports. 226 See generally, IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION (1992). cular 698 is unique in the sense that the government substitutes public tax program for regulatory means, and extends its jurisdiction to cross-border commercial activities. In a socioeconomic order, there have been a variety of means to meet social goals or respond to perceived social problems. Each regulatory technique is likely to generate a distinct pattern of gains and losses. Various additional governmental approval requirements and procedural delays may cause a chilling effect on many legitimate transactions that actually sustain FDI flows. 227 The regulatory intervention may ultimately deter FDI activities essential to improving the efficiency of the corporate law regime, which is in line with findings that government programs often hinder rather than help the growth of FDI activities.228 A series of regulatory movements have led to a substantial drop of outbound investment to the Cayman Islands and British Virgin Islands, as indicated in Table 3 above. In 2012, outbound investment to the Cayman Islands and British Virgin Islands was only 0.9% and 2.6% of China’s total outbound investment respectively. This again confirms the correlation between regulatory design and economic activities. Anti-tax avoidance measures can easily provoke controversy for two simple reasons. First, these measures have a tendency to increase the complexity and volume of new tax rules, which increases compliance costs in the corporate sector. Second, there is a natural outcry in the market due to political controversy over the role of the state in shaping public interest. While it can be argued that the regulatory regime generates too few benefits compared to costs, a public tax program may create a direct deterrent effect and have too few beneficiaries except the government itself. The major concern here is that the government, as the sole beneficiary of the public tax program, may have sheltered the tax regime from cost-benefit scrutiny on the grounds that tax is thought to be designed to protect the public more efficaciously. The deeper concern is related to the relationship between the corporate sector and the government, and the mediating role of the corporate tax code in between. The normative theory is that the public law status of the corporate tax code dictates the complexity and priority of the corporate tax law. Meanwhile, it has been well recognised that the public or national interest in corporate taxation is not necessarily in line with business interests. It is also no surprise to see corporate tax law in some cases fails to respond to the commercial and financial developments sought by society. A sensible regulatory instrument is the one which can align both interests simultane227 See Round-trip Investments Key to Reversing FDI Decline, CHINA LAW & PRAC. (May 8, 2009), 228 See generally John Armour & Douglas Cumming, The Legislative Road to Silicon Valley, 58 OXFORD ECON. PAPERS 596 (2006). Northwestern Journal of International Law & Business ously. This gap needs to be conceptualized in a way that anatomises the nature of the engagement between the corporate (investment) sector and the government. An ideological consensus should be that strong economic growth is a core element of the public (national) interest. The complexity here is that the public interest in China may largely lean towards the stateowned sector rather than the private or foreign-investor sector. In this regard, the shape of the corporate tax base in China is reflective of conscious political choices.229 Although the “round-trip investment” model is unique to China, the establishment of statutes and regulations to prevent abuse of tax treaties and tax havens through the use of cross-border business structures is not. Spearheaded by the world’s largest economies, there is a global trend towards tightening loopholes and sharing information to secure revenue and prevent tax evasion. Although the implications to company law remain of questionable legitimacy, examined within the context of this new global order, Circular 698 appears more reasonable. To offer a greater understanding of the current global regulatory trend, the next section addresses anti-avoidance measures taken in other jurisdictions and the global effort to share information and “crack down” on tax avoidance. C. Global Emphasis on Increased Tax Revenue and Anti-Avoidance In the aftermath of the financial crisis, there has been a trend towards governments trying to deal with tax evasion and avoidance so as to collect more taxes.230 Several high-profile cases involving Google and Apple and their tax avoidance planning have not only shone a harsh spotlight on the international tax system but also injected urgency into the global effort to 229 The tensions between the corporate sector and the government in other advanced economies have been managed in the context of successive administrations whose general ideologies place a high premium on the importance of the corporate sector in promoting the public interest. In this sense, the success of the corporate sector is a critically important component of the national success. HM TREASURY AND HMRC, CORPORATE TAX REFORM: DELIVERING A MORE COMPETITIVE SYSTEM (Nov. 2010), rm_complete_document.pdf. 230 The latest example is a plan of 11 European countries to impose a financial transaction tax: 0.1% on stocks and bonds and 0.01% for derivatives. The tax is designed to be applied widely in cases where a buyer, seller or issuer is located in a financial transaction tax-levying state. The underlying rationale of imposing this tax is that financial trading is under-taxed relative to the rest of the economy because of the exemption of value-added tax in the financial sector. Imposing financial transaction tax will raise €34 billion per year. Financial Transaction Tax: Don’t Panic, FIN. TIMES (May 23, 2013) , Opponents, however, claim that the imposition of financial transaction tax would kill financial growth, rob pensioners, impoverish financial institutions, destroy transactional models involving banks, bankers and exchanges, lower investor returns, increase borrowing costs, and worsen the EU debt crisis.. Avinash Persaud, Europe Should Embrace a Financial Transaction Tax, FIN. TIMES (May 28, 2013) , crack down on aggressive tax avoidance. The Organization for Economic Cooperation and Development (“OECD”) has drawn up a plan to reform the global tax rules and identified more than a dozen issues that need reform, which, if adopted, could lead to a drastic change in international tax standards. It has been reported that the OECD is likely to propose changes to “hybrids” or regulatory arbitrage, the structures and instruments that exploit differences between different regimes’ tax codes, and more importantly, to work out a multilateral treaty so as to revise double tax treaties. In this sense, Circular 698 can be viewed as a unilateral regulatory attempt made by the Chinese government in this global reform effort. The scenario Circular 698 is trying to tackle is similar to the paradox the US tax reform is facing. Apple, for example, as reported, has US$102 billion in foreign cash reserves, but the reserves are not subject to US tax unless they are repatriated to the United States.231 In other words, Apple has paid little or no tax for its earnings in the amount of tens of billions of dollars by making use of subsidiaries incorporated in Ireland and Irish tax loopholes.232 Similarly, Apple did not pay UK corporate tax in 2012 even though it has a number of subsidiaries in the UK, which made pre-tax profits of £68 million in the first three quarters of 2012 .233 Google, as reported, similarly only paid £ 10.6 million in taxes even though it generated £12 billion in revenues from the UK from 2006 to 2011.234 A US Senate committee in May 2013 highlighted Apple’s overseas tax rate of less than 2%. The loopholes in the US tax law have allowed US multinationals to park nearly US $2 trillion of lightly taxed foreign earnings in tax havens.235 As a result, this has turned out to be a “non-double taxation” scenario, leaving some cross-border commercial transactions and lightly taxed “stateless” income generated out of these transactions ultimately untaxed. The paradox in relation to the US corporate Northwestern Journal of International Law & Business tax code provides a certain level of legitimacy to the Chinese tax authority’s efforts. On the other hand, China’s regulatory move to put Circular 698 in place has also highlighted the difficulty of global cooperation on tax reform as the nations’ well-established instinct is to use the tax system to compete. Lighter fiscal regime often attracts tax payers’ reallocation of their tax residency. In reality, it is a trade war by another name—fought with income tax policies rather than tariffs. The best example is probably the UK. While the UK is expressing outrage at Apple and Google for stripping income and potential tax revenue out of the UK, it is simultaneously engaged in “beggarthy-neighbour” policies by attracting Italy’s Fiat Industrial to move its tax residency to the UK. While some countries have had a long history of having low corporate tax rates, there is a sign that other countries are joining a global race to cut rates. Portugal recently announced plans to lower its 24% corporate tax rate whilst the US government proposed eliminating business tax breaks to reduce the 35% corporate tax rate and the UK government plans to cut the corporate tax rate to 20%, the lowest in the G20.236 The chief theory underpinning such regulatory competition is a free-rider problem: each state likes others to clamp down on tax avoidance without having to touch its own tax codes and tax regime. The regulatory moves made by some other developed countries and the underlying regulatory competition theories indeed justify China’s unilateral and expansive regulatory move to catch offshore commercial activities under its realm. More relevant in this case, Circular 698 can be regarded as China’s attempt to strengthen its ability to tax Chinese investors’ profits generated from China-based assets. There is basically a lighter chance to have a more economically neutral and appropriate paradigm while all the countries are competing with each other in this game. As a result, the efforts made so far are to increase the level of transparency, which is used as a powerful weapon against tax avoidance, rather than ratifying the current international tax system.237 At the global level, the crackdown 236 Houlder, supra note 233. The underlying reason that the governments in developed economies are forced into austerity regimes is probably because of budget deficits. 237 The key problem of the current international tax system is how the profits of multinational companies are allocated to individual countries. The allocation is usually made on the basis of the location of economic activities or ownership of various assets which are, however, mobile in nature. As a result, some assets can be located in regimes with lower tax rates. The reform of the international tax regime— that is, a set of anti-avoidance rules—is to prevent companies taking undue advantage. Because the less mobile element in business activities is consumers, the government can tax the profits of a multinational company to the extent that it has sales to third parties who reside in the country. Imposing such a tax seems unlikely to induce people in that country to move to a tax haven. Implementing this tax can rely on the “destination principle” (the principle is codified in the value-added tax law). The basic approach is to tax income generated from sales in a particular country and give relief for expenditure incurred in that particular country. This can be achieved by taxing imports. Focusing on the residence of the customer can avoid some complexities involved in the VAT rules. The advantages of this “destination prinon tax evasion has been intensified due to the US’s threat to charge a 30% withholding tax on foreign banks that did not divulge US client information under its 2010 Foreign Account Tax Compliance Act (FATCA).238 The EU is increasing efforts to clamp down on tax avoidance by wealthy investors such as private equity and hedge funds. The EU’s largest five economies including the UK, France, Germany, Italy and Spain have agreed to share confidential information on individual’s investment income and capital gains and, more substantially, to extend such rules to the rest of EU members.239 The EU is to adopt the EU version of FATCA. The G8, for example, is trying to put a country-by-country reporting scheme in place so as to benefit local tax authorities, especially those in developing countries that have limited capacity to collate tax-related information themselves. The G20 has thrown weight behind the automatic exchange of tax information.240 Globally, there have been 800 tax information exchange agreements since 2009. However, the effectiveness of these agreements is doubtful as tax evaders are, other than repatriating funds, now shifting deposits to havens not covered by a treaty with their home country. Therefore, a pressing need is an international agreement on how to link tax bases to real economic activity and limit the creation of letterbox subsidiaries whose sole purpose is to locate the most profitable portion of the businesses in low-tax (or no-tax) regimes. This again calls for a much higher level of regulatory harmonisation (compared to somewhat ill-designed double taxation treaties) for a common consolidated corporate tax base. ciple” are multi-faceted. For instance, transfer prices charged for intra-company trade would not affect the tax base. The location of economic activity would not be affected because tax would not depend on the location or production or other factors. Competitive pressure or motivation to reduce the corporate tax rate to attract economic activity is also weakened. The US is planning to implement such a salescentered corporate tax—the corporate tax is imposed where sales are generated. Eric Schmidt, Why We Need to Simplify Our Corporate Tax System, FIN. TIMES (Jun. 16, 2013), The other option is a significant increase in corporate tax rates globally but the implementation of this option may result in less innovation, less growth and less job creation. 238 The website of the Foreign Account Tax Compliace Act (FATCA) is 239 The EU tax commissioner is to issue a reform proposal that requires tax authorities to automatically exchange banking details on capital gains, dividends and royalties. Currently, EU agreements on tax sharing have applied to interest on savings and deposits, rather than more complex investment structures. James Fontanella-Khan & Alex Barker, Brussels Steps Up Efforts Over Tax Avoidance, FIN. TIMES (May 5, 2013) , 240 Vanessa Houlder, Finance Ministers Step Up War on Tax Evasion, FIN. TIMES (Apr. 19, 2013) , Northwestern Journal of International Law & Business 1. European Approach to Cracking Down on Aggressive Tax Planning Authorities in Europe have been taking increasingly tough stances on tax avoidance and financial secrecy over the past few years, forcing domestic and international investors to change their tax planning strategies. More cases have been reported recently as a result of a clampdown by Italian finance police on tax evasion while the European sovereign debt crisis roiled more countries. The widespread use of holding companies registered in Luxembourg has been a specific target of tax authorities as member states in the EU seek to boost state coffers by returning billions of euros estimated to be held in tax havens. In one high-profile case, Italian fashion designers Domenico Dolce and Stefano Gabbana received suspended prison sentences of a year and eight months and were fined nearly half a million euros by a court in Milan for evading millions in taxes. Dolce and Gabbana are the owners of a multinational fashion group and sold their brand to Gado, a Luxembourg-based holding company, in 2004 in order to avoid declaring more than €100 million in royalties. Gado subsequently took control of the Italy-based business. Dolce and Gabbana were also fined nearly €500 million, opening up the possibility that the tax policy may allow the government to seize shares in the company and company assets. The prosecutor argued that the designers conducted a “sophisticated tax fraud and set up the Luxembourg holding company specifically to evade taxes.”241 The ruling handed down by the court is a clear sign that the Italian tax authorities and judiciary are looking more aggressively than ever at evasive or abusive schemes implemented by Italian companies of all sizes. The case comes at a time that some European companies have sought to set up international structures for legitimate and legal reasons as domestic demand no longer offers growth for their local businesses. These structures, meanwhile, are used as a means of obtaining tax advantages. Nevertheless, in the context of the current financial crisis, these structures may be categorized as abusive tax avoidance schemes. Italian tax police also seized assets owned by Roman jeweler Bulgari and the Marzotto textile dynasty in recent raids on the grounds of tax avoidance. The UK government also made an announcement in 2013 that it would crack down on aggressive tax planning. This new movement to close tax loopholes has prompted some wealthy individuals and companies to restructure their businesses in a more transparent and holistic manner. Back in 2004, the UK passed the disclosure of tax strategies legislation which 241 Rachel Sanderson, Dolce and Gabbana Get Suspended Sentence and €500m Tax Evasion Fine, FIN. TIMES (June 20, 2013), China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) forced taxpayers to declare any strategy or scheme that bore certain hallmarks. Governments across the EU and the world are using similar plans to identify and scrutinize existing tax planning schemes leading more investors to adopt more straightforward tax planning options since they fear being seen as an “untapped” resource. The changing regulatory climate is pushing the wealthiest members of society to pay their “fair share” of tax, which is also a popular and effective political rallying cry at a time of widespread global austerity measures. The EU announced plans to tackle the well-known tax avoidance arrangement so as to ensure a level playing field for “honest” businesses in the single market. Due to a mismatch between different countries’ tax systems, companies can minimize their tax liability by using hybrid instruments such as convertible preference shares or profit participating loans, which may be regarded as equity in some countries but debt in others. According to the EU plan, countries are required to tax payments arriving from a subsidiary in another member state where such payments had been treated as a tax-deductible expense.242 Along with this rule, the EU Commission is to introduce an anti-abuse rule in order to stop companies from setting up “wholly artificial” intermediary groups to avoid tax. If these rules were put in place, the benefits would be in the magnitude of billions of Euros. As the plan needs unanimous consent from all the member states, it may be difficult to be passed without encountering any resistance. While these initiatives may constitute a contribution to the international work on tackling tax base erosion and profit shifting, they are not immune from controversy for at least two technical reasons. First, it is debatable whether the hybrid schemes are abusive or not. Second, the implementation of these initiatives may lend a competitive advantage to companies based outside the EU or to private equity funds, which are not affected by these proposed changes. To step up its probe into alleged illegal tax-avoidance practices, the EU Commission recently expanded the investigation to cover arrangements for patent-holders by issuing an information injunction against Luxembourg and ordering it to reveal its specific promises made in the tax rulings between 2011 and 2012 to specific companies.243 Liechtenstein has stepped up its efforts to shed its reputation as one of the most secretive havens in the world and pressed ahead with automatic exchange of tax information and promising to sign a global tax agree242 Rebecca Christie, EU Seeks to Force Firms to Pay Tax on Hybrid-Loan Payments, BLOOMBERG NEWS (Nov. 25, 2013) ,; Vanessa Houlder, Europe Unveils Crackdown on Cross-border Tax ‘Hybrid’ Schemes, FIN. TIMES (Nov. 25, 2013) 243 Alex Barker, EU Steps up Probe into Tax Sweeteners for Multinationals, FIN. TIMES, Mar. 25, 2014. Northwestern Journal of International Law & Business ment.244 This move is a positive sign of the intensifying global crackdown on tax evasion that is forcing tax havens to open up and deal with their legacy of undeclared assets and develop new business models for their secretive financial sectors.245 By taking this step, Liechtenstein appeared ready to combine “guaranteed tax compliance with effective tax cooperation and effective, efficient automatic information exchange based on the future OECD standard.” Liechtenstein is to build on an agreement with the UK which took the form of a partial amnesty announced in 2009 to prompt investors to declare their secret accounts. The UK has collected about £600 million from 3,000 individuals who used the Liechtenstein Disclosure Facility. The arrangement posed low penalties to individuals who owned up to undeclared offshore assets, backed up by a promise to close the accounts of customers who could not prove they had paid their taxes in their home country. 2. The United States Approach The US corporate tax system is not problem-free. First, there is a mishmash of credits and deductions that encourages companies to contort themselves to reduce their tax bill. Second, the tax rates are too high. The statutory rate is 35%, the second highest in the world. This 35% tax rate is also applied to repatriated cash. The US has a higher corporate tax rate than any other leading economy, and imposes severe taxes on income earned outside its borders. This severely affects US-incorporated multinationals’ global competitiveness and discourages the repatriation of profits earned abroad. Third, corporate profits are extraordinarily high relative to gross domestic product but tax collection is low. The US corporate profits peaked at more than US$2 trillion in 2012. However, corporate tax receipts peaked not in 2012 but in 2007. In effect, the tax rate in 2012 was just 16% (aggregated taxes divided by aggregate pre-tax profit), down from 29% in 2000.246 The challenging part of the corporate tax reform is the taxation of global companies. Currently, US companies are taxed on their foreign profits, with a credit for taxes paid to other governments, only when they repatriate these profits. A rough estimation is that American businesses are holding nearly US$2 trillion in cash abroad.247 The current system can be a burden on China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) American multinationals as they suffer losses from bringing money home and the tax raises little revenue. From the multinationals’ perspective, there is a strong reason to delay repatriating earnings to the US even though there is no desirability of doing so: keeping money abroad to the detriment of companies and the American fiscals. However, from shareholders’ perspective, the multinationals may have to repatriate money back to the US and may have to pay taxes on their foreign profits. The US Senate Finance Committee unveiled the proposal for a sweeping rewrite of the US tax code. Likely, the US would impose a one-time 20% tax on an estimated US$2 trillion of cash held overseas by American multinationals.248 In a cross-border context, the US tax law also has loopholes. For instance, multinationals with big US operations may take advantage of a socalled tower structure, a hybrid scheme that complies with individual country’s tax laws while exploiting inconsistencies between them, to achieve a double tax deduction. It is a popular alternative to the more widely used strategy of routing inter-company loans through tax havens such as setting up an SPV in a tax haven to lend money to a subsidiary in a higher tax country. The scheme makes use of the 1997 US so-called check-the-box rules that allow companies to elect to disregard a subsidiary by ticking a box on a tax form. The rules, originally designed as a simplification, provided planning opportunities to foreign companies operating in the US as well as US multinationals to cut their tax bills as foreign subsidiaries can disappear into their parent companies for US tax purposes. The best example is FirstGroup’s acquisition of Laidlaw, the US yellow school bus operator. FirstGroup, the UK transport group, financed the acquisition with a US$1.8 billion intra-group loan. Interest on the loan however was paid by FirstGroup US Holdings, a new UK company used as a hybrid entity to own the target company. A check-the-box option for FirstGroup US Holdings means that any transactions would be regarded for US tax purposes as occurring in its parent, FirstGroup US Inc. The US tax authorities view the interest payments as coming from the US parent, resulting in a US tax deduction. The UK tax authorities on the other hand regard the loan as a UK company making a loan to another UK company within the same group. The interest income would be taxable in the UK but the interest paid would be tax deductible in the UK. The net result would be no taxable income in the UK. The overall group benefits as interest income is taxable once but the interest payment is tax deductible twice. The outcome is a cut in the cost Caterpillar, Apple Inc., Hewlett-Packard Co. and Microsoft Corp. have been using controversial international tax practices to shift profits overseas. Maxwell Murphy, New Slant on Corporate Taxes, WALL ST. J., Apr. 9, 2014, at B8. 248 James Politi, Democrats Eye Tax on Overseas Profits, FIN. TIMES, Nov. 20, 2013, at 1 (also saying that the changes to the international tax system would be paired with the elimination of some domestic corporate tax breaks and a reduction in the overall US corporate tax rate to between 25% and 30%). Northwestern Journal of International Law & Business of corporate financing.249 The other way of phrasing the overall result is a double tax deduction in both the UK and the US, which is offset by a single UK tax payment on the interest received.250 The United States, under the Obama administration, has taken a leading role in pushing for global tax reform and the sharing of information, but the majority of US efforts have focused on ensuring the US tax base from citizens and American business entities. In addition to cracking down on tax avoidance, the government sought increased income through rules unfavorable to tax payers. In 2010, the economic substance doctrine was codified with a two-part conjunctive test—the least favorable approach for tax payers. Additionally, the tax code was modified to require US citizens abroad to pay US income tax regardless of the income source (including Americans living and working abroad)251—a move that results in double taxation or tax avoidance behaviors by US citizens. This makes the US the only country in the OECD that taxes its citizens without regard to residence.252 The new rules led to a record number of Americans, many of them millionaires living abroad, renouncing their citizenship in 2011. That year, 1,788 Americans renounced their citizenship, more than the previous three years combined. 253 For the remaining Americans, the US government has a large financial incentive to receive income information and crack down on tax avoidance. In perhaps the largest global tax avoidance effort initiated to date, the United States passed the Foreign Account Tax Compliance Act (“FATCA”).254 FATCA applies worldwide to every financial firm that receives payments from the US sources, requiring disclosure from financial firms where accounts were maintained by US taxpayers to individuals or companies where a US person owned more than a 10% interest in the firm. Much like Circular 698, FATCA has an extraterritorial effect with a primary goal of protecting domestic tax revenue. The Act uses a two-pronged approach255 requiring US citizens and permanent residents (Green card holders) to report their accounts held outside the United States and requires 249 Similar results can be achieved in other countries by using partnerships or by using hybrid instruments such as preference shares, which are regarded as debt in one country but equity in the other. 250 Vanessa Houlder, Hybrid Tax Schemes Face Day of Reckoning, FIN. TIMES, Nov. 26, 2013, at 251 U.S. Citizens and Resident Aliens Abroad, Internal Revenue Service, Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad (last visited September 16, 2013). 252 Americans Renounce their Citizenship in Record Numbers in 2011, (last visited Sept. 16, 2013). 253 Id. 254 The FATCA is a part of the Hiring Incentives to Restore Employment (HIRE) Act and created 26 USC §§ 1471–1474 and 26 USC § 6038D. 255 FATCA also closed a tax loophole that allowed taxpayers to circumvent taxes of US dividends by utilizing swap contracts. 15. China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) foreign financial institutions to provide the IRS with information on American clients.256 As with any tax provision designed to have an extraterritorial effect, the fundamental difficulty is enforcement in foreign jurisdictions. To this end, FATCA compels financial firms to disclose information on US taxpayers to the US government and requires US financial institutions and their agents to withhold 30% on certain payments to foreign financial institutions that fail to meet the FATCA requirements and report required information.257 In this way, foreign financial intuitions are forced to either comply with the statute or cease doing business with American clients. This is in stark contrast to Circular 698 which fails to motivate foreign entities to disclose information to the Chinese tax authority—an omission that makes Circular 698 greatly ineffective. It appears that Circular 698 reporting is undertaken on a voluntary and self-reporting basis. The enforcement of Circular 698 largely depends on how actively the local tax bureaus would seek to strictly enforce Circular 698. Also borrowing from the US approach, China could seek agreements with individual governments for the disclosure of financial information used to determine tax payments. In order to facilitate compliance with FATCA and collect information on accounts held by American’s and their businesses, the US government entered into agreements with individual nations and the U.S. Department of the Treasury created model FATCA agreements.258 The need for agreements is not 256 The United States is one of the only countries that require non-resident citizens to pay taxes on foreign income with Eritrea being another. See Eritrea: Selected Issues and Statistical Appendix, International Monetary Fund, (July, 2003). PWC, Foreign Account Tax Compliance Act – New U.S. Rules That Will Affect Non-U.S. Entities, (last visited November 14, 2013) 257 FATCA supra; See also Foreign Account Tax Compliance Act, IRS, Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA) (last visited Sept. 13, 2013). 258 Resource Center, U.S. Department of the Treasury, (last visited Sept. 17, 2013); See also Reciprocal Model 1A Agreement, Preexisting TIEA or DTC, U.S. Department of the Treasury, (June 6, 2014),; Nonreciprocal Model 1B Agreement, Preexisting TIEA or DTC, U.S. Department of the Treasury (June 6, 2014),; Nonreciprocal Model 1B Agreement, No TIEA or DTC, U.S. Department of the Treasury, (Nov. 4, 2013) , FATCA-Nonreciprocal-Model-1B-Agreement-No-TIEA-or-DTC-11-4-13.pdf; Model 2 Agreement, Preexisting TIEA or DTC, U.S. Department of the Treasury, (Nov. 4, 2013) , resource-center/tax-policy/treaties/Documents/FATCA-Model-2-Agreement-Preexisting-TIEA-or-DTC11-4-13.pdf; Model Agreement 2, No TIEA or DTC, U.S. Department of the Treasury, (Nov. 4, 2013) , The model agreements provide a reciprocal version, where the US provides information to the partner country, and a non-reciprocal version. Under model 1, foreign financial institutions report information about American account holders to their government, which in turn pro Northwestern Journal of International Law & Business merely a result of the need for foreign cooperation, but the fact that compliance with FATCA may be illegal in foreign jurisdictions. The deputy director general of legal affairs at the People’s Bank of China said FATCA “creates unreasonable costs for foreign financial institutions and directly contravenes many countries’ privacy and data protection laws.”259 He further elaborated that “China’s banking and tax laws and regulations do not allow Chinese financial institutions to comply with FATCA directly.”260 Currently, at least nine countries have entered into FATCA agreements with the United States.261 With the exception of Mexico, a nation that is still a member of the G20 and greatly reliant upon the United States for trade, the countries entering into FATCA agreements with the US are developed nations—many with high tax rates. Therefore, most of these countries do not benefit from US investors using their locations, tax codes, tax shelters or hiding assets within their jurisdictions. The inability of the US to gain the cooperation of tax haven jurisdictions highlights the difficulty China will have in collecting data from these tax havens to determine when a sale has taken place and enlisting the support of those nations in enforcing judgments against the selling party who may no longer hold assets within China. However, it must be pointed out that FATCA will have a significant impact on China. Cayman Islands has already concluded an agreement with the US Treasury while the British Virgin Islands and the US have been in talks to create an intergovernmental agreement to exchange information on US taxpayers under FATCA. These moves put more pressure onto Hong Kong to comply with FATCA in order to maintain its competitive edge. Signing a similar pact would be a brand-enhancing move for China to attract more capital inflows. The pressure on financial firms in China to comply with FATCA stems from the fact that other financial firms would be loath to do business with a non-compliant firm and customers would shun non-compliant financial firms due to the withholding tax. The economic substance doctrine is arguably the primary tax avoidance doctrine in the United States, as was codified in 2010.262 Although the doctrine does not specifically target extraterritorial efforts at tax avoidance, it may be applicable and demonstrates the government’s devotion to invides the information to the United States. Under Model 2, foreign financial intuitions report information on US account holders directly to the US government and the partner country agrees to remove legal barriers to the aforementioned reporting. 259 China Central Bank Official Slams U.S. Tax Dodging Law, REUTERS (Nov. 28, 2012),, (quoting Liu Xiangmin, deputy director general of legal affairs at the People’s Bank of China). 260 Id. 261 The nine countries include Denmark, Germany, Ireland, Mexico, Norway, Spain, the United Kingdom, Japan, and Switzerland. See Resource Center: FATCA-Archive, U.S. Department of the Treasury, (last visited Sep. 18, 2013). 262 26 USC §7701(o) (clarifying of Economic Substance Doctrine). China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) creasing tax revenues, even through legislation extremely unfavorable to taxpayers. The philosophy behind the doctrine is similar to the business purpose doctrine in that the economic substance doctrine seeks to prevent tax benefits resulting from business transactions motivated purely by tax savings. In determining the existence of an economic benefit, the code employs a two-part conjunctive test requiring “the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.”263 Prior to codification, various courts used the conjunctive test while others utilized a disjunctive test, requiring the taxpayer to meet one of the two elements. 264 The codification is significantly less taxpayer friendly than the disjunctive test and is therefore less evenhanded than the Ramsay principle. In addition to its domestic efforts and extraterritorial efforts against US citizens, the US has been a leader in the global effort against tax evasion. The next subsection addresses the international efforts for global tax reform. 3. The G8, G20 and OECD – Global Tax Reform Tax reform is not limited to domestic changes in Europe and the United States. British Prime Minister, David Cameron, introduced a 10 point plan aimed at combating tax evasion during the G8 summit June 17–18, 2013, hosted by the United Kingdom after a wave of public anger over the low tax bills paid by some large multinationals. Alongside advancing trade, the UK government listed ensuring tax compliance and promoting greater transparency (an important issue in monitoring attempts to evade taxes) as the objectives of the summit. 265 Although the goals of the G8 summit demonstrate a commitment on the part of the world’s most developed countries to combat tax evasion, the proposals of the Cameron administration were too ambitions and failed to result in an agreement.266 The proposals included making beneficial ownership267 information from businesses’ registries public and sharing tax information with other nations, with develop263 26 U.S.C. § 7701(o)(1)(A) & (B) (2013). 264 LAMPREAVE, supra note 112. 265 UK Presidency of G8,, (last visited Sept. 16, 2013); See also Larry Elliot, G8 Summit: Tax Campaigners Condemn David Cameron’s 10-Point ‘Wish List’, GUARDIAN (June 18, 2013), 266 Elliot, supra note 265. 267 The term “beneficial owner” refers to the party with primary control and ownership rights. Reporting beneficial owners is important in combating tax evasion to prevent the nomination of “straw men” as owners and directors in order to avoid monitoring by tax authorities, or in the case of terrorist activities, police and intelligence agencies. Northwestern Journal of International Law & Business ing countries being of particular concern.268 However, unlike China, where the sole purpose of Circular 698 is to collect tax revenue, the motivation behind the UK’s proposal includes preventing money laundering by terrorist organizations. The recent G20 Summit hosted in Saint Petersburg by the Russian Federation was intended to focus on growth, but tax quickly dominated the agenda.269 The G20 member nations endorsed the creation of a global tax standard that provides for the automatic exchange of tax information by the end of 2015.270 This plan was originally proposed by the OECD, which is working with G20 member countries to develop the standard of automatic exchange of tax information.271 This effort is the culmination of several years of discussion. In 2011 , G20 countries discussed the voluntary exchange of information for tax reasons.272 In 2012, the OECD presented a report on exchanging tax information and urged countries to share information, and the current summit begins the more comprehensive scheme of automatic information sharing.273 Among others, hybrid structures are on the list of loopholes to be closed in the crackdown launched in 2013 by the G20.274 The OECD unveiled an action plan in July 2013 tackling tax evasion by multinationals. The plan aligns tax in a location with the economic activity in that location, preventing the artificial shifting of multinationals’ reported business to low-tax or no-tax jurisdictions like Cayman Islands, Bermuda and the British Virgin Islands. According to OECD’s plan, tax havens are required to disclose in a more transparent way the tax information of multinationals to the governments that taxed them. Other measures include neutralizing the various methods multinationals use to minimize their tax by “transfer pricing,” which is booking their profits among different tax jurisdictions. The OECD has put in place a Multilateral Convention on Mutual Administrative Assistance in Tax Matters which includes the new standard on automatic exchange of information. G20 nations are expected to be part of the initiative. China has incentives to joint this global framework so as to increase its right to tax, including by neutralizing 268 Id.; See also G8 Factsheet: Tax, GOV.UK, (last visited Sept. 16, 2013). 269 See Russia in G20: Priorities of Russia’s G20 Presidency in 2013, THE GROUP OF 20, (last visited Sept. 14, 2013). Russia set eight issues on the G20 Summit agenda, of the 8 eight only two had a loose connection with tax—international financial architecture reform and strengthening financial regulation. The other issues focused on corruption, growth, and sustainability. 270 Houlder, supra note 240; Tax Annex to the Saint Petersburg G20 Leaders Declaration, THE GROUP OF 20, (last visited Sept. 14, 2013). 271 Id. 272 Id. 273 Id. 274 Houlder, supra note 250. China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) some of the tax channeled through Hong Kong where there is no real business activity, given the fact that China has a huge amount of capital outflows through tax havens. Being a capital exporting country, China has legitimate reason to be concerned about tax evasion in tax havens. In this sense, the business order created by Circular 698 is essentially part of the global initiative the world community is in a great attempt to achieve. An update from the OECD is scheduled for the October Finance Ministers’ meeting of the G20 and the goal is to complete the framework by 2014, after which it is scheduled to be presented at the Finance Ministers and Central Bank Governors’ meeting in February 2014.275 An action plan on tackling tax base erosion and profit shifting is tabled to the G20 by the OECD. The OECD’s plan works on the most contentious issues including tax treatment on digital businesses and transfer pricing.276 In addition to concerns over tax evasion, the G20 addressed the issues of tax avoidance through the use of shifting profits to low tax jurisdictions. The use of these “very low” or “double non-taxation” practices “undermine the fairness and integrity” of the tax system.277 The leaders did not come to a specific agreement addressing how to prevent the abuse of tax planning by multinational enterprises. However, implementation of tax rules and punishment for violations take place at the national level. Therefore, the automatic sharing of information will provide an opportunity for individual nations to punish individuals and entities seeking to avoid their tax obligations, but will not ensure even-handed enforcement between jurisdictions. In order to prevent companies from taking advantage of different disclosure requirements, a common template is to be created to require companies to report their global profit allocation and tax payments. The Tax Annex to the 2013 Declaration does state that profits should be taxed “where economic activities occur and value is created.” In essence, this principle supports the Chinese tax authority’s reasoning in promulgating Circular 698. If the financial gain realized by the sale of a foreign company is attributable to the success of an enterprise or appreciation of an asset located in China, then China is arguably “where economic activities occur and value is created.” China’s Circular 698 can be better understood in the context of this evolving global tax reform. A simple comparison shows that taxing indirect offshore disposal is still, in a global context, a novel regulatory innovation with few countries having introduced such rules or taxing approaches to date.278 This innova275 Id. 276 Vanessa Houlder, G20 Sharpens Attack on International Corporate Tax Avoidance, FIN. TIMES (July 14, 2013), 277 Tax Annex to the Saint Petersburg G20 Leaders Declaration, supra note 270. 278 India is another country which has aggressively tightened its regulatory arms over cross-border transactions. India threatened to levy a charge and bring Nokia’s total liability to about US$1.1 billion. This may bar Nokia from transferring its Indian assets to Microsoft as part of the group’s €5.4 billion Northwestern Journal of International Law & Business tive and far-reaching regulatory approach, however, easily becomes a hotbutton issue in cross-border mergers and acquisitions involving China elements. Difficulties can easily arise for strategic investment by multinationals. It is also unclear how Circular 698 interacts with China’s network of tax treaties, which may complicate the availability of tax credits and relief under both China’s tax treaties and domestic tax laws. CONCLUSION “Denying the existence of the offshore holding company” in Circular 698 constitutes a new regulatory tool for lifting the corporate veil. When the ultimate foreign shareholder indirectly transfers the equity of the Chinese resident enterprise through the transfer of equity in the offshore holding company, the Chinese tax authority may “lift” (or “ignore”) the existence of the offshore holding company as a separate legal person according to Circular 698 and regard the transaction as the foreign shareholder’s direct transfer of equity in the Chinese resident enterprise so that enterprise income tax is levied on the corporate capital gain. However, it must be pointed out that the State Administration of Taxation has no legislative power to interpret or create new rules outside of the existing veil-piercing regime provided for in China’s Company Law. Thus, the Chinese tax authority’s regulatory attempt in this regard is seemingly unlawful. Meanwhile, it must be recognized that there is a rationality attached to Circular 698 and the underlying justification lies in the tax authority’s attempt to regulate increasingly popular “round-tripping” investments, which are adversely affecting China’s tax base. As a practical matter, while tax planning strategies that exploit loopholes are mostly legal, these strategies constitute a major risk to tax revenues, tax sovereignty and tax fairness. For years, multinationals have routed profits through low tax regimes and used other techniques to minimize their tax bills. Against this background, Circular 698 makes sense in the local context as well as given various Chinese authorities’ recent regulatory moves to tighten up the regulatory space around the “round-trip investment” model. Within this framework, Circular 698 can be viewed as a move in line with the Ramsay principle developed from English common law, a reformation of the traditional lifting circumstance of “avoiding the legal obligations.” With generally and vaguely termed provisions in Circular 698, the Chinese tax authority enjoys unlimited discretion. Further, the Chinese tax authority takes “no employee, no other assets and debts, no other investments and no other businesses” as the criteria to characterize the offshore phone business sale. Nokia had other tax disputes with India’s revenue department concerning a US$375 million payments made by its Indian subsidiary to its parent in Finland. James Crabtree & Richard Milne, Nokia Tax Dispute in Danger of Escalating, FIN. TIMES, Dec. 12, 2013, at 14. China’s Extraterritorial Veil-Piercing Attempt 35:469 (2015) holding company as a façade without any reasonable commercial purposes. While Circular 698 may be of use to further clarify or apply the veilpiercing doctrine under Chinese law, it may be more constructive if the Chinese tax authority, by utilizing the Ramsey principle, applies the Circular only in circumstances where (i) the foreign investors (i.e., ultimate shareholders) planned to indirectly transfer equity of the Chinese resident enterprise when setting up the offshore holding company and the plan will be implemented inevitably, and (ii) the formation of the offshore holding company has no other reasonable commercial purposes except avoiding tax liability. In these cases, the Ramsay principle can be applied to deny the separate legal personality status of the offshore holding company. However, if the offshore holding company is set up after the two parties of the acquisition deal have materialized their intention to transfer equity (unless the parties succeed in proving a reasonable commercial purpose), then the formation of the offshore holding company may justify veil piercing by the tax authority and accordingly a tax liability can be imposed on the offshore controlling party. The norm of income taxation, that is, the principle of equal taxation of all varieties of income from all sources, has been under attack in the recent financial crisis. In advanced economies, tax revenues have lagged behind the demands on public expenditure, which resulted in higher levels of public debt. Governments are in a transitional period of reforming not only welfare programs, but also taxation programs to meet new challenges. The increased global interconnectedness has made it more difficult for governments to effectively govern cross-border commercial transactions and activities. For example, the wide use of “offshore” vehicles and tax havens, while enabling investors to exploit aggressive tax planning, has increased the complexity and difficulty in governance. China suffered lost tax revenues and a distorted financial system from capital flight, which is facilitated and encouraged by the offshore system. The existence and availability of offshore systems made it extremely difficult for China, as well as other countries, to tax the passive investment income of their own residents. While the Chinese government continues to offer tax incentives to attract foreign investment, it is also under increased pressure to fill in regulatory loopholes so as to not only minimize the distortive effects on capital allocation through the offshore system, but also make the entire regulatory regime effective and functioning. The effects of tax planning of multinationals are a major source of public concern. The efforts to reform the international tax system, especially to deal with the problems of tax havens and capital flight, have been given a new impetus in the aftermath of the latest financial crisis. These issues have been taken up by the G8 and G20, and some multilateral initiatives to deal with a global systemic system have also been taken up by the OECD, the EU, G8 and G20. Nevertheless, the original plan to have a clear com Northwestern Journal of International Law & Business mon transparency standard embodied in a multilateral treaty for secrecy information exchange lost its way. As a result, the current status goes back to individual states which are supposed to negotiate bilateral tax information exchange agreements. Against this background, it is not surprising to see China, among others, take some self-standing initiatives for its own interests, one of which was the adoption of Circular 698. This individual-state approach (opposite to a system-wide perspective), however, is difficult to administer and the lack of clear guidelines could have a negative impact on investment decisions. There is a clear need for a more comprehensive system for global cooperation even though the existing international taxation system leaves legitimation of taxation to each state, creating a competitive tension between states. China is currently facing a variety of structural challenges and shifts. Among others, the most fundamental challenge is to have a functioning and modern legal infrastructure. Apart from the judiciary, an effective regulatory regime, including regulatory tools, instruments, ideology and methodologies, is key for China’s long-term growth. China’s economy is far more complicated than it was previously. It is also, so far as it draws in questions of legislative simplicity and administrative efficacy, relevant to the concerns about complexity, instability and the rule of law. The crux of the issue here is that any reform to the corporate tax system should represent a pattern of values and a harnessing of public law, molding the relations between the corporate sector and the state so as to promote a specific ideological view of the public interest. Part of the corporate tax regulatory scheme, Circular 698 could also be seen in legal terms as a form of public law due to its extensive involvement in spheres of public life.279 Accordingly, any reform to the corporation (tax) code needs to reflect a consensus around the imperative of economic growth, around the importance of fairness, and in the tax regulation’s shifting nature and constant change, a series of more or less prudential responses to the contingencies of a changing business sector. Consequently, the tax reform should return to the rule of law, i.e., reducing its complexity and ambiguity, keeping the rules as stable and comprehensive as possible and assessing more accurately the costs that businesses will have to bear for compliance, all of which reflect the conventional normativist concerns with public law280 (arguably including corporate law). All these concerns can be and should be accommodated within a neoliberal ideological framework with a prioritization of rule of law in corporate tax code reform. The reform of the corporate tax code should also be driven by commercial factors rather than by pure tax considerations. 279 MARTIN LOUGHLIN, THE IDEAS OF PUBLIC LAW 131 (2003). 280 Id. at 129. Introduction............................................................................................... 472 I. Circular 698 and its Implications for the Veil-Piercing Doctrine.......... 473 A. Circular 698: Scope and Application ........................................ 473 B. Circular 698 and the Veil-Piercing Doctrine ............................. 476 C. Overview of the Common Law Veil-Piercing Doctrine............ 479 1. Modern British Approach to Piercing the Corporate Veil .. 479 2. The American Approach to the Veil-Piercing Doctrine ..... 480 3. Domination and Control ..................................................... 480 (a) Corporate Formalities. ................................................. 480 (b) Adequate Capitalization .............................................. 481 (c) Intercompany Transactions and Commingling of Assets.......................................................................... 482 (d) Overlap in Officers and Directors ............................... 482 (e) Other Miscellaneous Factors ....................................... 482 4. Fraud and Misuse of Corporate Form ................................. 483 II. Legitimacy of Circular 698 . ................................................................. 484 A. Why Are Corporations Provided Limited Liability Protection? .............................................................................. 484 B. Is Circular 698 a Specific Application of the Veil-Piercing Doctrine Under the Company Law? . ...................................... 486 1 . Agency ................................................................................ 489 2 . Single Economic Unit ......................................................... 491 3 . Avoiding Legal Obligations/Fraud ..................................... 492 C. Is the New Veil-Lifting Rule in Line With the PRC Legislation Law?. .................................................................... 493 III. Is Circular 698 Creating a New Veil-Piercing Doctrine? . .................. 496 A. China 's Adoption of the Veil-Piercing Doctrine....................... 496 B. Circular 698 and Veil-Piercing Policy Objectives..................... 499 1. Preventing Abuse of the Corporate Form Contrary to the Intentions of Corporate Law ............................................. 499 2. Preventing Fraud or Intentional Misuse of the Corporate Form .................................................................................. 499 3 . Preventing Harm to Involuntary Creditors.......................... 500 4. Anti-avoidance Measures Against the Systematization of Tax Avoidance .................................................................. 500 C. Administrative Enforcement of Circular 698 . ........................... 501 1 . Chongqing Case and Circular 698 ...................................... 503 2 . Xinjiang Case and Circular 698.......................................... 503 3 . Yangzhou Case and Circular 698 ....................................... 504 3 Id . 9 See James K. Dumont , Pleading Insanity in Piercing the Corporate Veil: Supplemental Rule E's Heightened Pleading Standard Protects Polluting Shipowners in the Fourth Circuit, 38 TUL . MAR. L.J. 655 , 670 ( 2014 ). 10 Zhonghua Renmin Gongheguo Gongsi Fa (2005 Xiuding) ( 中华人民共和国公司修订 2005 ) [Company Law (2005 Revision) ] (promulgated by the Standing Comm . Nat'l People's Cong . Oct. 27 , 2005, effective Jan. 1 , 2006 ) CHINALAWINFO (last visited Sept . 13 , 2013 ) at art. 20 ( 2 ), lib=law [hereinafter PRC Company Law] (China) 11 Id . at art. 20 ( 1 ). 12 Id. at art. 64 . 13 Id. at art. 21 . 14 For a study of veil piercing cases in China see Hui Huang, Piercing the Corporate Veil in China: Where Is It Now and Where Is It Heading? 60 AM. J. COMP. L. 743 ( 2012 ). 34 See The Business Torts Reporter , Equitable Remedies, 25 BUS. TORTS REP . 308 , 310 ( 2013 ). 35 Smith, supra note 24 at 1178. 36 Id. at 1179 . 37 See Jeffery W. Warren & Adam Lawton Alpert, Creditors' and Debtors' Practice in Florida, CD FL-CLE 8-1, § 8 .18 ( 2012 ) which discusses the case of Dania Jai-Alai Palace, Inc. v Sykes, where the court considered location and joint tax filing in piercing the corporate veil . 425 So.2d 594 , 599 (Fla. 4th DCA 1982 ). 38 Dave Rugani , Twenty-First Century Equity: Tailoring the Corporate Veil Piercing Doctrine to Limited Liability Companies in North Carolina, 47 WAKE FOREST L. REV . 899 , 905 - 06 ( 2012 ). 39 Wallace v . Wood , 752 A.2d 1175 , 1184 ( Del. Ch . 1999 ). 40 Smith, supra note 24, at 1180 (citing Itel Containers Intern . Corp. v. Altanttrafik Exp. Serv. Ltd., 909 F.2d 698 , 704 ( 2d Cir . 1990 ) rev'd on other grounds , 982 F ,2d 765 ( 2d Cir . 1992 ). 41 Dante Figueroa , Comparative Aspects of Piercing the Corporate Veil in the United States and Latin America , 50 DUQ. L. REV. 683 , 689 ( 2012 ). 42 Id. at 690. 43 Id . 44 Id. at 697. “[I] n 1662, an act of Parliament granted shareholders of the British Fisheries Company, omitted).” 45 David J. Morrissey , Piercing All the Veils: Applying an Established Doctrine to a New Business Order , 32 J. CORP . L. 529 , 534 ( 2007 ). 217 Guowuyuan Bangong Ting Guanyu Jianli Waiguo Touzi Zhe Binggou Jingnei Qiye Anquan General Office of the State Council, effective March , 3 2011 ) [hereinafter Nationl Security Review Rules] (China) . 218 Id. at art. 1 . 219 Shangwu Bu Shishi Waiguo Touzi Zhe Binggou Jingnei Jingnei Qiye Anquan Shencha Zhidu De Guiding (商务部公告 2011 年第 53 号 商务部实施外国投资者并购境内企业安全审查制度的规定) Domestic Enterprises by Foreign Investors , Announcement [2011] No. 53] (promulgated by the Ministry of Commerce (MOFCOM) , effective Sept. 1 , 2011 ), art. 9, 08 /26/content_1934046.htm [hereinafter MOFCOM Rules] (China). 220 Id. at art. 9. 231 The challenging part of the US corporate tax reform is to tax global companies . US companies they suffer losses from bringing money home, but the tax may raise little revenue . 232 James Fontanella-Khan & Jamie Smyth , Ireland Pledges Cooperation on Global Tax Avoidance Plan , FIN. TIMES (May 22 , 2013 ), - 11e2 - 9bcb- 00144feab7de. html. The economic rights to the goods Apple sold were held in Ireland. As reported in 2011 , 84% of Apple's non-US operating income was booked by Apple Sales International, an Irish sub- sidiary which was not a tax resident anywhere and which only paid tax at a rate of 0 .05%. Vanessa Houlder , Apple Paid No UK Corporation Tax in 2012, FIN . TIMES (Jun. 30 , 2013 ), - 11e2 - 95c1 -00144feabdc0.html. 233 Tax deduction from share awards to employees helped wipe out the corporation tax liabilities of the UK subsidiaries in the year to September 2012 . UK subsidiaries reported tax deductions relating to share scheme of £27.7 million. Vanessa Houlder, Figures Shed Light on Tax Avoidance Haul , FIN. TIMES (Apr. 28 , 2013 ), - 11e2 - 8d07-00144feabdc0.html. 234 Ed Hammond, Google Chairman Schmidt in Taxing Hunt for London Home, FIN. TIMES (Jul . 5, 2013 ), 01677132 -e561 - 11e2 - ad1a -00144feabdc0.html. 235 Lawrence Summers , Help American Businesses - Tax Their Profits Abroad, FIN . TIMES (Jul . 7, 2013 ), - 11e2 - 875b -00144feabdc0.html. 244 Vanessa Houlder & James Shotter , Liechtenstein Moves to Shed Reputation as Secretive Tax Ha- ven , FIN. TIMES, Nov. 15 , 2013 , at 6. 245 Liechtenstein yielded to international pressure by agreeing to sign up to international standards on transparency after the LGT Bank scandal in 2008 . Lynnley Browning, Banking Scandal Unfolds Like a Thriller , N.Y. TIMES ( August 14 , 2008 ), 2008 /08/15/business/ worldbusiness/15kieber.html. 246 US Corporate Taxes: Who Pays More?, FIN. TIMES (Aug. 2 , 2013 ) (online ). 247 Lawrence Summers, Help American Businesses - Tax Their Profits Abroad, FIN . TIMES (July 7 , 2013 ), - 11e2 - 875b-00144feabdc0.html. It is reported that

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Shen, Wei, Watters, Casey. Is China Creating A New Business Order? Rationalizing China's Extraterritorial Attempt to Expand the Veil-Piercing Doctrine, Northwestern Journal of International Law & Business, 2015,