Abstract：The PRC enterprise income tax law was enacted on January 1, 2008, with accordance to which the enterprise income tax law system has been changing. It took a long time to promulgate the law just as it takes and will take certain period to integrate the system from the constitutional law to tax polices. The lack of taxing power under constitutional law, the silence of a basic tax law, and the arbitrary of tax policy issuance lead to an unstable structure of enterprise income tax law system. Lawmakers shall announce the taxing power under the constitutional law, form a general tax law, and take time to screen tax policies to improve the system.

 

Key words: Enterprise, Income Tax Law, Restructure, Comparison 

 

Author： S.J.D., Madison

University of Wisconsin-Madison, Law School, USA

 

Source： Beijing Law Review, 2011, 2, 63-73

 

Corporate income tax is a tax imposed for each taxable year on the taxable income of every corporation [1]. It is the term that widely used in the world, for example, known as Corporate Tax in the US. However, the term China adopts for the corporate income tax is “enterprise income tax”, and it named the new law promulgate in 2008 the “Enterprise Income Tax Law of People’s Re-public of China” (hereinafter “EIT Law”). Imposed on various incomes of enterprises such as incomes from sales, services, interests, or the rental property [2], the tax is playing a more and more important role in China.

 

However, the enterprise tax structure in China is unstable. There are two major reasons. First, the enterprise income tax law system is under construction. Laws and regulations have been made, amended, or revised to meet the needs of society or economic development in the past decades. The same to the history of enterprise income tax law system development. Not only have great efforts been made to fill the blank of enterprise income tax law field such as the EIT Law was promulgated in 2008, but also regulations and rules have been expelled or organized to meet the WTO requirements, for instance, the State Administration of Taxation issued two notices to screen enterprise related tax rules, one in the year 2006 [10] and the other in 2008 [11], especially the second notice because the EIT law was en-acted so that old policies under old laws could not be applied anymore. Such kind of adjusting is an ongoing process and will continue into the future.

 

Second, the quick economic development involves arbitrary issuance of tax policies and rulings. China is making progress each year, accompany with which the market changes and becomes more and more sophisticated. Meanwhile, problems have appeared case by case, some of which have similar situation while others are particular or unique. Since making a new law requires complicated processes and is time-consuming, a quick and effective way instead is to issue policies. Moreover, it is unlikely to make laws for each case unless the problem goes wild in the country. That is the reason many explanations, measures, and notices have been issued to rule individual cases or to deal with particular law application problem.

 

Three aspects compose the incompleteness of the structure of enterprise income tax law system: the lack of taxing power under constitutional law, the silence of a basic tax law, and the arbitrary of tax policy issuance. In the following sections, each aspect is discussed one after anther through introduction of countries with comparatively more sophisticated corporate income tax law sys-tem such as the US and the UK for the purpose of pro-viding China with possible options for the restructure of the system. When the taxing power is announced under the constitutional law, a basic tax law is made, and tax rulings are simplified and consistent, the disproportionate layer of enterprise income tax law system will be fixed.

 

 

The power to tax is a basic incident of sovereignty. A tax is primarily a means of raising revenue, and the power to tax involves the power to destroy. Given such a characteristic, this power is normally controlled and limited by the constitutional law, the highest legal authority within the territory, and is exercised by the top legislature, such as the Congress or the perspective governing branch in individual countries. The purpose of such arrangement is to lower the possibility of power abuse in the democratic society. The enterprise income taxing power shall be part of it. However, such mechanism has not appeared in China.

 

In ancient times, it was easy for the King or Emperor to issue orders to levy taxes or to make changes because his orders were absolute regulation that all citizens had to obey, which prevented power limitation from being established. Highly centralized government tended to the arbitrary use of tax privilege. At that time, the dominant concept was that all things within the country be-longed to King. Therefore, he could decide when and how to take what from his people. Taxes were among these. People had no legal right to fight for ownership against the authority because their ownership was not protected. The powerless mass could only obey the order and pay taxes.

 

The situation had not changed until the foundation of Modern China. It was the first time that the government attempted to regulate taxing power, not specifically enterprise income taxing power, under the constitutional law. However, the warlord era and the political struggle did not bring China into a democratic era. As a result, the first trial failed. The harsh social climate that lacked democracy, law and order substantially delayed the embodiment of ideal power in the constitutional law.

 

The stronger the centralized power was, the less possibility the limitation of power appeared. The similar situation appeared again under the planned economy after the country was founded. No other power had the chance to balance it under such circumstances. To limit the central power’s ability to impose taxes in any way such as through the Constitution was not possible.

 

The “reform and open-up policy” in 1978 began to change the country’s economic and social structures, but it has not made any difference in regulating taxing power in the constitutional law till today. Only the obligation of citizens to pay taxes can be found under PRC Constitution. The power to tax enterprises is not under the constitution.

 

Constitutional law is supreme to all laws in a country and it regulates sources of powers. Basic principles, national affairs, fundamental rights of people and authorities of the government are included. A power that may limit the exercise of people’s rights or the use of personal properties shall be declared under the constitutional law. The tax, especially the enterprise income tax, as the means of collecting revenue from people without considerations, belongs to this kind. Without the highest-level legal authorization, power is easily abused and the people would have been suffered, similar to the situation in the history. Therefore, the constitutional law, as the mother law in a country, has to take the responsibility to draw lines of imposing taxes with the due process.

 

Magna Carta opens a new page of UK constitution by limiting king’s power including imposing taxes to the law. Originally issued in the year 1215, it was the first document forced onto an English King John I by a group of the barons in an attempt to limit his powers by law and protect their privileges. It bound the king to grant to all freemen the rights and liberties the great charter described, and with Magna Carta, King John placed himself and England’s future sovereigns and magistrates within the rule of law. It says, “No freemen shall be taken or imprisoned or disseised or exiled or in any way destroyed, nor will we go upon him nor send upon him, except by the lawful judgment of his peers or by the law of the land. To no one will we sell, to no one will we refuse or delay, right or justice”. That means the principle that no one, including the king or a lawmaker, is above the law was established. In that case, no tax should be levied by the king arbitrarily but by the law and the people that being taxed on.

 

Unlike the arrangement in United Kingdom, United States authorizes taxing power to the Congress under the codified Constitution. Article 1 section 8 Clause 1 was known as Taxation Clause, which says, the congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States. The Congress represents the people of the United States. Therefore, the right to tax is in the hands of its people.

 

Except the UK and the US, there are two more types in regulating taxing power. One is the Italian Constitution that mentions people’s obligation to pay taxes but without the clause stating the power to tax. It is similar to China’s current Constitutional Law. The other type is represented by Japan’s Constitutional Law, which includes people’s obligation to pay taxes as well as the principle of no tax above the law. But compare to the US or the UK constitutional laws, the government branch that is authorized to make laws to impose taxes is not assured.

 

In my opinion, articles in the constitutional law should be general, simple and highly condensed since it is the mother law in a country’s legal system. There is no need to specify any tax matters due to the particular need of taxation. Principles of fairness, transparent, efficiency or no tax above the law is suitable, but others such as basic procedures or separation of powers are too detailed to fit in. Another subject is very important that has to be put in the constitutional law, the judicial review over tax legislations. It is a good example of the functioning of separation of powers in a modern governmental system. Nevertheless, it is left blank in current China’s tax law system.

 

 

Most enterprise income tax policies or rulings are issued by national tax administrations upon official opinions of applying rules. They are bridging over demands of individual taxpayers and the application of rules. When an enterprise income tax issue arises without recognized by laws, a ruling is used to explain how the case shall be dealt with. In the case that nowhere else could find any opinion on the situation, and then rulings are required to fill the blank in the area. Countries like the US, the UK, Germany, and France circulate tax policies although forms and authorities in charge are different.

In China, State Administration of Taxation (SAT) mainly takes charge of publishing tax policies and rules in form of “Notice” or “Reply”. Since tax laws are in lack and rules that are supposed to be regulated by tax laws are now included in regulations, tax rulings are taking the position of both regulations as well as rulings. That makes rulings more than it should have.

As for enterprise income taxes, inconsistency and instability are results of issuing a huge number of tax rulings. The inconsistency is due to the two -tier system before January 1, 2008. That is, domestic enterprises are regulated by the PRC Interim Regulation on Enterprise Income Tax, enacted in the beginning of 1994, while foreign enterprises are ruled by the PRC Income Tax Law of Enterprise with Foreign Investment and Foreign Enterprise, published in April 1991. Many notices were issued for both laws, and even more to fill the gap between the two.

 

 

Theoretically, China confronts difficulties to complete the system designed by the constitutional law in the second and third level. The tax collection law was made by NPC Standing Committee, which sits it in the category of the law rather than the basic law. How can it parallel with the basic tax law? On the other hand, the enterprise income tax law was made by National People’s Congress, which categorized it into the second level instead of the third. Does this mean it is categorized in the same level with the basic tax law? Then how could it lead by the basic law? Individual income tax law is appeared in the appropriate position but most other specific tax rules are under the lower level.

 

Alternatively, redefine the system to make it feasible and not fall in the trap. That is to merge the second and the third level, at least they are all “laws” and no need to further divide them into basic or not basic, although there should be difference between the law made by the National People’s Congress and that made by its standing committee, I think. This is an easy way but not the best choice. In my opinion, stick to the designed structure and consider it as a final goal. The country shall make the basic tax law as well as tax collection law while amend the enterprise income tax law. The project of improving China’s enterprise income tax law system has been launched. We are happy to see the good beginning. However, it requires further contribution of work, time and costs. We look forward to further big leaps China’s legislature will make in the future to solve the problem.