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PamAmSat Co.Ltd. Vs. Beijing
State Administration Taxation
-----Classification of cross border income and the relation between tax treaty and domestic tax law
Liu Yuan

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【正文】

  The PamAmSat Co.Ltd. Singed a contract with the CCTV on April 3rd 1996.The contract stipulated that this company provided digital condemns television satellite transmission service for the CCTV, and the CCTV paid them around 22 million dollars total. On June 30th 2000 Beijing State Administration Taxation of China asked the CCTV to withhold tax about 1.5 million dollars in all. The tax authority reckoned that according to the tax treaty between US and China, the payments were royalties, so it should pay the withholding tax. The PamAmSat thought that the income was business profit, and instituted administration reconsideration to the State Administration Of Taxation. But the tax authority maintained the decision they had made. Then the PamAmSat instituted a lawsuit, but they lost the case. The Beijing Supreme Court supported the tax authority.

  There were two points of the dispute. The first one was that whether the income of the PamAmSat was royalties according to the tax treaty. And there were two main perspectives about this issue.

  One perspective was that the income was the business profit of the PamAmSat, it derived from its positive operating activities for years. The PamAmSat provided the communication service and transmitted signals by their satellites and ground facilities. The staff of the company took charge of the satellites and ground facilities installation and operation. According to the tax treaty [1] Article 5 and Article 7, “…The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment…” so, the company shouldn’t pay the withholding tax.

  The other perspective was that the income was royalties, according to tax treaty A.11 “…The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, technical know-how, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience…”. Like the satellite repeater can transmit the signals, and the CCTV used the function of these equipments to broadcast its program. Because The TV station used the satellites and other equipments of the PamAmSat, so the payments were royalties.

  

  It is quite important to determine the nature of the income not only in domestic income tax law but also in international tax law. According to the tax treaty China concluded with other states, it applies different rules on different kind of income for the avoidance of double taxation and the prevention of tax evasion , for example with respect to the cross border business profit, it applies “ permanent establishment principal”, and when it comes to dividend, interest and royalties, it adopts of “ the tax sharing principal”.

  In china domestic tax law, the royalties are confined to the considerations of getting the right to use the intangible intellectual property, including payments of any kind received as a consideration for the use of, or the right to use, copyright, patent, technical know-how, and trademark. Its extension is smaller than the definition of the term in tax treaty, not including the considerations of alienating the right to use of physical property. From my point of view, the PamAmSat didn’t pass the ownership or the right to use the satellites and the affiliated facilities to the CCTV. Because if we define the royalties in terms of “the use of, or the right to use, industrial commercial or scientific equipment”, there should be alienation of the right to use these equipments, and the transferee should have physical control over these equipments. However, the PamAmSat not only took charge of the installation, operation, inspection and maintenance of satellites and ground facilities, but also responsible for the quality of the signals transmission in this case. While the CCTV didn’t have the physical control of these equipments, even didn’t know how satellite transmission works. What the TV station got was only a matter of the outcomes of the satellites operation. Therefore, this payments weren’t royalties.

  

  The second point of the dispute was whether the tax authority had the power to tax withholding tax based on its domestic law. There were two main viewpoints about this issue.

  The PamAmSat thought that, the term ”royalties” used in Chinese domestic tax law only means the payment got from transferring the right to use of the intellectual property, and not involving the “the use of, or the right to use, industrial commercial or scientific equipment”. The definition of “the use of, or the right to use, industrial commercial or scientific equipment “similar to the meaning of “letting”, while, the contract between the PamAmSat and the CCTV in quite diffident form the leasing contract in nature. Therefore, the Chinese tax authority didn’t have the power to tax them because of lacking of domestic law basis. Furthermore cross border income taxation should comply with international practice, and tax treaty must be interpreted according to international rules and the aim they wanted to achieve when concluding the agreement.

  But the tax authority reckoned that there were legal basis to tax the company of withholding tax, that is the tax treaty between China and the US and the China income tax law of enterprises with foreign investment and foreign enterprises ” Where the provisions of a tax agreement concluded between the government of the People's Republic of China and a foreign government are different from the provisions of this Law, the provisions of the agreement shall prevail. “So the tax authority didn’t apply the law wrongfully.

  

  From my point of view, the key point of this issue is the relationship between tax treaty and domestic law. First, tax treaty overrides domestic law. Article 28 of the china income tax law of enterprises with foreign investment and foreign enterprises stipulates that “ Where the provisions of a tax agreement concluded between the government of the People's Republic of China and a foreign government are different from the provisions of this Law, the provisions of the agreement shall prevail. “ However, this doesn’t mean that tax treaty can impose a new item of taxation that never exist in domestic law or increase in power of the taxation of the domestic tax authority, since that the functions of the tax treaty are eliminating double taxation and facilitating cross border investment and trade .so the tax treaty is supposed to have negative effect on the contracting state tax jurisdiction.

  Second, because the tax treaty and the domestic law have respective independent legal conception system, the definitions of terms should mutually complement each other. For example, the term royalties defined in the tax treaty is generally independent of domestic law, there are certain terms used in the definition are not defined in the tax treaty, but these may be defined under domestic tax law i.e. the term ``patent'', and its meaning has been elaborated in the context of domestic law. For the same reason, the domestic court can apply the definitions under tax treaty to interpret the legal terms in domestic law, in order to implement the tax treaty.

  By analysis the two points of the dispute in this case, we can also infer that OECD Model Double Taxation Convention is more favorable to industrialized countries. Bilateral tax treaties between industrialized countries arise in a context where the flow of investment and trade creates issues common to the tax policies of both treaty countries. While the United Nations model double taxation convention between the developed and developing countries is more favorable to developing countries i.e. the withholding taxes on royalties.[2] The tax authority won this case based on the tax treaty that adopted the article of the UN model convention, but unfortunately the reasoning of this case was not good enough.

  Furthermore, in order to apply domestic law and tax treaty harmoniously, we should clear that on one side, the creation of taxing power of new item of taxation must by domestic tax law first, and on the other side, the provisions of the tax treaty shall prevail when they conflict with domestic law, provided that it wont violate the purpose of the tax treaty to impose excess tax burden on the tax payers.

  

【作者简介】
    Liu Yuan, Renmin University.
【注释】
  [1] AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME 
  [2] article 12 
 
【参考资料】
    《国际税收》刘剑文主编 北京大学出版社 2004年 
  《跨国电子商务的国际税收法律问题及中国的对策》廖益新 中国财税法网 
  《再论ABC卫星公司税收案》龙英峰 《涉外税务》2005年第一期 
  《电子商务跨国所得的定性问题探究》蔡庆辉 《现代法学》2004年第六期 
  《ABC卫星公司税收案例分析》刘怡 李 吉力 《涉外税务》 2003年第一期 
 
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