——A Lesson from a Success Case
I. The case and dispute
Several years ago, Mr. Liu and Mr. Chen jointly bought two realties, which were registered as joint ownership. Afterwards, disputes occurred and a lawsuit was initiated to claim for partition. The final judgment of second instance decides that two realities belong to Mr. Liu and Mr. Liu shall compensate Mr. Chen RMB 1.28 million.
Then, Mr. Liu, according to the final judgment, filed an application for execution to demand for registration for change. However, when Mr. Liu filed tax returns to the taxation authority, tax disputes arisen.
The taxation authority thinks that as the two realities value RMB 7 million and transfer of such realities registered as joint ownership to Mr. Liu means Mr. Chen transfers half to Mr. Liu, so both parities shall pay taxes calculated based on half value, RMB 3.5 million.
But in Mr. Liu’s opinion, according to the finial judgment, the compensation is RMB 1.28million rather than RMB 3.5million, so the tax shall be calculated based on RMB 1.28 million rather than RMB 3. 5million.
II. To send a lawyer’s letter to the taxation authority for resolution
Acting as an agent of Mr. Liu, we think Mr. Liu’s opinion that tax shall be calculated based on RMB 1.28 million is quite reasonable. After communications and failures to resolution, we sent a lawyer’s letter to the local taxation authority in the place where the realities are located.
The lawyer’s letter mainly states the following opinions:
1.The realities are registered as joint ownership rather than several co-ownership.
China’s Property Law stipulates that “a joint owner of a commonly owned realty or chattel shall enjoy the ownership of the realty or chattel on a common basis”.
In theory, joint owners of a commonly owned property jointly enjoy the ownership of such property, regardless of shares; in another word the joint owners can’t be deemed to enjoy the same shares. Moreover, the concept of “share” is only involved in several co-ownership, but there is no idea of “share” in joint ownership.
According to the final judgment, the court partitions the realities and decides Mr. Liu shall compensate RMB 1.28 million to Mr. Liu. Therefore, the amount of RMB 1.28 million shall be the compensation for Mr. Chen’s joint ownership instead of the consideration to “shares”.
The right a joint owner would transfer shall refer to “common ownership” rather than “shares”, so it is arbitrary to determine that Mr. Chen has transferred a half of realties to Mr. Liu.
2. Under the condition “the taxation basis filed by a taxpayer is obviously much lower, and without reasonable ground”, taxation authority should have right to access the amount of tax payable by taxpayers, but the case described above isn’t satisfied with such condition.
China’s Law concerning Administration on Tax Collection provides that where a taxpayer is in any of the following circumstances, the taxation authority shall have the right to assess the amount of taxes payable by the taxpayer… … (vi) the taxation basis filed by a taxpayer is obviously much lower, and without reasonable ground”. Also China’s Interim Regulations on Business Tax and Provisions on Title Deed Tax stipulates such.
However, the case described above isn’t satisfied with such condition because of the following reasons:
First, in this case, Mr. Liu, according to the final sentence, gains the ownership of the realties at the cost of RMB 1.28 million, which can’t be treated as that Mr. Chen assigns 50 % shares to Mr. Liu with RMB 1.28 million. Therefore, such situation doesn’t constitute “taxation basis is obviously much lower”.
Second, the amount of RMB 1.28 million is decided by the final judgment with public credibility, instead of the agreement of both parties. To say the least, provided that the taxation authority thinks RMB 1.28 million is much lower, however, the final judgment constitutes the “reasonable grounds” specified in the provision described above. Hence, the taxation authority has no right to assess according to the provision described above.
Furthermore, we notify the taxation authority that if taxpayer’s objections are rejected, we would file an administrative review or even an administrative litigation on behalf of Mr. Liu.
Ultimately, after we sent the lawyer’s letter and communicated with taxation authority for several times, the taxation authority accepts our opinions that the taxation basis shall be RMB 1.28 million, which actually decrease the amount of tax payable by Mr. Liu.
III. The reflect on the case
1. Don’t forget as a taxpayer the rights you enjoy. The China’s Law concerning Administration on Tax Collection and other laws and regulations provide a taxpayer with the right of statement, the right of defense, etc. when he isn’t satisfied with the tax collection, however, in practice, such above rights are easily neglected by taxpayers or even they don’t know how to exercise.
In practice, the taxation authority collects taxes according to internal documents, which are of vagueness and loophole, on contrary, actual situations taxes shall be collected are quietly various, as a result, there are possibilities that discrepancy happens to tax collections. Additionally, the taxation authority is relatively mighty and seldom emphasizes on the objections proposed by taxpayers. As a whole, in such situation, to a tax payer, how to exercise his statutory rights of objection by effective ways becomes an important issue to protect of his rights and interests.
2. If you aren’t happy with the tax collection, it’s a better way to entrust a lawyer to send lawyer’s letter to object. In one hand, a lawyer is much more professional who can clarify the facts and opinions clearly, and communicate with the taxation authority effectively. On the other hand, a professional lawyer’s letter is likely to be regarded as your serious attitude to argue strongly on reasonable grounds, which may impose modest stress on the taxation authority and the taxation authority may put emphasis on the taxpayer’s objections or even possibly accept reasonable objections.
3. If the disputes still can’t be resolved through face to face communication or lawyer’s letter, when necessary, administrative review and administration litigation, the statutory rights of a taxpayer can be taken into consideration. In a word, what’s the most important thing is that our own rights and interests shall be protected by ourselves, don’t be embarrassed!
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