Dare You Sue the Tax Collector? An Empirical Study of Administrative Lawsuits Against Tax Agencies in China

Washington International Law Journal Washington International Law Journal

Volume 23 Number 1

1-1-2014

Dare You Sue the Tax Collector? An Empirical Study of Dare You Sue the Tax Collector? An Empirical Study of

Administrative Lawsuits Against Tax Agencies in China Administrative Lawsuits Against Tax Agencies in China

Ji Li

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Dare You Sue the Tax Collector? An Empirical Study of Administrative Lawsuits Against Tax

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, 23 Pac. Rim L & Pol'y J. 57 (2014).

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DARE YOU SUE THE TAX COLLECTOR? AN

EMPIRICAL STUDY OF ADMINISTRATIVE LAWSUITS

AGAINST TAX AGENCIES IN CHINA

Ji Li

†

Abstract: Though taxes are as certain as death, each year tens of thousands of

people in the United States go to court to challenge their assessed tax liabilities, and

many succeed. By contrast, very few Chinese taxpayers litigate against tax agencies, and

most of those who sue eventually settle, despite low formal litigation costs. China’s non-

litigious culture does not fully explain the reluctance to sue, as courts in Taiwan

adjudicate five times more lawsuits against tax agencies. Judicial bias favoring

government officials, weak enforcement of judgments against the state, and agency

retaliation help to explain the aversion to litigate disputes with tax agencies in China.

However, once the reluctance to sue is explained, the small amount of cases that go to

trial constitutes a more intriguing puzzle. Why would anyone in China insist on judicial

resolution of disputes with powerful tax agencies, given the adverse conditions that have

deterred hundreds of thousands of others from doing so? This article offers a number of

theoretical explanations that take into account the political and institutional context for

both administrative litigation and tax administration in China. People are more inclined

to sue a tax agency when they have limited extractable resources, powerful allies in

government, substantial interests in the dispute without alternative resolutions, or no

expectation to interact with the agency in the future. These explanations are evaluated

and substantiated with an empirical analysis of all tax-related administrative lawsuits that

went to trial from 2009 to 2011 in Henan Province, one of the most populous provinces

in China. These findings will contribute to the literature on Chinese tax administration,

administrative litigation in China, and extant trial selection theories.

I. INTRODUCTION

Benjamin Franklin once said that only two things are certain in life:

death and taxes.

Apparently not all agree. Each year tens of thousands of

taxpayers in the United States go to court to challenge their assessed tax

liabilities, and many succeed. For example, more than 20,000 cases were

filed at the U.S. Tax Court in 2003 against the Internal Revenue Service.

Around the same time period, more than seven thousand cases were filed at

†

Assistant Professor, Rutgers Law School-Newark. The author thanks Susan Rose-Ackerman, Wei

Cui, Yan Xu, Benjamin Liebman, Richard Cullen, Eric Ip, Eva Pils, Carl Minzner, Margaret Lewis, Taja-

Nia Henderson, John Leubsdorf, Stuart Deutsch, James Pope, Alan Hyde, Chrystin Ondersma, Christina Ho,

Reid Weisbord, and other participants in the seminar at the Center for Rights and Justice of the Chinese

University of Hong Kong, the Colloquium at Rutgers Law School-Newark, and the Chinese law seminar at

Seton Hall Law School. The author may be contacted at jli@kinoy.rutgers.edu.

BARTLETT’S FAMILIAR QUOTATIONS (Nathan Haskell Dole ed., 10th ed. 1919).

Donald E. Tidrick, Inside the U.S. Tax Court: An Interview with the Honorable Judge Juan F.

Vasquez, CPA, U.S. Tax Court,

THE CPA J., http://www.nysscpa.org/cpajournal/2004/104/

text/p20.htm (last visited Jan. 24, 2013).

58 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

the New Jersey State Tax Court alone to challenge state and property taxes.

In addition, numerous cases are filed each year at U.S. district courts and the

Federal Court of Claims for federal tax refunds. In China, by contrast, a

total of 405 cases were filed nationwide in 2011 against tax agencies

and

most of the cases were eventually settled, despite low formal litigation costs.

The reluctance to sue cannot be easily attributed to cultural differences. In

Taiwan, a place sharing the same cultural attitudes towards litigation with

Mainland China, 2520 cases against tax agencies were filed in 2010 at three

regional high courts, six times that of the Mainland China,

whose

population of roughly 1.3 billion dwarfs the approximately 23 million people

living in Taiwan.

A structural analysis of the Chinese judiciary explains the puzzling

reluctance to sue. There is a shared understanding that local courts do not

normally adjudicate administrative lawsuits against government agencies

impartially and judicial bias is presumably more serious when powerful

agencies, such as tax bureaus, are sued.

In rare cases where the

complainant manages to obtain a favorable ruling against a defendant tax

agency, he will still face daunting challenges in getting the ruling enforced.

To further complicate the issue, agency retaliation will most likely follow

any successful enforcement of the ruling.

This article analyzes the high

costs of taxpayer litigation due to the power and discretion enjoyed by

Chinese tax agencies, which result in few people litigating tax disputes in

China.

The cases that go to trial, though small in number, constitute another

intriguing empirical puzzle. Why would anyone insist on judicial resolution

of disputes with powerful tax agencies, given all the adverse conditions that

deter thousands from doing so? This article argues that tax agencies in

China do not enjoy unlimited power. The tax agencies’ jurisdiction is

TAX COURT OF NEW JERSEY, ANNUAL REPORT OF THE PRESIDING JUDGE OF THE TAX COURT OF

NEW JERSEY, JULY 1, 2004-JUNE 30, 2005, 2 (2005) available at http://www.judiciary.state.nj.us/taxcourt/

acrobatpdf/tca2005.pdf.

SUMMARY OF FIRST INSTANCE ADMINISTRATIVE LAWSUITS IN CHINA (2011),

http://www.court.gov.cn/qwfb/sfsj/201206/P020120628451878418099.xls (last visited Aug. 27, 2012).

Guoren Zhang, Shuiwu Xingzheng Susong Shenglu Jin 7.6% [Tax-Related Administrative

Litigation Win Rate Only 7.6%], C

OMMERCIAL TIMES, (Oct. 15, 2010) http://www.deloitte.

com/view/tc_TW/tw/pressroom/41939/2fa3d084af9a8210VgnVCM200000bb42f00aRCRD.htm .

See CIA, China, THE WORLD FACTBOOK, https://www.cia.gov/library/publications/the-world-

factbook/geos/ch.html (last visited Sept. 30, 2013) and CIA, Taiwan, T

HE WORLD FACTBOOK,

https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html (last visited Sept. 30, 2013) for

the population figures of China and Taiwan, respectively.

Kevin J. O’Brien & Lianjiang Li, Suing the Local State: Administrative Litigation in Rural China,

51 T

HE CHINA J. 75, 75-76 (2004).

Id. at 90.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 59

territorial and their power is checked by other agencies of the state.

Therefore, some taxpayers may avoid the heavy losses of agency retaliation

if they expect only a one-time interaction with a tax agency, lack extractable

resources, or have powerful allies in the local state. For these taxpayers,

administrative litigation is less costly and may be pursued if substantial

interests are at stake and alternatives to litigation are unavailable. In

addition, as in the resolution of all disputes, high transaction costs and

optimism may also contribute to the pursuit of administrative lawsuits

against tax agencies in China.

This article evaluates and substantiates these arguments with an

empirical analysis of all tax-related administrative lawsuits that went to trial

from 2009 to 2011 in Henan Province, one of the most populous provinces

in China. As far as the author is aware, this is the first study of Chinese

administrative litigation that contains a substantive analysis of an unbiased

sample of cases.

The findings contribute to the literature on Chinese tax

administration, administrative litigation in China, and trial selection theories.

The article is divided into eight Parts. Part II provides a brief survey

of Chinese tax law and administration. Part III introduces the institutions for

state control of tax agents in China. Part IV describes the puzzles about tax-

related administrative litigation and relevant literature. Part V argues that

factors such as limited extractable resources, the limited jurisdiction of tax

agencies, substantial taxpayer interests, and lack of future interaction with a

tax agency explain the puzzling persistence of tax litigation that goes to trial.

Part VI evaluates and illustrates this argument by analyzing a dataset

comprised of all tax-related administrative lawsuits from Henan Province

(2009-2011). Part VII discusses how the findings of this article contribute to

existing literature. Part VIII concludes by acknowledging the limitations of

this study and making suggestions for future research.

For a sample of empirical research that discusses administrative litigation rates or plaintiff win

rates, see Xin He & Yang Su, Do the “Haves” Come out Ahead in Shanghai Courts?, 10 J.

EMPIRICAL

LEGAL STUD. 120 (2013); Ji Li, Suing the Leviathan—an Empirical Analysis of the Changing Rate of

Administrative Litigation in China, J.

EMPIRICAL LEGAL STUD. (forthcoming 2013); Minxin Pei, Citizens v.

Mandarins: Administrative Litigation in China, 152 T

HE CHINA Q. 832 (1997); Haibo He, 困顿的行政诉

讼 [Administrative Litigation in Trouble],

华东政法大学学报 [J. OF E. CHINA U. OF POL. SCI. & LAW] 86

(2012). For a sample of research that contains substantive analysis of a selected sample of administrative

cases, see O’Brien & Lianjiang Li, supra note 7; Qinghua Wang, Zhongguo Xingzheng Susong:

Duozhongxin Zhuyi De Sifa [Administrative Litigation in China: Polycentric Adjudication], 19 Z

HONGWAI

FAXUE [PEKING U. L. J.] 513 (2007). For a sample of research that uses large-scale surveys to explore

administrative litigation in China, see Jinhua Cheng, Institutional Options for the Settlement of

Administrative Disputes in China: From the Perspective of Public Demand, S

OC. SCI. IN CHINA 5 (2010);

Pierre Landry, The Institutional Diffusion of Courts in China: Evidence from Survey Data, in R

ULE BY

LAW: THE POLITICS OF COURTS IN AUTHORITARIAN REGIMES (Tom Ginsburg & Tamir Moustafa eds.,

2008).

60 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

II. T

HE PEOPLE’S REPUBLIC OF CHINA TAX LAW AND ADMINISTRATION

Taxation is essential to the survival of any political regime, especially

those of the managerial type. The Chinese government, in order to provide

basic public goods and achieve its policy objectives, established a wide

variety of extractive institutions.

This article focuses on the institutions for

tax administration. The state currently levies taxes on nineteen major

categories.

Since the tax reform of 1994, the extractive capacity of the

central government has strengthened to the extent that it achieved an annual

revenue growth of approximately 20% for the last decade, almost twice the

rate of China’s GDP growth for the same period.

For purposes of maintaining political legitimacy, the nineteen taxes

currently levied contain a number of progressive elements. For instance, the

People’s Republic of China (“P.R.C.”) Law on Individual Income Taxation

sets the rate for the highest income bracket at 45%, much higher than the 3%

rate for the lowest income bracket.

A recent amendment of the law

exempts taxpayers with salary income of less than RMB 3500 from paying

any income tax.

Though the value-added tax (“VAT”) that accounts for a

quarter of total government revenues is a regressive tax, the state has

attempted to ameliorate its wealth effects on low-income individuals by, for

example, reducing the VAT rates for household necessities.

The progressive elements, however, coexist with features that reflect

the state’s efforts to garner support from constituencies of vested interests.

For instance, the state does not levy any estate taxes.

In addition, selected

local governments only recently began to experiment with the collection of

One important institution is the property regime, which provides that urban land is owned by the

state. X

IANFA art. X (1982). Local governments in China have relied heavily on leasing of land use right

to enrich their coffers. See, e.g., Guining Yue, Lili Teng & Chunhua Wang, 我国地方政府“土地财政”问

题研究[Research on Local Governments’ “Land Finance” Problem], 144 开放导报[C

HINA OPENING

HERALD] 47, 48 (2009).

The nineteen taxes include corporate income tax, individual income tax, value added tax, business

tax, consumption tax, land appreciation tax, real estate tax, arable land occupation tax, urban land-use tax,

stamp tax, custom duties, deed tax, vehicle acquisition tax, vehicle and vessel tax, resource tax, urban

construction and maintenance tax, vessel tonnage tax and tobacco tax.

STATE ADMINISTRATION OF TAXATION, CHINA TAXATION YEARBOOK (2011).

Chart for Marginal Tax Rates, 中华人民共和国个人所得税法[P.R.C. Law on Individual Income

Taxation] (on file with author).

Id. at art. 6, §1.

Yan Xu, Putting the 'Value Added' in China's Vat, 58 TAX NOTES INT'L 487, 490 (2010).

Shumin Guo, 遗产税应该尽快出台[For Immediate Enactment of Estate Tax], 中国房地产金融

HINA REAL EST. FIN.] 2 (2012).

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 61

real property taxes.

Such tax benefits for the privileged contribute to the

fast-growing wealth gap in China.

Figure 1: Amount of several major taxes (RMB billion) collected in

2010.

Data source: China Statistical Yearbook (2011).

In the past three decades, the state constructed a powerful and rather

sophisticated institutional apparatus for tax administration. By the end of

2010, tax bureaus of all levels employed more than 755,000 full-time and

105,000 part-time agents.

China is geographically administered, and the

central government shares political power with regional governments. The

Jing Zhang & Shuhui Huang, 房产税试点年内将扩容：地方草案加密上报[Experimentation

with Property Taxes Will Expand by Year End: Local Governments Submit Drafts],

第一财经日报 [FIRST

FIN. DAILY] (May 27, 2013), http://news.xinhuanet.com/fortune/2013-05/27/c_124766628.htm.

The government refused to release the GINI coefficient, a statistical measure widely used to gauge

wealth gap in a region. A 2005 study by the social science academy found the GINI coefficient to be 0.47

(coefficients below 0.4 are generally considered reasonable level of wealth disparity). See generally Xuyan

Fang & Lea Yu, Gov't Refuses to Release Gini Coefficient, C

AIXINONLINE (Jan. 18, 2012)

http://english.caixin.com/2012-01-18/100349814.html. A recent study done by the Xinan University of

Economics and Finance shows the GINI coefficient of 2010 to be 0.61, an extraordinarily high level.

Survey said China in 2010 far exceeded the world average income gap, C

AIXINONLINE (Dec. 10, 2012),

http://china.caixin.com/2012-12-10/100470254.html.

See STATE ADMINISTRATION OF TAXATION, SHUIWU GANBU DUIWU JIANSHE [DEVELOPMENT OF

TAX ADMINISTRATION STAFF], http://www.chinatax.gov.cn/n8136506/n8136608/n8138877/n11897218/

11901216.html (last visited October 14, 2013).

domestic

VAT

domestic

consumption

tax

business tax corporate

income tax

personal

income tax

tariff

500

1000

1500

2000

2500

62 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

structure of the tax administration reflects that institutional arrangement.

Among full-time tax agents, nearly half (357,000 by the end of 2010) work

for tax agencies of regional governments.

As illustrated in Figure 2 below, the central government established a

hierarchical ordering of tax administration. Under the leadership of the

national State Taxation Bureau (“STB”), offices were set up at the

provincial, municipal, district, and county levels, in order of decreasing

rank.

Parallel to the STB structure, each province also established a

vertical ordering of tax administration, the Local Tax Bureau (“LTB”), with

a provincial office at the top, subject to dual leadership of the STB and the

provincial government.

The former provides professional guidance and

inter-provincial coordination and supervision, while the latter exercises

direct leadership.

Under the provincial bureau of the LTB are municipal

and prefectural offices, which are of the same official rank, and the county

LTB offices.

These sub-provincial LTBs are subject to dual leadership of

the higher ranking tax bureaus and the corresponding local governments,

with the latter playing the primary supervisory and leadership role.

Most

of the tax bureaus set up outposts, branches, offices, information centers, and

other specialized entities to assist in tax administration.

By the end of

2010, the STB system contained 3556 tax bureaus at various levels of

administration, and 3414 inspection bureaus and direct branches, 10,193

outposts and tax offices, and 4346 information centers and service centers.

Similarly, the LTB system consisted of 3055 regional tax bureaus at various

levels of administration, 5186 investigation bureaus and direct branches,

16,373 outposts and tax offices, and 2190 information centers and service

centers.

Through such an extensive network of tax agents, the state

See STATE ADMINISTRATION OF TAXATION, STATE ADMINISTRATION OF TAXATION (2012),

http://www.chinatax.gov.cn/n6669073/n6669133/6886063.html (last visited October 14, 2013).

See STATE ADMINISTRATION OF TAXATION, SHUIWU ZUZHI JIGOU [ORGANIZATIONAL STRUCTURE

TAX ADMINISTRATION], http://www.chinatax.gov.cn/n8136506/n8136608/n8138877/n11897218/

11901206.html (last visited October 14, 2013).

Id.

Id. To reflect fiscal policy preference favoring Tibet, China established no regional tax bureau in

the region. Id. The STB and the LTB offices collect different types of taxes. Id. The former is responsible

for the collection of the VAT, consumption tax, automobile tax, business tax of certain SOEs, and so on. Id.

The regional tax bureaus collect business tax, corporate tax, personal income tax, etc. Id. Customs is

responsible for collecting tariffs and certain other specific taxes. Id.

STATE ADMINISTRATION OF TAXATION, SHUIWU ZUZHI JIGOU [ORGANIZATIONAL STRUCTURE OF

TAX ADMINISTRATION], http://www.chinatax.gov.cn/n8136506/n8136608/n8138877/n118972181190120

6.html (last visited Oct. 14, 2013).

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 63

achieved an annual revenue growth of approximately 20% in the past

decade.

Figure 2: Structure of the P.R.C. Tax Administration.

The state empowers the agents to carry out their duties with a set of

formal laws and regulations. The fundamentals are laid down in the Law of

the P.R.C. Concerning the Administration of Tax Collection.

Major

substantive laws include the P.R.C. Law on Individual Income Taxation, the

CHINA STATISTICS BUREAU, CHINA STATISTICAL YEARBOOK, 8-1 (2011).

STATE ADMINISTRATION OF TAXATION, SHUIWU ZUZHI JIGOU [ORGANIZATIONAL STRUCTURE OF

TAX ADMINISTRATION], http://www.chinatax.gov.cn/n8136506/n8136608/n8138877/n11897218/1190120

6.html (last visited Oct. 14, 2013).

Zhōnghuá Rénmín Gònghéguó Shuìshōu Zhēngshōu Guǎnlǐ Fǎ (中华人民共和国税收征收管理

法) [Tax Collection Management Law] (promulgated by the Ninth National People’s Congress, April 28,

2001, effective May 1, 2001), ch. 1, art. 1-2, http://www.gov.cn/banshi/200508/31/content_146791.htm.

State Council

State Taxation Bureau

(STB)

Provincial Governments

Provincial Bureaus of

STB

Provincial Offices of

Local Tax Bureau (LTB)

Municipal or Regional

Governments

Municipal or Regional

Bureaus of STB

Municipal or Regional

Offices of LTB

County Governments

County Offices of STB

Tax Stations

(Branches) and Other

Affiliated Entities for

STB

County Offices of STB

Tax Stations

(Branches) and Other

Affiliated Entities for

STB

64 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

P.R.C. Law on Enterprise Income Taxation, and the P.R.C. Law on Vehicle

and Vessel Taxation.

The P.R.C. Law on Legislation allows the State

Council to make regulations regarding taxation not covered by the statutes in

accordance with proper delegation from the National People’s Congress or

its Standing Committee,

as well as regulations about statutory

enforcement.

It also allocates certain legislative power to government

agencies such as the Ministry of Finance (“MOF”) and the STB.

While the

power to legislate tax regulations was delegated by the Standing Committee

of the National People’s Congress (“SCNPC”) to the State Council,

departmental rules about the interpretation and implementation of the tax

regulations lack clear legislative delegation.

As a result, the legality of the

numerous normative rules issued and applied by the STB, the MOF, and the

LTB is debatable. Yet in practice the rules are largely accepted by taxpayers

and tax professionals.

The sheer volume and complexity of the normative

documents probably contributes to the fact that Chinese taxpayers rely

heavily on personal interpretations by tax agents to comply.

Recently the

national agencies have begun to rationalize tax rulemaking, especially the

making and enforcement of normative rules.

III. C

ONTROLLING THE TAX AGENTS

In order to collect enough revenue to meet its ever-increasing

spending needs, the state empowers its tax agents and grants them wide

discretion over tax administration. Meanwhile, the state also implements a

number of institutional measures to solve the inherent agency problem

ubiquitous in a political system lacking freedom of press or a democratic

check. For the sake of clarity, the agency-controlled institutions are

STATE ADMINISTRATION OF TAXATION, SHUISHOU ZHIDU DE FALU JICI [THE RANKING OF LAWS

CONCERNING TAX COLLECTION], http://www.chinatax.gov.cn/n8136506/n8136608/n8138877/n11897113/

11900938.html (last visited Oct. 14, 2013).

Zhōnghuá Rénmín Gònghéguó Lìfǎ Fǎ (中华人民共和国立法法) [Law on Legislation]

(promulgated by Ninth National People’s Congress, Third Session, effective March 15, 2000), art. 9

http://news.xinhuanet.com/legal/2003-01/21/content_699610.htm.

Id. at art. 56.

Id. at art. 71.

Wei Cui, What Is the “Law” in Chinese Tax Administration, 19 ASIA PAC. L. REV. 73, 75 (2011).

Wei Cui, Two Paths for Developing Anti-Avoidance Rules in China, 17 ASIA PAC. TAX BULL. 1

(2011).

Id. at 2.

Id. at 4.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 65

categorized according to the Ginsburg typology: hierarchy, second-party

supervision, and third-party supervision.

Mechanisms in the first category, hierarchy, include positive sanctions

(e.g., merit-based bonus and promotion) and negative sanctions (e.g.,

administrative punishment) within the agency, merit-based recruiting,

regular study sessions, and so forth.

For instance, since 2003 all candidates

applying to work for the STB have been required to pass the highly

competitive National Civil Servant Examination.

When hierarchical mechanisms fail to prevent, detect, and correct

agency abuses, second-party supervision comes into play. Two powerful

institutions, the Communist Party of China Central Disciplinary Committee

(“CDC”) and the Ministry of Supervision, which are charged with the

responsibility to investigate and punish misconduct by government officials,

are seriously under-staffed.

Hence, their supervision is limited to high

ranking government officials and they rarely implicate tax agents at the local

level.

The procuratorate may also function as an institution for second-

party supervision over tax agents and subject the more abusive ones to

criminal punishment.

Adopted from former Soviet Union, the

procuratorate may take the initiative to investigate official misconduct.

However, the discretion enjoyed by tax agents renders it difficult to

distinguish routine exercise of discretion from illegal misconduct.

To deal with the information asymmetry problem inherent in second-

party supervision, the state created third-party supervisory institutions that

allow parties with private information about official misconduct to report it

to the government. Two examples are the letter and visit offices and the

administrative reconsideration offices.

The former, in spite of its long

TOM GINSBURG, RULE BY LAW: THE POLITICS OF COURTS IN AUTHORITARIAN REGIMES 61-63,

(Tom Ginsburg & Tamir Moustafa, eds. 2008).

Id. at 61.

See STATE ADMINISTRATION OF TAXATION, SHUIWU GANBU DUIWU JIANSHE [ON DEVELOPING

STATE ADMINISTRATION OF TAXATION STAFF], http://www.chinatax.gov.cn/n8136506/n8136608/

n8138877/n11897218/11901216.html (last visited July 26, 2013).

Jiangnan Zhu, Officials’ Promotion Likelihood and Regional Variation of Corruption in China at

83 (Dec. 2008) (unpublished Ph.D. dissertation, Northwestern University) (on file with author).

See, e.g.,北京地税局原局长王纪平被“双规[Director of Beijing LTB Was Under Shuanggui],

INHUA (May 6, 2010), http://news.xinhuanet.com/legal/2010-05/06/c_1275967.htm.

The institution’s functions include prosecution of crimes and supervision of government and

judicial officials. See Zhōnghuá Rénmín Gònghéguó Jiǎnchá fǎ (中华人民共和国检察法) [Law on the

Procuratorate] (promulgated by the Eighth National People’s Congress Standing Committee, Feb. 28, 1995,

effective July 1, 1995), art. 6, http://www.china.com.cn/law/flfg/txt/200608/08/content _7063805.htm.

Id.

For a thorough description of the letter and visit offices, see Carl Minzner, Xinfang: An Alternative

to Formal Chinese Legal Institutions, 42 S

TAN. J. INT'L L. 103 (2006).

66 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

history, have proved ineffective in resolving individual grievances.

The

latter are a relatively new institution.

The State Council first enacted the

Administrative Reconsideration Regulation (“ARR”) to facilitate the

implementation of the Administrative Litigation Law (“ALL”), a

groundbreaking statute that enabled Chinese citizens to bring government

officials to court.

The ARR was upgraded to a statute after a few years of

trial implementation.

The legislature intended the administrative

reconsideration regime to complement, not substitute, administrative

litigation, so the procedure was designed to be informal, cost-free, and

expedient.

Citizens unsatisfied with any concrete administrative action

may file a petition for reconsideration with a supposedly independent body

lodged in the agency or a higher government body.

Besides the legality of

the challenged administrative act, the reconsideration body may review its

Id. at 106.

In a very general sense, the administrative reconsideration mechanism resembles a typical

administrative appeals institution in the United States.

For a brief summary of the legislative history, see Randall Peerenboom, Globalization, Path

Dependency and the Limits of Law: Administrative Law Reform and Rule of Law in the People's Republic

of China, 19 B

ERKELEY J. INT'L L. 161, 191-92 (2001).

See Zhōnghuá Rénmín Gònghéguó Xíngzhèng Fùyì Fǎ (中华人民共和国行政复议法) [Law on

Administrative Reconsideration] (promulgated by the Ninth National People’s Congress Standing

Committee, April 29, 1999, effective Oct. 1, 1999), http://www.gov.cn/banshi/2005-

08/21/content_25100.htm.

For instance, complainants incur no cost to file a petition for administrative reconsideration.

Zhōnghuá Rénmín Gònghéguó Xíngzhèng Fùyì Fǎ (中华人民共和国行政复议法) [Law on Administrative

Reconsideration] (promulgated by the Ninth National People’s Congress Standing Committee, April 29,

1999, effective Oct. 1, 1999) at art. 31, http://www.gov.cn/banshi/2005-08/21/content_25100.htm. In

addition, the reconsideration body is required to respond to a petition within 60 days after its filing. Id.

The filing may be done either in writing or orally, to accommodate those who are illiterate or are not

accustomed to formal written complaints. Id. at art. 11. The procedure was designed to be informal and

flexible.

Petitions against bureaus of the STB are handled by the bureau at the next highest level. See

Shuìwù Xíngzhèng Fùyì Guīzé (税务行政复议规则) [Tax Rules for Administrative Reconsideration]

(promulgated by the State Administration of Tax Bureau, Dec. 15, 2009, effective April 1, 2010),

http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/9563669.html. Petitions against an

office of the LTB may be filed with either the corresponding local government or the bureau of a higher

rank, unless otherwise stipulated by regional rules. Petitions against the STB in Beijing may be filed with

the bureau itself. Petitions should in general be filed, orally or in writing, within 60 days after knowledge

of the concrete administrative action. Relevant administrative reconsideration body should review a

petition within five days of its filing and decide whether to accept it. Rejection may be based on a limited

number of situations such as nonpayment of the disputed tax liabilities and fines. Once accepted, a petition

should be directed to the responding party, which carries the burden of proof. The administrative

reconsideration body shall conduct investigation and render a decision within 60 days of the acceptance of

the petition. An additional 30 days may be granted if the case is complex. For disputes over the exercise of

discretion by tax agents or matters over the reasonableness of certain administrative action, reconciliation

and mediation are allowed. The reconsideration body may uphold the administrative action, amend it, or

withdraw it after determining its illegality, in which case it should order the responding party to take new

administrative action in accordance with the law. Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 67

appropriateness and the legality of relevant agency rules,

both of which fall

beyond the jurisdiction of typical courts.

Once taxpayers have exhausted administrative recourse for disputes

over a tax matter, they may turn to the courts.

The defendant agency

generally bears the burden to prove the challenged administrative action was

carried out in accordance with law.

If the court deems the evidence

insufficient, it may conduct its own investigation.

Under current law, a

judgment or decision must be rendered within three months after the

docketing of an administrative lawsuit, and unsatisfied parties may appeal

the trial decisions to a higher court.

In sum, the Chinese government has over the years enacted a whole

set of substantive and procedural laws and regulations over tax

administration, and has constructed an administrative law regime to rein in

abusive government officials. Though the resulting legal framework

contains some elements that appear more favorable to tax agencies—e.g.,

payment of the purported tax liability is required for initiating the

administrative reconsideration procedure

—it should provide a reasonable

institutional protection to Chinese citizens against abusive tax agents or

misinterpretation of tax laws and regulations.

IV. E

MPIRICAL PUZZLES AND EXTANT LITERATURES

While the state has set up a rather comprehensive legal framework to

restrain government agencies and to protect Chinese taxpayers, very few

taxpayers have chosen to use this legal framework.

According to recent

Zhōnghuá Rénmín Gònghéguó Shuìshōu zhēngshōu guǎnlǐ fǎ (中华人民共和国税收征收管理法)

[Tax Collection Management Law] (promulgated by the Ninth National People’s Congress, effective May

1, 2001), art. 35, http://www.gov.cn/banshi/2005-08/31/content_146791.htm.

Id. at art. 88.

Zhōnghuá Rénmín Gònghéguó Xíngzhèng Sùsòng Fǎ (中华人民共和国行政诉讼法 )

[Administrative Procedure Law] (promulgated by the Seventh National people’s Congress, April 4, 1989,

effective Oct. 1, 1990), art. 32.

Id. at art. 34.

Id. at art. 57.

Shuìwù Xíngzhèng Fùyì Guīzé ( 税务行政复议规则) [Tax Rules for Administrative

Reconsideration] (promulgated by State Administration of Taxation Dec. 15, 2009, effective April 1, 2010),

ch. 6.

Wei Cui, supra note 37, at 5.

From 1994 to 2005, courts nationwide received merely 1,399 lawsuits against tax agencies, an

average of 120 cases per year. See Jingjing Chen, Shuiwu Xingzheng Anjian Liunian Fanfan, Nanshuiren

Xiguan Falu Jiuji Shouduan [Administrative Cases Double in Six Years, Taxpayers Used to Legal

Remedies] L

EGAL DAILY, Feb. 7, 2007. Another source, however, reports a much larger number (6,154

cases from 1996 to 1999). See H

ARBIN MUNICIPAL LOCAL TAXATION BUREAU, SHUI WU XINGZHENG FU

VI SHI WU ZHONG DE WENTI VU DUICE (税务行政复议实务中的问题与对策) [ISSUES AND SOLUTIONS IN

68 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

data published by the Supreme People’s Court (“SPC”), out of 136,353 first

instance administrative lawsuits filed in all Chinese courts in 2011, only 405

were against tax agencies.

Among the 399 cases that were closed by the

end of the year, 279 were concluded without reaching any substantive issues,

and the courts issued decisions not judgments. Of the 279 decisions, 225

were court approvals for plaintiffs to withdraw their complaints, and twenty

five cases were dismissed without a trial.

Of the mere 120 cases where

courts rendered judgments on substantive legal issues, defendant tax

agencies prevailed in 106 cases and plaintiffs in only fourteen, a victory rate

of 11.7%.

To the uninitiated, it must be puzzling that taxpayers in China avoid

judicial resolution of tax disputes to such a great extent. The next part

explains the unusual reluctance to sue. However, the explanations will at the

same time unveil a more intriguing puzzle: why does any tax-related lawsuit

go to trial at all, given all the factors that have turned thousands of taxpayer

disputants away from judicial resolution?

A. The First Puzzle: Why Are Potential Litigants Reluctant to Sue?

To scholars familiar with administrative litigation in China, reluctance

to sue government agencies is hardly a puzzle. Here it is posed as such

mostly to set up the context for the discussion of the next empirical question:

who, and under what circumstances, sues the tax bureau—arguably one of

the most powerful agencies in China.

When asked to comment on administrative litigation, a Chinese

businessman made the following comment: “It is very unlikely that I will

win a lawsuit against the government. Even if I won in court, I would then

risk losing everything.”

This comment reflects a widely-shared

THE PRACTICE OF TAX ADMINISTRATIVE RECONSIDERATION] (Oct. 24, 2008),

http://www.chinalaw.gov.cn/article/xzfy/llyj/200811/20081100066707.shtml.

SUMMARY OF FIRST INSTANCE ADMINISTRATIVE LAWSUITS IN CHINA (2011),

http://www.court.gov.cn/qwfb/sfsj/201206/P020120628451878418099.xls (last visited Aug. 27, 2012).

Id.

One source cites the victory rate of all cases filed between 1994 and 2005 to be 45%. See Hong

Lan, Shuiwu Xingzheng Anjianshu Cheng Shangsheng Qushi [Trend of Increase for Tax-Related

Administrative Cases], Z

HONGGUO SHUIWU BAO [CHINA TAX'N] (Feb., 5 2007). See also Wei Cui, The

Rule of Law in Chinese Tax Administration, in T

HE DELICATE BALANCE: TAX, DISCRETION AND THE RULE

LAW 362-63, (Chris Evans, et al., 2011). The STB's high plaintiff victory rate may include cases

withdrawn by the plaintiffs after the defendants had changed their administrative acts. Or it may just be

figures from a few years ago, before the national campaign for ADRs.

Qian Wang & Xuena Li, Jie Qiye Er Yu,( 竭企业而渔) [Destroying Tax Basis by Overtaxing

Companies] X

IN SHI JI [NEW CENTURY MAG.] (Aug. 27, 2012), http://magazine.caixin.com/2012-08-

24/100428102.html.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 69

understanding and explains why most taxpayers choose not to sue tax

agencies when disputes arise. In theory, litigation is a preferred method for

dispute resolution if and only if its benefits outweigh its costs and the net

benefits outweigh those of other alternative dispute resolution methods

(including not doing anything at all).

From the viewpoint of welfare maximization, when litigation costs are

high, rational disputants should agree to settle and split the cost savings. In

the United States, expensive legal fees probably deter many from suing.

This deterrence does not directly apply in China because the formal costs for

administrative lawsuits are low. As noted earlier, the administrative law

regime was established in part to encourage information-holders to assist the

state in monitoring local agents. So under current law, the court fee for

filing an administrative case is merely RMB 50 (USD 7.5).

In addition, the

defendant government agency generally bears the burden of proof in

administrative lawsuits.

Finally, relatively low attorneys’ fees make the

assistance of legal counsel affordable to many, though evidence shows that

Chinese lawyers tend to avoid representing cases against the state.

The low

formal litigation costs in China suggest that the deterrent to suing the state

lies elsewhere.

Judicial weakness and bias favoring state agencies and high costs of

agency retaliation explain the strong reluctance to file lawsuits against tax

agencies in China. Judicial weakness and bias in administrative litigation is

not a new concept to scholars of Chinese law and politics.

Courts in China

are reluctant to challenge the local officials who control court funding and

major personnel decisions.

When adjudicating administrative lawsuits,

pragmatic Chinese judges consider the potential impact of their rulings on

local stability and the compliance costs for the local government.

The

tactic often employed is to dodge difficult cases.

Because of judicial

For the sake of clarity, responses to a grievance against a state agency can be grouped into three

categories: 1) lumping it (bearing the loss without protesting), 2) negotiating a settlement or protesting

through other non-judicial channels, and 3) litigating against the agency.

Susongfei Jiaona Banfa (诉讼费用交纳办法) [Measures Regarding Payment of Litigation Fee]

(promulgated by the St. Council, Dec. 19, 2006, effective April 1, 2007), art. 13, § 5,

http://www.gov.cn/zwgk/2006-12/29/content_483407.htm.

Zhōnghuá Rénmín Gònghéguó Xíngzhèng Sùsòng Fǎ (中华人民共和国行政诉讼法 )

[Administrative Procedure Law] (promulgated by the Seventh National people’s Congress, April 4, 1989,

effective Oct. 1, 1990), art. 32.

Ji Li, supra note 9, at 22.

See Xin He & Yang Su, supra note 9; O’Brien & Lianjiang Li, supra note 7.

Benjamin L. Liebman, China's Courts: Restricted Reform, 191 THE CHINA Q. 620, 627 (2007).

Qinghua Wang, supra note 9, at 525.

Id. at 525-26. See also, Xin He, The Judiciary Pushes Back: Law, Power, and Politics in Chinese

Courts, in

JUDICIAL INDEPENDENCE IN CHINA: LESSONS FOR GLOBAL RULE OF LAW PROMOTION (R. P.

70 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

weakness, litigants have to resort to multiple mechanisms, such as media and

mass protest, to pressure judges to accept and adjudicate administrative

lawsuits fairly.

Of course, not all government agencies are treated equally.

Judges tend to be more inclined to rule in accordance with the law if the

defendant is a weak administrative agency and the unfavorable decision

would not negatively impact its interests.

In contrast, when a case touches

upon critical interests of powerful administrative agencies, the court will try

to avoid registering the case or ruling against the defendant.

Even if the

plaintiff manages to obtain a favorable ruling in court, the subsequent

enforcement is at best uncertain. Powerful state agencies face a low risk of

punishment for delaying or refusing to comply with judgments against their

interests.

In the rare case where the plaintiff in an administrative lawsuit wins in

court and is able to enforce the judgment, agency retaliation will most likely

follow.

The costs and damages of such retaliation, if from a tax agency, are

substantial. To ensure revenue collection, the state grants local tax agents

wide discretion to implement tax laws and policies. Consequently, disguised

retaliation is of low risk for the agents, but costly for the targeted ex-

plaintiff. For instance, a tax agency may retaliate by conducting more

inspections and audits of the taxpayer’s books, causing excessive delays in

processing the taxpayer’s requests, over-assessing taxpayer’s revenues or

profits, and issuing harsh penalties for tax deficiencies.

Typical business practices in China also contribute to the high costs of

agency retaliation. Formality is not highly valued in small business

Peerenboom ed., 2010). Until recently, local courts could dodge administrative lawsuits by not acting on it.

Rejecting it outright would enable the complainant to appeal the case to a higher court, so the case filing

division could choose not to do anything about a complaint. A recent SPC rule was intended to solve this

problem. Complainants are now allowed to bring a lawsuit directly to a higher court if the first instance

court ignores the filing.

See, e.g., O’Brian & Lianjiang Li, supra note 9, at 82.

Xing Ying & Zuo Xu, Case Registration Politics and the Stagnation of Administrative Litigation:

An Empirical Study of Two Northern China Basic Courts, 6 T

RIB. OF POL. SCI. & L. 111, 117 (2009).

Id. at 116-18.

See O’Brian & Lianjiang Li, supra note 9, at 90. However, some empirical evidence indicates that

the enforcement of court judgment in civil cases is better than generally expected. See Xin He, Debt

Collection in the Less Developed Regions of China: An Empirical Study from a Basic-Level Court in

Shaanxi Province, 206 T

HE CHINA Q. 253 (2011).

See HARBIN MUNICIPAL LOCAL TAXATION BUREAU, supra note 61.

The statute in general stipulates penalties in the range of 50% to 500% of the assessed tax

deficiency, and the agency has the discretion to decide the exact percentage. See Zhōnghuá Rénmín

Gònghéguó Shuìshōu Zhēngshōu Guǎnlǐ Fǎ (中华人民共和国税收征收管理法) [Tax Collection

Management Law] (promulgated by the Ninth National People’s Congress, April 28, 2001, effective May 1,

2001), ch. 1, art. 1-2, http://www.gov.cn/banshi/2005-08/31/content_146791.htm.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 71

transactions between Chinese companies.

A large number of small

businesses pay presumptive taxes.

Jeopardizing a cooperative relationship

with a tax agency will presumably result in higher tax assessments. In

addition, many businesses engage in some form of tax evasion.

A good

relationship with local tax agents ensures that agents ignore the tax evasion.

Such a practice, however, allows tax agencies to easily retaliate against

businesses if the agencies ever choose to strictly enforce relevant tax laws.

Because the actual tax burden of a Chinese taxpayer depends on his or her

relationship with tax collectors,

few would jeopardize that relationship by

challenging the collectors in court.

Moreover, most Chinese firms are well aware of the importance of a

good relationship with tax agents and will actively cultivate and maintain

one. An empirical study found that Chinese companies constantly set aside

a significant portion of their business expenses as “money bribes to

government officials in exchange for lower expropriation.”

Chinese

companies also engage in frequent personal interactions with local tax

agents to obtain information about tax law enforcement.

All these

precautions reduce the probability of disputes arising in the first place.

Systemic reforms aimed at easing social tensions further reduce the

filing of administrative lawsuits.

These reforms strengthened

administrative reconsideration institutions and encouraged mediation at

every phase of the litigation procedure.

Chinese courts even implemented

target responsibility systems to increase the rate of mediation for civil and

administrative litigation.

In the context of this national campaign to

promote non-judicial dispute resolution, most of the administrative lawsuits

against tax agencies, once docketed, must be actively mediated by the

courts. If the mediation efforts succeed, the taxpayer will withdraw his

complaint and the case closes. Otherwise, the lawsuit will go to trial. Even

throughout the trial process, the judge will press the parties to settle before

See Max Boisot & John Child, From Fiefs to Clans and Network Capitalism: Explaining China's

Emerging Economic Order, 41 A

DMIN. SCI. Q. 600, 612-13 (1996).

Wei Cui, The Prospect of New Partnership Taxation in China, 46 TAX NOTES INT'L. 625, 630

(2007).

See Qian Wang & Xuena Li, supra note 65.

Id.

Hongbin Cai, et al., Eat, Drink, Firms, Government: An Investigation of Corruption from the

Entertainment and Travel Costs of Chinese Firms, 54 J.L.

& ECON. 55, 63 (2011).

Id. at 66.

Wei Cui, supra note 37, at 3.

See generally, Carl Minzner, China's Turn Against Law, 59 AM. J. COMP. L. 935 (2011).

Xing Ying & Zuo Xu, supra note 75, at 120.

Minzner, supra note 87, at 957.

72 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

issuing a decision or judgment.

Thus, any administrative lawsuit filed

against a tax agency filters through a number of institutions that are designed

to provide non-judicial resolution.

In sum, judicial weakness and bias in favor of the state, high costs of

agency retaliation, and the state campaign to promote alternative dispute

resolutions determine that, when disputes arise between taxpayers and local

tax officials, the former tend to show a high level of tolerance. If any action

is taken, it is likely directed towards non-judicial dispute resolution. As a

result, only a few hundred administrative lawsuits are filed each year against

tax agencies in China.

B. The Second Puzzle: Why Does Anyone Sue and Insist on a Trial?

Given the state campaign to promote alternative dispute resolution,

judicial bias, and the high cost of agency retaliation, the existence of any

tried cases is an intriguing puzzle. Why does anyone in China go through

the adjudicatory process to resolve disputes with powerful tax agencies,

given the adverse conditions? The answer to this question is of critical

importance to the understanding of tax administration in China, the

development of its administrative law regime, and more generally China’s

legal reform.

Questions about the selection of lawsuits for trial have generated a

vast amount of literature.

Assuming litigation is more costly than

settlement, all lawsuits should settle but for transaction costs or information

asymmetry. Further, those lawsuits that go to trial are neither a random nor

a representative sample of all the lawsuits. According to the classic model

developed by Professors George L. Priest and Benjamin Klein (“Priest/Klein

model”), after satisfying certain assumptions, lawsuits will only be tried if

they are “close cases,” and plaintiffs will have approximately a 50% win

rate.

Systematic deviation from the 50% rate may occur if: 1) litigation

costs are low relative to settlement costs, 2) plaintiffs expect judgments to be

high relative to litigation costs (encouraging litigation for a high proportion

Xing Ying & Zuo Xu, supra note 75, at 119.

See George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL

TUD. 1 (1984); Donald Whittman, Dispute Resolution, Bargaining, and the Selection of Cases for Trial: A

Study of the Generation of Biased and Unbiased Data, 17 J.

LEGAL STUD. 313 (1988); Theodore Eisenberg,

Testing the Selection Effect: A New Theoretical Framework with Empirical Tests, 19 J.

LEGAL STUD. 337

(1990).

See Priest & Klein, supra note 91, at 17.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 73

of disputes), or 3) the two parties have different stakes in the litigation’s

outcome.

One notable alternative theory, the asymmetric information model,

loosens the implicit assumption of the Priest/Klein model that disputants are

equally informed.

Because the disputants hold asymmetric information

and the informed party offers to settle only when it expects to lose at trial,

the informed party should prevail in most tried cases.

So in contrast to the

Priest/Klein model, the asymmetric information model does not predict a

general tendency of 50% win rate.

Instead, the more informed party should

have a much higher victory rate.

In the past three decades, the Priest/Klein model and alternative

theories have spawned numerous empirical studies.

U.S. Tax Court cases

are ideal for testing these theories because the judgments of both settled and

tried civil tax controversy cases are disclosed to the public. One study found

divergent expectations to be a critical factor in determining the likelihood of

settlement, and active judges will facilitate the meeting of such expectations

and minimize strategic behavior by the disputants.

However, taxpayers’

risk preference and the use of legal counsel show no significant impact on

the settlement of tax court cases.

Very few empirical studies have touched on why administrative

lawsuits go to trial in China. The most notable study is Professor Pei

Minxin’s article in 1995, which found both parties to an administrative

dispute had incentives to settle.

100

According to the study, plaintiffs suing

government officials in China expect to lose and are better off settling with

the defendants.

101

The sued government agencies are also threatened by the

small possibility of losing in court, which would harm not only government

authority but, more importantly, the career prospect of responsible

Id. at 20.

Id. at 24-29.

Joel Waldfogel, Reconciling Asymmetric Information and Divergent Expectations Theories of

Litigation, 41 J.L.

& ECON. 451, 452 (1998).

See Steven Shavell, Any Frequency of Plaintiff Victory at Trial Is Possible, 25 J. LEGAL STUD. 493

(1996); Waldfogel, supra note 95.

See Daniel Kessler, et al., Explaining Deviations from the Fifty-Percent Rule: A Multimodal

Approach to the Selection of Cases for Litigation, 25

J. LEGAL STUD. 233(1996); Eisenberg, supra note 91;

Daniel Klerman, The Selection of 13th-Century Disputes for Litigation, 9 J.

EMPIRICAL LEGAL STUD. 320

(2012); Samuel R. Gross & Kent D. Syverud, Getting to No: A Study of Settlement Negotiations and the

Selection of Cases for Trial, 90 M

ICH. L. REV. 319 (1991). Most of these studies use evidence from the

United States.

Leandra Lederman, Which Cases Go to Trial?, 49 CASE W. RES. L. REV. 315, 341 (1999).

Id.

100

Minxin Pei, supra note 9, at 844.

101

Id.

74 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

officials.

102

As a result, defendant government agencies are incentivized to

settle as well.

103

In addition, Chinese courts—stuck between the conflicting

interests of maintaining their institutional legitimacy and protecting the

interests of state agencies—are equally enthusiastic about settlement.

104

Given the stakes implicated by non-judicial resolution of administrative

disputes, a significant proportion of plaintiffs in Pei’s empirical study settled

and withdrew their complaints.

105

Pei also compared the defendant win rates

in administrative lawsuits against different government agencies and

concluded that powerful agencies enjoy greater advantages in administrative

litigation.

106

In reaching this conclusion, Pei neglected the Priest/Klein theory and

failed to address the causes of the deviation from the 50% plaintiff victory

rate. In addition, Pei’s study centered on a sample of 236 administrative

cases that were published in the early 1990s as model precedents for judges

and lawyers, creating a problem of selection bias.

107

Moreover, the study

provided a survey of several general attributes of the cases—such as who

were the plaintiffs, who was sued, and who prevailed—without reaching into

the substance and contexts of the lawsuits.

108

Therefore, it fails to explain

why a portion of the cases went to trial in spite of all the unfavorable

conditions for administrative litigation recognized in the study.

Other empirical works of administrative litigation in China relied on

either a small number of non-random cases and interviews or a large-scale

social survey.

109

Both methodologies are flawed with the selection bias

problem. And most of the studies cover administrative lawsuits against all

government agencies.

110

It is widely recognized that all state agencies are

not equal in the highly fragmented authoritarian regime, with powerful ones

enjoying more advantages in court.

111

By treating all government defendants

the same, existing studies miss this important aspect of Chinese politics.

In sum, existing literature does not sufficiently explain why some tax-

related administrative lawsuits reach the trial stage despite the nationwide,

state campaign for settlement, high costs of government retaliation, little

chance of victory, and low possibility of enforcement of any favorable

102

Id.

103

Id.

104

Id. at 844-45.

105

Id. at 842-45.

106

Id. at 845.

107

Id. at 847-48.

108

Id. at 851.

109

See sources cited supra note 9.

110

See sources cited supra note 9.

111

Xing Ying & Zuo Xu, supra note 75, at 116-18.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 75

judgments. The next part sets out to answer the intriguing empirical

question.

V. M

AKING SENSE OF THE “IRRATIONAL” ADMINISTRATIVE LAWSUITS

AGAINST TAX AGENCIES IN CHINA

This part discusses four main factors that contribute to the trial of

certain lawsuits against powerful tax agencies: 1) immunity to extra-judicial

retaliation; 2) substantial stake and lack of alternative dispute resolution; 3)

high transaction costs; and 4) optimism of the disputants.

As discussed earlier, though formal litigation costs are insignificant in

China, extra-judicial costs, i.e., the costs of agency retaliation, tend to be

substantial for those who take government officials to court, which results in

only a few lawsuits against tax agencies. The critical role of agency

retaliation in deterring lawsuits, however, also explains why complainants

who may avoid the costs will be able to significantly reduce the actual

litigation costs and be more incentivized to sue.

Tax agencies in China, though powerful, are subject to certain

restraints. First, their jurisdiction is territorial.

112

A tax agency enjoys wide

discretion in tax administration within its own territory, but crossing the line

into another agency’s jurisdiction significantly curtails this discretion.

Because of this limit on a local tax agency’s power, a complainant may

avoid retaliation costs if she moves her taxable assets away from the

agency’s jurisdiction and does not interact with the agency again after the

lawsuit. Second, the exercise of local tax agencies’ monitoring,

investigative, and extractive authority and discretion is largely restricted to

taxable income and assets.

113

Therefore, individuals and companies with

low incomes and revenues are relatively immune to the agencies’ retaliation

threats. Third, the authoritarian regime of China is highly fragmented,

114

having a powerful ally in the political system significantly reduces the

probability of tax agency retaliation.

While retaliation costs may be curbed in these limited circumstances,

persistence in continuing to trial would not exist without an expectation of

high returns. Put differently, a lawsuit will more likely be tried if substantial

112

See supra Part II for a discussion about the system for tax administration in China.

113

Zhōnghuá Rénmín Gònghéguó Shuìshōu Zhēngshōu Guǎnlǐ Fǎ (中华人民共和国税收征收管理

法) [Tax Collection Management Law] (promulgated by the Ninth National People’s Congress, April 28,

2001, effective May 1, 2001), http://www.gov.cn/banshi/2005-08/31/content_146791.htm.

114

For a detailed discussion of the concept of fragmented authoritarian regime, see KENNETH

LIEBERTHAL & MICHEL OKSENBERG, POLICY MAKING IN CHINA : LEADERS, STRUCTURES, AND PROCESSES

137-51 (1988).

76 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

interests are at stake and alternative dispute resolution channels are

unavailable. Expectation of positive return depends first of all on a positive

probability of winning a lawsuit. For the following reasons, such positive

probability may exist in spite of the serious judicial bias discussed earlier.

Though plaintiffs of administrative lawsuits are very likely to lose at the trial

level,

115

it is possible to win upon appeal. Appellate courts tend to be less

influenced by defendant government agencies.

116

Plaintiffs in administrative

lawsuits therefore expect a better chance of obtaining favorable judgments at

the appellate level.

A unique institutional feature of the Chinese legal system, the lack of

judicial finality, further improves the plaintiffs’ chance of obtaining an

eventual victory. Though in general appellate decisions are final, in certain

circumstances they may be further challenged. The procuratorate may lodge

a protest of a legally binding decision to a higher court on numerous

grounds, such as erroneous application of the law by judges.

117

For reasons

similar to other second-party supervisory institutions, only a very few

administrative cases are processed by the procuratorate each year.

118

Other

possible channels to challenge an appellate decision include directly

petitioning a higher court to intervene and retry the case or petitioning the

deciding appellate court to reopen the case.

119

Such intervention is more

likely if the higher court faces external pressure from the legislature,

120

ranking government officials,

121

or public media.

122

In sum, due to the lack

of adjudicatory finality and the possibility of prevailing when higher

authorities intervene, plaintiffs in a suit against tax agents may try a losing

case and then appeal if substantial interests are at stake. Readers should note

that the discussion of this and the preceding paragraph is only to show that

115

Xin He & Yang Su, supra note 9, at 132.

116

Minxin Pei, supra note 9, at 847.

117

See Zhōnghuá Rénmín Gònghéguó Xíngzhèng Sùsòng Fǎ (中华人民共和国行政诉讼法 )

[Administrative Procedure Law] (promulgated by the Seventh National people’s Congress, April 4, 1989,

effective Oct. 1, 1990), art. 64.

118

For example, from 2008 to 2011, Zaozhuang Intermediate Procuratorate lodged 122 protests, but

only one was for an administrative lawsuit. See Jiang Yang (姜洋), Lun Kangsu Zaishen Anjian De Tedian,

Nandian Ji Jianyi (论抗诉再审案件的特点、难点及建议) [On the Features, Difficulties and Suggestions

Regarding Protest-Triggered Retrial Cases],

CIVIL PROCEDURE LAW (June 17, 2012),

http://www.civilprocedurelaw.cn/html/jcjd_1174_2538.html.

119

Zhōnghuá Rénmín Gònghéguó Xíngzhèng Sùsòng Fǎ (中华人民共和国行政诉讼法 )

[Administrative Procedure Law] (promulgated by the Seventh National people’s Congress, April 4, 1989,

effective Oct. 1, 1990), art. 62.

120

See Young Nam Cho, Symbiotic Neighbour or Extra-Court Judge? The Supervision over Courts

by Chinese Local People's Congresses, 176 T

HE CHINA Q. 1068, 1073-77 (2003).

121

See Liebman, supra note 71, at 626-27.

122

See id. at 628-29.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 77

the probability of post-trial victory is positive, not zero. As will be

illustrated in the next part, appellate courts rarely reverse lower court

decisions favoring a strong state agency. In other words, the probability of

winning an administrative lawsuit, at trial and afterwards, is positive but

very low, so plaintiffs will insist on trial only if substantial interests are at

stake.

In sum, while the high extra-judicial costs of suing tax agencies

explain the small number of administrative lawsuits filed each year, they

also explain why those that do not bear the costs may persist on going to trial

for a reasonable amount of material rewards. Moreover, substantial stake

and lack of alternative dispute resolution may also explain why some cases

fail to settle. The theoretical explanations specific to China’s political legal

context do not necessarily conflict with general selection theories. High

transaction costs and optimism of the disputants should also contribute to the

filing of lawsuits against tax agencies in China.

The next part examines these theories against the results from

administrative lawsuits against tax agencies in Henan Province from 2009 to

2011.

VI. A

NALYSIS OF TAX-RELATED ADMINISTRATIVE LAWSUITS FROM HENAN

PROVINCE

This part evaluates and substantiates the theoretical explanations

proposed in Part V with an analysis of all of the major administrative cases

against tax agencies that went to trial in Henan Province from 2009 to 2011.

The author selected Henan Province for the following reasons. First and

foremost, the province took the lead in publishing court decisions and

judgments. In response to a SPC rule about case disclosure,

123

the Henan

123

As part of the judicial reform, the SPC published the Six Rules on the Disclosure of Judgments

and the Measures on the Publication of Judgments Online, both of which encourage public disclosure of

court decisions and judgments, but also provide three general categories of non-publication: national

security, privacy and adolescent crimes. See Guanyu Sifa Gongkai De Liu Xiang Guiding (关于司法公开

的六项规定) [Six Rules on the Disclosure of Judgments] (promulgated by the Sup. People’s Ct., Dec. 8,

2009, effective Dec. 8, 2009), para. 5, http://www.chinanews.com/gn/news/2009/12-23/2034717.shtml;

Zuigao Renmin Fayuan Guanyu Renmin Fayuan Zai Hulianwang Gongbu Caipan Wenshu De Guiding (最

高人民法院关于人民法院在互联网公布裁判文书的规定) [Measures on the Publication of Judgments

Online] (promulgated by the Sup. People’s Ct., Nov. 21, 2010, effective Nov. 21, 2010), §1, para. 2,

http://www.court.gov.cn/xwzx/rdzt/sfgkxcyhdzt/zdwj/201203/t20120326_175408.html. In addition, the

rules provide that pending judgments and cases that have been mediated and withdrawn should not be

publicized. See Guanyu Sifa Gongkai De Liu Xiang Guiding (关于司法公开的六项规定) [Six Rules on

the Disclosure of Judgments] (promulgated by the Sup. People’s Ct., Dec. 8, 2009, effective Dec. 8, 2009),

§ 2, para. 2.

78 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

Provincial High Court issued detailed implementation guidance for the rules

of disclosure, according to which all judgments effective as of October 1,

2008, should be published online except those that fell clearly in the exempt

categories.

124

To encourage compliance, the High Court linked local judges’

compliance with the implementation of the rules to their performance

evaluation.

125

Because administrative lawsuits against tax agents are

unlikely to fall into the exempt categories, a large fraction of them should be

published and available online. Though the author’s research finds that a

few cases are missing from the database, relevant information is available in

published cases, which limits the potential bias.

126

The second reason the author selected Henan for the study is the

amount of official malfeasance in the province. Earlier research indicates

that local governments in Henan suffer from a severe fiscal shortage, leading

to heavy tax burdens and highly predatory local officials.

127

This gives rise

to massive grievances against the state and a steady supply of administrative

lawsuits. In particular, it gives rise to enough tax-related cases for a

meaningful empirical study.

Third, Henan led other Chinese provinces in promoting administrative

litigation. The Provincial High Court was one of the first to establish a high-

quality administrative law division.

128

With support from the court president

and the provincial party leaders, the division actively promoted lawsuits

against local officials and reported one of the highest administrative

litigation rates in China (calculated as number of filings per resident).

129

124

Cáipàn Wénshū Shàngwǎng Gōngbù Guǎnlǐ Bànfǎ (裁判文书上网公布管理办法 )

[Administrative Rules Regarding Online Disclosure of Court Decisions and Judgments] (promulgated by

the Henan Supreme Court, Oct. 9, 2009, effective Oct. 14, 2009), http://thxfy.chinacourt.org/public/

detail.php?id=170.

125

Id.

126

The High Court published one lawsuit that it should not have because the plaintiff withdrew the

case. See Yuangao Zhumadian Shi Tian Yi Jiudian Guanli Youxian Gongsi Yu Beigao Henan Sheng

Zhumadian Shi Dìfang Shuiwu Ju Jicha Ju Shuishou Chafeng Baoquan Cuoshi Weifa Sunhaile Qi Hefa

Quanyi Yi An (原告驻马店市天驿酒店管理有限公司与被告河南省驻马店市地方税务局稽查局税收

查封保全措施违法损害了其合法权益一案) [Zhumadian Tianze Hotel Management Ltd. v. Henan

Zhumadian Ltd. Inspection Bureau], (Henan Zhumadian Yicheng Dist. Ct. 2009) (on file with author).

Additionally, one administrative case should have been published because the plaintiff received a verdict.

See Yuangao Renleliang Su Beigao Luoyang Shi Xi Gongqu Guojia Shuiwu Ju Shuiwu Xingzheng Jiangli

Yi An (原告任乐亮诉被告洛阳市西工区国家税务局税务行政奖励一案) [Ren Leliang v. Luoyang STB],

http://xgqfy.chinacourt.org/public/paperview.php?id=433625 (last visited Sept. 27, 2013). Note the three

decisions for the retrial of the Zhumadian cases were not published.

127

See Hongbin Cai, et al., supra note 84 at 62.

128

Ji Li, Suing the State: A Study of Administrative Litigation at the Provincial Level in China 108

(2012) (unpublished Ph.D. dissertation, Northwestern University) (on file with author).

129

Id. at 110-11.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 79

Moreover, Henan was for a long time the most populous province in

China

130

and, located close to the geographic center of the country, the

province is representative of China in many aspects. For the above reasons,

theories derived from a study of tax-related administrative lawsuits in Henan

should be widely applicable in many other Chinese provinces.

In addition to the lawsuits against tax agents reported by the courts in

Henan, the author conducted archival research into published materials

relating to the cases, the parties involved, and the underlying disputes. This

included other lawsuits (civil and criminal) in which the plaintiffs

participated. This research enabled the author to understand the contexts for

the tax-related administrative disputes and derive a few general attributes

that explain the puzzling existence of tried lawsuits against tax agencies in

China.

Before proceeding to the detailed case analysis, some summary

statistics of the cases are in order. From 2009 to 2011, only forty-one

decisions and judgments involved tax agencies as defendants.

131

Because

the sample contains decisions and judgments by both trial and appellate

courts, some of which relate to the same underlying disputes, there are a

total of only nineteen separate complainants. In addition, some courts

reported multiple judgments or decisions for different claims or issues of the

same case. Also, because several of the complainants are related parties,

e.g., companies implicated in the same tax evasion investigation, the actual

number of underlying disputes is even smaller.

Appellate courts rendered sixteen of the forty-one published decisions

and judgments. Plaintiffs appealed more than half of the cases filed after

2009.

132

The extra efforts by the plaintiffs, however, did not translate into

substantial benefits. Only three cases appealed by taxpayers were sent back

for retrial, all of which satisfied the appellate court after a few cosmetic

changes by the trial court.

133

Among the nineteen plaintiffs, seven initiated

lawsuits in 2009, three in 2010, and nine in 2011. Eight of the plaintiffs are

individuals, the rest are all privately-owned corporate entities. Among the

defendant tax agencies, ten are STB bureaus, eight are LTB bureaus, and one

130

See CHINESE BUREAU OF STATISTICS, REPORTS BASED ON THE YEAR 2000 CONSENSUS, TABLE 1-1

http://www.stats.gov.cn/tjsj/ndsj/renkoupucha/2000pucha/pucha.htm (last visited Sept. 27, 2013).

131

Cases on file with the author.

132

Several of the trial court rulings omitted from publication are included in this total.

133

One additional case was sent back to the trial court for a retrial after the procuratorate lodged a

protest. See Yuanshen Yuangao Liuyongjian, Yang Feng Su Guangshan Xian Caizheng Ju Shuiwu

Zhengshou Xingzheng Jiufen Yi An (刘永建、杨锋诉光山县财政局税务征收行政纠纷一案) [Liu &

Yang v. Guangshan County Finance Department], (Henan Guangshan Cnty. Ct. 2010),

http://www.110.com/panli/panli_4014611.html (last visited Sept. 28, 2013).

80 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

is a local finance department. Of the plaintiffs, 52.6% hired legal counsel,

compared to 84.2% of the defendants.

134

Finally, none of the plaintiffs

prevailed at the initial trial.

As discussed in the previous part, judicial bias and agency retaliation

prevent escalation from disputes to administrative lawsuits. Tax agencies,

however, do not enjoy unlimited power. Their jurisdiction is territorial and

other powerful agencies check their power in the political system. Those

that are able to avoid the heavy costs of agency retaliation may sue if

substantial interests are at stake and no alternative resolutions are available.

In addition, as in the resolution of all disputes, high transaction costs and

plaintiffs’ optimism may further contribute to the trial of administrative

lawsuits against tax agencies in China. As will be shown, all of the cases in

the analyzed sample contain one or more of these factors, in ways not

necessarily mutually exclusive.

A. Lack of Taxable Resources and Professional Whistleblowers

Because tax agencies’ authority is limited to taxable income and

assets, those with low income are largely immune to any post-litigation

retaliation by the agencies. In Ren v. Zhengzhou STB Inspection Bureau, the

plaintiff, a tax whistleblower, reported suspected tax evasion by a furniture

store to the local STB.

135

According to the factual findings of the case, the

defendant investigated the reported violation, but failed to inform the

plaintiff of the results.

136

The plaintiff alleged the STB inspection bureau

violated the law by not fully disclosing the investigation and the penalties

subsequently imposed.

137

The plaintiff in this case had a low-paying job,

which exempted him from paying income taxes other than those withheld by

his employer.

138

Without much to lose, he was therefore immune to

retaliations by local tax agencies, which significantly reduced his actual

litigation costs.

Nonetheless, low costs are costs. What are the plaintiffs’ positive

incentives for challenging powerful state agents in court? In the Ren case,

134

In two of these cases, it is not entirely clear whether the parties were represented by legal counsel.

135

Renleliang Su Zhengzhou Shi Guojia Shuiwu ju Jicha Ju Buluxing Fading Zhize Yi An Yishen

Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决书) [Ren

v. Zhengzhou STB Investigation Bureau] (Zhengzhou 27 Distr. Ct., Mar. 20, 2012),

http://www.31credit.com/caselaw/1056106.html.

136

Id.

137

Id.

138

Yunlong Zhao, “Yiyuan Jiangli” Jubaoren Ai Weiquan [“One Yuan Award” Informant Enjoys

Rights-Protection], J

INAN TIMES (Oct. 17, 2011), http://news.sohu.com/20111017/n322393854.shtml.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 81

the plaintiff reported possible tax evasion of a local furniture store in order

to receive a material reward.

139

Under current law, the state rewards a

portion of the levies and fines subsequently assessed (capped at 5% of the

deficiency) to tax whistleblowers who contribute to the tax evasion detection

and prosecution.

140

In the Ren case, the plaintiff insisted on the disclosure

about the penalty specifically so he could challenge the amount of his

reward.

141

Article 20 of the Administrative Rules re Reporting Tax

Violations, issued by the national office of the STB, provides that tax report

centers should notify the informant of the investigation result, but only if he

so requests.

142

In this case, the court ruled that the plaintiff did not make a

clear request for investigation result, so the defendant was not obliged to

inform him.

143

In Ren v. Luoyang Xigong District STB, the same tax whistleblower

directly challenged the amount the court rewarded him, which was in the

amount of RMB 1, the equivalent of approximately USD 0.17.

144

The fact

patterns of the two cases are similar: in each case, a merchant refused to

issue invoices evidencing a purchase and the plaintiff reported the possible

tax evasion to the local tax center.

145

In Ren v. Luogong, the plaintiff alleged

that the tax inspection bureau failed to take necessary actions to investigate

139

Renleliang Su Zhengzhou Shi Guojia Shuiwu ju Jicha Ju Buluxing Fading Zhize Yi An Yishen

Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决书) [Ren

v. Zhengzhou STB Investigation Bureau] (Zhengzhou 27 Distr. Ct., Mar. 20, 2012),

http://www.31credit.com/caselaw/1056106.html.

140

税务违法案件举报奖励办法 [Rules on Awards for Reporting Tax Law Violations] (July 27,

2005), http://www.chinatax.gov.cn/n8136506/n8192153/n8192242/n8192667/n8194601/8248300.html.

141

See Renleliang Su Zhengzhou Shi Guojia Shuiwu ju Jicha Ju Buluxing Fading Zhize Yi An

Yishen Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决

书 ) [Ren v. Zhengzhou STB Investigation Bureau] (Zhengzhou 27 Distr. Ct., Mar. 20, 2012),

http://www.31credit.com/caselaw/1056106.html.

142

Shuiwu Weifa Anjian Jubao Jiangli Banfa (税务违法案件举报奖励办法) [Rules on Awards for

Reporting Tax Law Violations] (promulgated by the State Administration on Taxation, effective July 27,

2005), http://www.chinatax.gov.cn/n8136506/n8192153/n8192242/n8192667/n8194601/8248300.html.

143

See Renleliang Su Zhengzhou Shi Guojia Shuiwu ju Jicha Ju Buluxing Fading Zhize Yi An

Yishen Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决

书 ) [Ren v. Zhengzhou STB Investigation Bureau] (Zhengzhou 27 Distr. Ct., Mar. 20, 2012),

http://www.31credit.com/caselaw/1056106.html.

144

Yuangao Renleliang Su Beigao Luoyang Shi Xi Gongqu Guojia Shuiwu Ju Shuiwu Xingzheng

Jiangli Yi An (原告任乐亮诉被告洛阳市西工区国家税务局税务行政奖励一案) [Ren v. Luoyang

Xigong District STB] (Oct. 26, 2010), (on file with author). Video footage is available at

http://tv.hncourt.org/video/detail/court/0/id/10315 (last visited Sept. 30, 2013).

145

Yuangao Renleliang Su Beigao Luoyang Shi Xi Gongqu Guojia Shuiwu Ju Shuiwu Xingzheng

Jiangli Yi An (原告任乐亮诉被告洛阳市西工区国家税务局税务行政奖励一案) [Ren v. Luoyang

Xigong District STB] (Oct. 26, 2010), (on file with author).

82 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

the case.

146

After repeated requests by the plaintiff, the bureau eventually

found the reported merchant in violation of tax law and imposed a fine.

147

then mailed a notice to the plaintiff of the reward of RMB 1 ( USD 0.17) for

reporting the violation.

148

The tax whistleblower then filed a lawsuit to

challenge the amount of the reward.

149

At trial, the lawyer for the tax bureau

argued that if the law had been strictly followed, the reward would have

been even lower (RMB 0.5, or USD 0.085).

150

In other words, the tax

whistleblower had been excessively rewarded. The court ruled for the tax

bureau, though it commented that the reward appeared unreasonably low.

151

The meager award in this specific case was not the only incentive for

the lawsuit, nor was the tax whistleblower solely after the legal right to be

informed by tax agencies. To fully understand the plaintiff’s motives, one

has to look at the case in light of its social and legal context. The plaintiff

was a member of an emerging group of professional whistleblowers who

live on the material rewards received for being informants to government

agencies or on compensations from caught violators.

152

Over the past two

decades, the state has established a plethora of laws and regulations to

sanction illegal practices such as selling fake products or tax evasion and

provide material rewards to those who assist in enforcement of the law.

153

Such a modern-day bounty system can be found in the tax administration of

most countries, including the United States. Because some of the rewards

146

Zhiqiang Huang, Jubao Shangjia Taoshui Jinhuo Yiyuan Jiangli (黄志强,

举报商家逃税仅获一

元奖励

, 东方早报 ) [Reporting of Tax Violation Awarded One Yuan Only], DONGFANG DAILY (Sept. 24,

2011), http://www.dfdaily.com/html/33/2011/9/24/670404.shtml.

147

Id.

148

Id.

149

Id.

150

Id.

151

Yuangao Renleliang Su Beigao Luoyang Shi Xi Gongqu Guojia Shuiwu Ju Shuiwu Xingzheng

Jiangli Yi An (原告任乐亮诉被告洛阳市西工区国家税务局税务行政奖励一案) [Ren v. Luoyang

Xigong District STB] (Oct. 26, 2010) (on file with author). Video footage is available at: http://tv.

hncourt.org/video/detail/court/0/id/10315 (last visited Sept. 30, 2013).

152

Zhengfang Tang, Zhongguo Sanqian Zhiye Dajiaren: Qingjia Dangchan Chihaichong (中国 3000

职业打假人：倾家荡产“吃害虫”) [Three Thousand Professional Whistleblowers in China], N

ANGUO

DAILY (Jan. 22, 2008), http://www.cctv.com/community315/special/C20532/20080122/104785.shtml.

153

See, e.g., Zhōnghuá rénmín gònghéguó shípǐn ānquán fǎ (中华人民共和国食品安全法) [Food

Safety Law] (promulgated by order of the President of the People’s Republic of China, Feb. 28, 2009,

effective June 1, 2009), §96, http://www.procedurallaw.cn/english/law/200903/t20090320_196425.html;

Zhōnghuá rénmín gònghéguó xiāofèi zhě quányì bǎohù fǎ (中华人民共和国消费者权益保护法) [Law for

the Protection of Consumer Rights] (promulgated by the National People’s Congress, Oct. 31, 1993,

effective Jan. 1, 1994), §49, http://www.wipo.int/wipolex/en/details.jsp?id=8745; Measures on Rewarding

the Reporting of Tax Evasion (July 2005) at § 5 (on file with author).

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 83

are substantial

154

and non-compliance is rampant in China, some

whistleblowers have engaged full-time in seeking out illegal practices and

claiming compensation from the violators or rewards from relevant

government agencies.

155

This explains why the plaintiff in Ren v. Luogong sued for RMB 1 and

refused to settle. Because caught violators fear negative publicity, it is easier

for them to compensate a well-known litigious whistleblower directly.

Whistleblowers are therefore incentivized to litigate cases that could receive

intensive media coverage because this enhances their publicity and helps

maintain a credible litigation threat to violators.

156

The media, though still

subject to state control, often find stories about suing government officials

interest-provoking.

157

After litigating the Luogong case, Mr. Ren quit his

previous job and became devoted full-time to uncovering and reporting

counterfeits and illegal commercial activities, earning enough to support his

family.

158

Among the nineteen plaintiffs who went to trial against tax agencies in

Henan Province from 2009 to 2011, three were whistleblowers

159

who share

a few common characteristics—namely that they were largely immune to

potential agency retaliations due to their low and simple-sourced income.

The extra-judicial costs of suing local officials were therefore lower for them

than most other victims of abusive tax agents. In addition, some of the

154

For instance, 2006 Nian Shuishou Jianmian He Weisheng Baojian Fa (2006 年税收减免和卫生保

健法)[Tax Relief and Health Care Act of 2006] § 406 caps the reward at 30% of the recovered taxes.

155

See Zhengfang Tang, supra note 152.

156

Xingzou zai Bianfengzhong de Zhiye Dajiaren (行走在边缝中的职业打假人群) [Professional

Whistleblowers Walk on the Edge], 379 P

HOENIX WKLY. (2010).

157

Daniela Stockmann & Mary E. Gallagher, Remote Control: How the Media Sustain Authoritarian

Rule in China, 44 C

OMP. POL. STUD. 436 (2011).

158

Shuxiang Chang & Jiwei Wan, Bubihui Bieren Shuowo Kao Suopei Shenghuo, Jinbao

Mianduimian zhi Dajian Renshi Ren Leliang (不避讳别人说我靠索赔生活今报面对面之打假人士任乐

亮, 东方今报 ) [Not Afraid of Living on Whistleblowing, Jinbao Faces Whistleblower Ren Leliang],

ONGFANG DAILY (Mar. 13, 2012), http://www.jinbw.com.cn/jinbw/xwzx/zzsx/201203137593.htm.

159

Renleliang Su Zhengzhou Shi Guojia Shuiwu ju Jicha Ju Buluxing Fading Zhize Yi An Yishen

Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决书) [Ren

v. Zhengzhou STB Investigation Bureau] (Zhengzhou 27 Distr. Ct., Mar. 20, 2012),

http://www.31credit.com/caselaw/1056106.html; Yuangao Wangpenghui Su Beigao Zhengzhou Shi Erqi

qu Guojia Shuiwu Ju Jicha Ju Shuiwu Xingzheng Chuli Yi An Yishen Xingzheng Wenshu (原告王朋辉诉

被告郑州市二七区国家税务局稽查局税务行政处理一案一审行政文书) [Wang v. Zhengzhou 27

District STB Investigation Bureau], (Henan Zhengzhou 27 District Court, Mar. 9, 2011) (on file with

author); Jiaguoqiang Su Henan Sheng Guojia Shuiwu Ju Bufu Fuyi Jueding Yi An Yishen Xingzheng

Panjueshu (贾国强诉河南省国家税务局不服复议决定一案一审行政判决书) [Jia v. Henan Provincial

STB] (Henan Zhengzhou Jinshui District Court, Aug. 15, 2011), http://www.31credit.com

/caselaw/651791.html.

84 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

whistleblowers litigated pro se or with the assistance of fellow

whistleblowers,

160

which further lowered the formal costs of litigation.

Moreover, they were savvy users of public media, which protected them and

eased negotiations for compensation.

161

However, while media coverage

gives the whistleblowers additional incentives to sue, it also increases the

stakes for the defendant agencies to prevail in the lawsuits. Furthermore, the

agencies do not fully incorporate the costs of litigation as individual

disputants. Therefore, in all three of the above mentioned cases initiated by

the informants, the agencies engaged outside legal counsel, even in the case

where the claim was for RMB 1.

162

Though low-income earners are retaliation-proof, they are rarely seen

in courts against tax agencies. This, however, should not be a surprise. If an

individual barely survives above the subsistence level, little income is left

for taxation. Therefore, the lack of interaction between low-income earners

and tax collectors curtails the probability of conflicts between the two

parties. Lawsuits do not exist without conflicts in the first place.

B. Limited Interaction with Tax Agencies

Agency retaliation can be very costly if the complainant expects to

interact with the agency for a long period of time. Therefore, the rational

response to official malfeasance is often to take no action. However, if the

complainant expects no further dealings with the agency, his or her exposure

to retaliation is limited and litigation becomes an attractive option, especially

if substantial interests are at stake.

The lawsuits by Wu Jishan and Li Wenfeng against the local STB of

Xin County best illustrate this point.

163

Before filing the administrative

lawsuit, the plaintiffs had spent years pursuing other paths towards a

remedy.

164

After being laid off during the economic reform of the late

1990s, the plaintiffs invested all their savings and a significant amount of

160

See Jiaguoqiang Su Henan Sheng Guojia Shuiwu Ju Bufu Fuyi Jueding Yi An Yishen Xingzheng

Panjueshu (贾国强诉河南省国家税务局不服复议决定一案一审行政判决书) [Jia v. Henan Provincial

STB] (Henan Zhengzhou Jinshui District Court, Aug. 15, 2011), http://www.31

credit.com/caselaw/651791.html.

161

See Xingzou zai Bianfengzhong de Zhiye Dajiaren, supra note 156.

162

See Zhiqiang Huang, supra note 146.

163

Wujishan, Liwenfeng Yu Xin Xian Gongye He Xinxi Hua Ju, Xin Xian Gongshang Ju, Xin Xian

Guojia Shuiwu Ju, Xin Xian Zhiliang Jishu Jiandu Ju Xingzheng Peichang Jiufen Yi An (吴继山、李文凤

与新县工业和信息化局、新县工商局、新县国家税务局、新县质量技术监督局行政赔偿纠纷一案)

[Wu Jishan & Li Wenfeng v. Xin County STB and Others for Administrative Compensation], (Henan Xin

County Court, Feb. 28, 2011) (on file with author).

164

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 85

borrowed money into a mobile gas station.

165

In 1999, they obtained all

necessary licenses, permits, and tax registrations for the operation of the

small business.

166

Yet, within a year of the approvals, a joint team of local

government officials confiscated all of the plaintiff’s permits and business

licenses and forcefully shut down the gas station without any

compensation.

167

During this process, the officials used force and failed to follow legal

procedures.

168

Having lost all of their investments, the plaintiffs began to

petition through an alternative channel called “letter and visit” for redress,

arguing that the confiscation and shutdown of their business was illegal.

169

Their efforts proved fruitless and Wu suffered a stroke in 2003.

170

When his

health improved in 2008, they resumed their petition efforts.

171

The local

officials negotiated with the plaintiffs and persuaded them to use the court to

resolve the dispute.

172

The plaintiffs agreed that if the court accepted the

case, they would cease petitioning through the letter and visit system.

173

With nothing to lose and their future livelihood at stake, the couple filed an

application for an administrative reconsideration petition and then filed the

lawsuit.

174

The legal system, however, was not designed to accommodate such

cases. The court ruled against the plaintiffs on the basis that the statute of

limitations had run.

175

The whole adjudicatory process appears to have been

another tactic of the local state to delay the case and add more costs to the

plaintiffs’ pursuit for justice. In addition, by enticing the plaintiffs in a legal

battle they would certainly lose, the local state could label the plaintiffs’ act

“illegal.” Embedded in local politics, trial courts generally cannot resist the

pressure to cooperate and share the responsibilities of the politicians’ illegal

acts.

176

As discussed earlier, a tax agency’s control is limited to its own

jurisdiction. Therefore, if a taxpayer’s only contact with a tax jurisdiction is

the holding of certain taxable assets, the interaction between the taxpayer

165

Id.

166

Id.

167

Id.

168

Id.

169

Id.

170

Id.

171

Id.

172

173

Id.

174

Id.

175

Id.

176

See, e.g., Qinghua Wang, supra note 9.

86 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

and the tax agency ends when the ownership terminates, as was the case in

Chen v. Xingyang LBT.

177

The taxpayer in that case sold all of his shares in a

cemetery business to another individual.

178

The tax bureau of the district

where the cemetery was located calculated his gains from the sale and levied

heavy income taxes.

179

The plaintiff then filed a lawsuit challenging the

calculation.

180

With all of the shares in the cemetery business sold and the

only contact with the tax agency’s jurisdiction terminated, the plaintiff freed

himself from future agency retaliation and significantly reduced the extra-

judicial costs of litigating the dispute.

Unlike professional whistleblowers who may litigate cases for a trivial

amount of money, but high publicity, most taxpayers sue because large sums

of money are at stake. In the Chen case, the retaliation-proof plaintiff

challenged the assessed tax because it would have imposed a substantial

financial burden on him

181

and he had nothing to lose through agency

retaliation.

C. Substantial Interests at Stake and a Lack of Alternative Channels for

Dispute Resolution

Trial may also occur if the relationship between the complainant and

the defendant tax agency has turned irremediably hostile. Hostility shuts

down all less confrontational channels for resolving a conflict and litigation

will add little extra cost to the complainant in such a situation. Also, if

substantial interests are at stake, such as large sums of money, long-

established reputations, or the survival of businesses, the lawsuit will likely

go to trial, as illustrated in the following case.

In Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB and

Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB for

Administrative Compensation, the plaintiff was a new subsidiary of a

national company in sales.

182

The subsidiary in Zhengzhou had encountered

177

Chen Zhan Shengsu Henan Sheng Xingyang Shi Difang Shuiwu Ju Shuiwu Xingzheng Chufa Yi

An Yishen Xingzheng Panjueshu (陈战胜诉河南省荥阳市地方税务局税务行政处罚一案一审行政判决

书) [Chen v. Xingyang LBT], (Henan Xingyang Court, June 13, 2011) (on file with author).

178

Id.

179

Id.

180

Id.

181

Id.

182

Zhengzhou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu Zhengzhou Shi Zhongyuan Qu

Guojia Shuiwu Ju Yi An (郑州博宇有色金属炉料有限公司与郑州市中原区国家税务局一案)

[Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB], (Henan Zhengzhou Intermediate Court,

July 1, 2009) (on file with author); Zhengzhou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu

Zhengzhou Shi Zhongyuan Qu guojia Shuiwu Ju Xingzheng Peichang Yi An (郑州博宇有色金属炉料有

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 87

numerous tax administrative problems since its establishment.

183

The

plaintiff suspected that the STB local agent erected administrative barriers in

order to assist the company’s local competitor.

184

For instance, the defendant

refused to register the plaintiff as a “general VAT taxpayer” or to properly

issue VAT invoices to the plaintiff.

185

Because of the wide discretion enjoyed by the tax agent, these

administrative barriers were not per se illegal. The dispute that triggered the

lawsuit was the tax agent’s refusal to register the plaintiff as a regular

general VAT taxpayer.

186

Under China’s VAT system, newly-established

companies often undergo a trial period.

187

For up to six months, the taxpayer

conducts its business under the guidance of relevant tax agents.

188

The trial

period ends when the agents consider the taxpayer capable of fulfilling its

VAT-related tax obligations (such as properly distributing VAT invoices).

189

During the trial period, deduction for VAT is subject to delay because of the

heightened scrutiny by the tax agency.

190

In this case, the local tax agent

denied the plaintiff’s application for registration as a regular general VAT

taxpayer, citing its inability to obtain and issue VAT invoices properly.

191

The plaintiff company responded by publishing harsh criticisms of the tax

agents on its company website.

192

The hostility between the two parties

限公司与郑州市中原区国家税务局行政赔偿一案) [Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan

District STB for Administrative Compensation], (Henan Zhengzhou Intermediate Court, July 1, 2009 (on

file with author).

183

Dui Zhongyuanqi Xushuizhen Guoshuiju De Zaici Tousushu (

对中原区须水镇国税局的再次投

诉书

) [Second Petition About Zhongyuan District Xushui Township Stb], ZHENGZHOU BOYU LTD. (May 21,

2008), http://www.myboyu.com/news/%E5%86%8D%E6%AC%A1%E6%8A%95%E8%AF%89%E4%

B9%A6/tabid/1497/Default.aspx.

184

Id.

185

Id.

186

Zhengzhou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu Zhengzhou Shi Zhongyuan Qu

Guojia Shuiwu Ju Yi An (郑州博宇有色金属炉料有限公司与郑州市中原区国家税务局一案)

[Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB], (Henan Zhengzhou Intermediate Court,

July 1, 2009) (on file with author).

187

Guójiā shuìwù zǒngjú guānyú jiāqiáng xīn bàn shāngmào qǐyè zēngzhí shuì zhēngshōu guǎnlǐ

yǒuguān wèntí de jǐnjí tōngzhī (国家税务总局关于加强新办商贸企业增值税征收管理有关问题的紧急

通知)[STB Notice on Issues Regarding VAT Collection and Administration for Newly-Established

Businesses] (repealed in 2010 by Administrative Rules On Vat General Taxpayer During Trial Period),

http://www.jincao.com/fa/17/law17.s132.htm (last visited Oct. 14, 2013).

188

Id. at § 3.

189

Id.

190

Id. at § 4.

191

Zhengzhou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu Zhengzhou Shi Zhongyuan Qu

Guojia Shuiwu Ju Yi An (郑州博宇有色金属炉料有限公司与郑州市中原区国家税务局一案)

[Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB], (Henan Zhengzhou Intermediate Court,

July 1, 2009) (on file with author).

192

Dui Zhongyuanqi Xushuizhen Guoshuiju De Zaici Tousushu, supra note 183.

88 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

almost certainly ruled out the option of non-judicial resolution of their

dispute.

Because the plaintiff filed a lawsuit against the local agent, the court

rejected its application for administrative reconsideration immediately.

193

During trial and appeal, the plaintiff produced evidence, such as audio

recordings of a key witness, to show that it had complied with the relevant

regulations and that the defendant had abused its discretion.

194

The counsel

for the defendant argued that the identity of the recorded person could not be

verified so the audio evidence could not contradict the written testimony of

the witness used by the defendant as evidence of VAT non-compliance.

195

Both the trial court and the appellate court, instead of exercising their

judicial authority and verifying the identity of the key person, readily

accepted the defendant counsel’s technical argument and ruled for the tax

agent.

196

The plaintiff likely consulted its parent company’s corporate counsel

before filing the lawsuits.

197

Given the amount of evidence gathered from

dealings with the defendant agency, the counsel was likely optimistic about

winning the case and perhaps inspired the plaintiff’s persistence in the trial

and subsequent appeal. However, apparently fair evidentiary rules applied

by a selectively passive court produced surprising results.

Similarly, in Hua County Hongri Auto Ltd. v. Hua County LTB

Chengguanzhongxin Tax Office and the derivative lawsuit for administrative

compensation, the relationship between the plaintiff and the defendant tax

agency was broken prior to the filing of the lawsuits.

198

The plaintiff in these

lawsuits registered with the local tax office in early 2007

199

but paid no taxes

193

Zhengzhou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu Zhengzhou Shi Zhongyuan Qu

Guojia Shuiwu Ju Yi An (郑州博宇有色金属炉料有限公司与郑州市中原区国家税务局一案)

[Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB], (Henan Zhengzhou Intermediate Court,

July 1, 2009) (on file with author).

194

Id.

195

Id.

196

Id.

197

Dui Zhongyuanqi Xushuizhen Guoshuiju De Zaici Tousushu, supra note 183.

198

See Huá xiàn hóng rì chē yè yǒuxiàn gōngsī su huá xiàn dìfāng shuìwù jú chéngguān zhōngxīn

shuìwù suǒ shuìwù xíngzhèng zhēngshōu yī àn èrshěn xíngzhèng pànjuéshū (滑县红日车业有限公司诉滑

县地方税务局城关中心税务所税务行政征收一案二审行政判决书) [Hua County Hongri Auto Ltd. v.

Hua County Ltb Chengguanzhongxin Tax Office Re Administrative Taking], (Anyang Intermediate Court)

(on file with author); Shàngsù rén huá xiàn hóng rì chē yè yǒuxiàn gōngsī yīn yāoqiú huá xiàn dìfāng

shuìwù jú chéngguān zhōngxīn shuìwù suǒ xíngzhèng péicháng yī àn èrshěn xíngzhèng pànjuéshū (上诉人

滑县红日车业有限公司因要求滑县地方税务局城关中心税务所行政赔偿一案二审行政判决书

) [Hua

County Hongri Auto Ltd. v. Hua County Ltb Chengguanzhongxin Tax Office Re Administrative

Compensation] (on file with author).

199

See Huá xiàn hóng rì chē yè yǒuxiàn gōngsī su huá xiàn dìfāng shuìwù jú chéngguān zhōngxīn

shuìwù suǒ shuìwù xíngzhèng zhēngshōu yī àn èrshěn xíngzhèng pànjuéshū (滑县红日车业有限公司诉滑

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 89

until May 2008 when the tax office issued a deficiency letter.

200

After the

plaintiff failed to respond,

201

its legal representative was arrested under the

charge of criminal tax evasion. He pled guilty and was sentenced to six

months in jail with one year suspension and a fine of RMB 20,000

(approximately USD 3,000).

202

The plaintiff was also ordered to pay back

taxes and tax penalty in the amount of more than RMB 20,000 .

203

The

criminal prosecution most likely closed the door for negotiation and

settlement. Moreover, having suffered the criminal punishment, the plaintiff

likely feared no further retaliation by local tax officials. With much at stake,

the plaintiff filed administrative lawsuits against the tax agency.

204

After the

trial court unsurprisingly dismissed the claims,

205

the plaintiff appealed.

206

Upon appeal, the plaintiff’s lawyer pointed out several major errors

committed by the trial court, which included: 1) the court’s disregard for the

company’s status as a newly established company (meaning the enterprise

income tax should not have been imposed),

207

2) the lack of a legal basis for

levying real estate tax and land use tax (the evidence was collected during

the criminal prosecution and after the administrative penalties had been

levied),

208

and 3) the agency’s failure to follow relevant legal procedures in

providing most of the legal documents to the plaintiff, directly causing her

failure to timely appeal the penalties and advance relevant legal claims.

209

The plaintiff asked the appellate court to reverse the trial court’s ruling and

to order compensation for her losses due to the defendant’s illegal actions.

210

The appellate court agreed with the trial court, even though the tax

agency failed to provide sufficient evidence of its compliance with legal

procedures.

211

The court emphasized that the criminal charges, unchallenged

by the plaintiff, clearly established the validity of the tax penalties.

212

县地方税务局城关中心税务所税务行政征收一案二审行政判决书) [Hua County Hongri Auto Ltd. v.

Hua County Ltb Chengguanzhongxin Tax Office Re Administrative Taking], (Anyang Intermediate Court)

(on file with author).

200

Id.

201

Id.

202

Id.

203

Id.

204

Id.

205

Id.

206

Id.

207

Id.

208

Id.

209

Id.

210

Id.

211

Id.

212

Id.

90 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

Another case sharing similar features is Xin'an Huafeng Corp. v.

Henan Xin'an STB for Administrative Compensation, where the plaintiff

sued local STB agents after its application for administrative compensation

was rejected.

213

The application claimed that the tax agents forged

documents causing the applicant and his company to be criminally

prosecuted for tax evasion.

214

The plaintiff used to have close business

relationships with the local government and had previously extended trade

credits to two companies owned by the government.

215

By 1999, the two

county-owned companies owed the plaintiff back payments totaling more

than RMB 1.3 million.

216

When the debtors refused to pay back the loans,

the plaintiff took them to court.

217

While the civil case was being litigated

and the court put a lien on the debtors’ assets, the plaintiff was arrested by

Xin’an County police and prosecuted for tax evasion and fraud.

218

The

county court found him guilty of both crimes and sentenced him to prison

for six years, plus a fine of RMB 200,000.

219

On appeal, the intermediate court sent the case back for retrial by the

county court, which again found the plaintiff guilty of tax evasion, but

dismissed the fraud charge.

220

The plaintiff was sentenced to three years in

prison, with a three-year reprieve.

221

By the time the plaintiff was released

on bail, he had spent seventeen months in jail.

222

The plaintiff then appealed

the county court decision to the intermediate court, which affirmed the

decision.

223

The tax evasion case was publicized that year as one of eight

major cases in Henan Province.

224

The salience of the case and the

213

Xin'an Huafeng Corp. V. Henan Xin'an STB for Administrative Compensation (新安华峰中油销

售公司诉河南省新安县国家税务局行政赔偿纠纷一案一审行政裁定书), (Henan Laocheng District

Court) (on file with author).

214

See Xīn'ān huá fēng zhōngyóu xiāoshòu gōngsī su hénán shěng xīn'ān xiàn guójiā shuìwù jú

xíngzhèng péicháng jiūfēn yī àn yīshěn xíngzhèng cáidìng shū (新安华峰中油销售公司诉河南省新安县

国家税务局行政赔偿纠纷一案一审行政裁定书) [Xin'an Huafeng Corp. v. Henan Xin'an STB for

Administrative Compensation], (Henan Laocheng District Court) (on file with author).

215

See Henan Laoban Xiang Zhengfu Qiye Cuikuang Hou Bei Panxing, Baniang Hou Huo Qingbai

[Henan Businessman Sentenced after Demanding Debt Payment from SOE, Acquital After Eight Years],

AOHE BAO (Oct. 13, 2010), http://news.xinhuanet.com/legal/2010-10/13/c_12653610.htm.

216

Id.

217

Id.

218

Id.

219

Id.

220

Id.

221

Id.

222

Id.

223

Id.

224

STATE ADMINISTRATION OF TAXATION, DAIHE BAO,TOUTAO KENGPIAN GUOJIA SHUISHOU

1357.82 WANYUAN, BAQIYE HEIBANG YOUMING (偷逃坑骗国家税收 1357.82 万元 8 企业“黑榜”有名],”

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 91

endorsement by different levels of the local government made it difficult to

reverse the judgment.

As noted earlier, the Chinese judicial system allows for the reopening

or retrial of a case that has been decided by an appellate court. The lack of

finality to the judicial process partially explains why some litigants persist

on going to trial even though they fully expect to lose. With a possibility of

favorable results at higher levels, taxpayers may litigate if the stakes

involved are high enough. In the case described above, the plaintiff

followed this path and petitioned the appellate court for a review of its own

decision.

225

When the petition was rejected, he brought the complaint all the

way to the provincial high court.

226

The high court accepted it in 2005, but

waited until 2010 to render a ruling favorable to the plaintiff.

227

The dramatic prosecution and subsequent quest for justice exhausted

the plaintiff’s wealth, insulating him for future costs of agency retaliation.

Also, the prosecution by the county government inevitably resulted in deep

hostility between the parties, closing all other channels for resolving their

conflicts. Moreover, lengthy legal battles usually educate plaintiffs about

how to navigate the judicial system, making them more inclined to sue.

228

With substantial interests at stake, the plaintiff filed lawsuits against a

number of powerful local government agencies soon after the provincial

high court reversed the lower decision.

229

Litigation may also be the only option if the taxpayer is implicated in

major corruption cases, as illustrated by Zhumadian Yatai Shiye Ltd. v.

Zhumadian LTB Inspection Bureau and related cases.

230

All of the tax

大河报) [TAX EVASION OF 13.5782 MILLION YUAN, EIGHT COMPANIES ON BLACKLIST] (May 17, 2004),

http://www.chinatax.gov.cn/n8136506/n8136608/n9948163/10023706.html.

224

Henan Laoban Xiang Zhengfu Qiye Cuikuang Hou Bei Panxing, Baniang Hou Huo Qingbai,

[Henan Businessman Sentenced after Demanding Debt Payment from SOE, Acquital After Eight Years],

AOHE BAO (Oct. 13, 2010), http://news.xinhuanet.com/legal/2010-10/13/c_12653610.htm.

225

Henan Laoban Xiang Zhengfu Qiye Cuikuang Hou Bei Panxing, Baniang Hou Huo Qingbai,

[Henan Businessman Sentenced after Demanding Debt Payment from SOE, Acquital After Eight Years],

Daohe Bao (Oct. 13, 2010), http://news.xinhuanet.com/legal/2010-10/13/c_12653610.htm.

226

Id.

227

Id.

228

See Mary E. Gallagher, Mobilizing the Law in China: “Informed Disenchantment” and the

Development of Legal Consciousness, 40 L

AW & SOC'Y REV. 783, 802-05 (2006).

229

See, e.g., Yuángào lúshūmín, lúzhànfēng, zhānghuìlíng, mèng dōngjiāng yīn yǔ bèigào xīn'ān xiàn

chǎnyè jíjù qū guǎnlǐ wěiyuánhuì xíngzhèng péicháng yī àn de xíngzhèng yīshěn cáidìng, (2011) luò xíng

chū zì dì 6 hào (原告卢书民、卢占峰、张会玲、孟东江因与被告新安县产业集聚区管理委员会行政

赔偿一案的行政一审裁定, （2011）洛行初字第 6 号) [Lu et al v. Xin’an County Industrial District

Administration Committee re Administrative Compensation] (2011) (on file with author).

230

See Yuángào zhùmǎdiàn shì jīnfǎ jīngjì màoyì yǒuxiàn gōngsī bèigào hénán shěng zhùmǎdiàn shì

dìfāng shuìwù jú jīchá jú xíngzhèng chǔfá yī àn (原告驻马店市金发经济贸易有限公司被告河南省驻马

92 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

disputes behind these administrative lawsuits can be traced back to a series

of bribery prosecutions, and the companies suspected of playing a

facilitating role were investigated by several government agencies, including

the LTB inspection bureau.

231

After the investigation, the tax agency levied

heavy fines.

232

For instance, the LTB fined Yatai Shiye Ltd. about RMB 85

million and Jinfa Ltd. about RMB 20 million.

233

Several companies’ assets

were insufficient to pay the penalties, so the inspection bureau went after

their shareholders in an attempt to pierce the corporate veil.

234

The penalties were too heavy for the investigated companies to fully

comply with, especially after huge sums had been transferred to a third

party.

235

Because other channels for dispute resolution had been closed, the

companies seemingly had no choice but to file administrative lawsuits

challenging the penalties. Moreover, because they had lost all of their

assets, the plaintiffs were immune to further retaliation. The initial set of

trial court decisions contain simple dismissals of the complaints, with the

店市地方税务局稽查局行政处罚一案) [Zhumadian Jinfa Jingji Maoyi Ltd. v. Henan Zhumadian LTB

Inspection Bureau], (Henan Zhumadian City Yicheng District Court) (on file with author) [hereinafter

Zhumadian Jinfa v. Henan Zhumadian]; Yuángào zhùmǎdiàn shì yà tài shíyè yǒuxiàn gōngsī bèigào hénán

shěng zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú xíngzhèng chǔfá yī àn (原告驻马店市亚泰实业有限公司

被告河南省驻马店市地方税务局稽查局行政处罚一案) [Zhumadian Yatai Shiye Ltd. v. Henan

Zhumadian LTB Inspection Bureau], (Henan Zhumadian City Yicheng District Court) (on file with author)

[hereinafter Zhumadian Yatai v. Henan Zhumadian]; Yuángào zhùmǎdiàn shì gāoxīn qū jīnmíng shāngmào

yǒuxiàn gōngsī bèigào hénán shěng zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú xíngzhèng chǔfá yī àn (原告

驻马店市高新区金明商贸有限公司被告河南省驻马店市地方税务局稽查局行政处罚一案)

[Zhumadian Gaoxin District Jinming Shangmao Ltd. v. Henan Zhumadian LTB Inpsection Bureau],

(Henan Zhumadian City Yicheng District Court) (on file with author) [hereinafter Zhumadian Gaoxin v.

Henan Zhumadian].

231

See Hénán shěng zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú shēnqǐng zhíxíng bèi zhíxíng rén

zhùmǎdiàn shì yà tài shíyè yǒuxiàn gōngsī, bèi zhíxíng rén zhùmǎdiàn shì jīnfǎ màoyì fāzhǎn yǒuxiàn

gōngsī zhíxíng yìyì cáidìng shū (河南省驻马店市地方税务局稽查局申请执行被执行人驻马店市亚泰实

业有限公司、被执行人驻马店市金发贸易发展有限公司执行异议裁定书) [Henan Zhumadian LTB

Inspection Bureau Motion for Execution Re Zhumadian Yatai Shiye Ltd. & Zhumadian Jinfa Maoyi

Fazhan Ltd.], (Henan Zhumadian Intermediate Court) (on file with author).

232

Id.

233

Id.

234

Zhōu nóngchǎng děng yǔ zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú lànyòng gōngsī fǎrén dúlì dìwèi

hé gǔdōng yǒuxiàn zérèn péicháng jiūfēn yī àn (周农场等与驻马店市地方税务局稽查局滥用公司法人

独立地位和股东有限责任赔偿纠纷一案）[Zhou Nongchang and Others v. Zhumadian LTB], (Henan

High Court) (on file with author).

235

See Hénán shěng zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú shēnqǐng zhíxíng bèi zhíxíng rén

zhùmǎdiàn shì yà tài shíyè yǒuxiàn gōngsī, bèi zhíxíng rén zhùmǎdiàn shì jīnfǎ màoyì fāzhǎn yǒuxiàn

gōngsī zhíxíng yìyì cáidìng shū (河南省驻马店市地方税务局稽查局申请执行被执行人驻马店市亚泰实

业有限公司、被执行人驻马店市金发贸易发展有限公司执行异议裁定书) [Henan Zhumadian LTB

Inspection Bureau Motion for Execution Re Zhumadian Yatai Shiye Ltd. & Zhumadian Jinfa Maoyi

Fazhan Ltd.], (Henan Zhumadian Intermediate Court) (on file with author).

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 93

court briefly noting that the statute of limitations had run and the plaintiffs

failed to show cause.

236

The plaintiffs appealed the trial court decisions, which were reversed

by the appellate court and sent back for retrial.

237

The trial court again ruled

in favor of the tax agency but this time on technical grounds.

238

The legal

representatives of the plaintiff companies were fugitives wanted by the local

police.

239

Unable to appear in court, they engaged a lawyer from Beijing,

who was granted the power of attorney to litigate the cases against the local

LTB.

240

During the retrial, the defendant argued that the lawyer could not

prove that the seal and signatures on the engagement letters were authentic,

taking advantage of the fact that the clients could not appear in court to

testify.

241

The lawyer made the reasonable rebuttal that the defendant should

bear the burden to prove that the prima facie valid seal and signatures were

forged.

242

The court, however, sided with the tax agency and dismissed the

cases.

243

The appellate court, apparently reluctant to step into a battle

between the fugitives and the powerful local tax agency, upheld the trial

court decisions this time.

244

Xinxiang Yungongmao Ltd. v. Weihui City LTB

245

is further proof that

litigation is the only available channel for dispute resolution when business

relations with the government fail. In this case, the plaintiff challenged an

enormous deficiency assessed by the city LTB.

246

The plaintiff’s company

236

Yuángào zhùmǎdiàn shì gāoxīn qū jīnmíng shāngmào yǒuxiàn gōngsī bèigào hénán shěng

zhùmǎdiàn shì dìfāng shuìwù jú jīchá jú xíngzhèng chǔfá yī àn (原告驻马店市高新区金明商贸有限公司

被告河南省驻马店市地方税务局稽查局行政处罚一案) [Zhumadian Gaoxin District Jinming Shangmao

Ltd. v. Henan Zhumadian LTB Inpsection Bureau], (Henan Zhumadian City Yicheng District Court) (on

file with author).

237

See Zhumadian Yatai Shiye Ltd. for Administrative Punishment (驻马店市亚泰实业有限公司税

务行政处罚一案二审行政裁定书 ), (Henan Zhumadian Intermediate Court) (on file with author);

Zhumadian Gaoxin District Jinming Shangmao Ltd. for Administrative Punishment (驻马店市高新区金明

商贸有限公司税务行政处罚一案二审行政裁定书), (Henan Zhumadian Intermediate Court) (on file with

author); Zhumadian Jinfa Jingji Maoyi Ltd. for Administrative Punishment (驻马店市金发经济贸易有限

公司税务行政处罚一案二审行政裁定书), (Henan Zhumadian Intermediate Court) (on file with author).

238

Id.

239

Id.

240

Id.

241

Id.

242

Id.

243

Id.

244

Id.

245

Xinxiang Yungongmao Ltd. v. Weihui City LTB Re (2009) 005 and (2010) 005 Punishment (新乡

市运工贸有限公司不服被告卫辉市地方税务局卫地税罚（2009）005 号《税务行政处罚决定书》和

卫地税罚（2010）005 号《税务行政处罚决定书》一审行政判决书), (Henan Weihui City Court) (on

file with author).

246

Id.

94 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

had at one point enjoyed close business ties with the local government.

247

The two parties agreed to set up a joint venture, but the local government

failed to invest the prior stipulated amount of capital.

248

Instead of letting

the joint venture dissolve, the local government granted the company tax

deductions as replacement for the capital investment.

249

It also ordered other

government agencies to allow the joint venture to pass annual examination

and registration, despite insufficient equity.

250

At a certain point, the

cooperative state-business relationship must have broken down because in

2004, the tax bureau issued the plaintiff a penalty for tax deficiency, which

the plaintiff paid in full.

251

In 2009, the LTB again audited the company’s

accounts from 1995 to 2009, issued a deficiency notice with penalty, and

broadcasted it on local television.

252

The accumulated hostility, the publicity

of the tax controversy, and the substantial stakes for both parties made

litigation the preferred option to resolve this dispute.

Following an administrative reconsideration decision in favor of the

tax agency, the plaintiff filed the lawsuit and raised numerous legal issues,

both procedural and substantive.

253

The plaintiff claimed that the “Notice of

Tax Deficiency and Penalty” was issued twice and delivered ineffectively to

one of the plaintiff’s lawyers, who lacked the requisite special power of

attorney.

254

The plaintiff also presented evidence that its tax registration had

been revoked so that the defendant was partially responsible for the

plaintiff’s noncompliance and that some of the taxes were erroneously

assessed.

255

The court regarded these procedural and evidentiary issues as minor

flaws that were not critical to the court’s decision.

256

Upon appeal, the

plaintiff made a similar technical argument about the illegality of the

247

Id.

248

Id.

249

Id.

250

Id.

251

Id.

252

See Zhōnghuá Rénmín Gònghéguó Shuìshōu Zhēngshōu Guǎnlǐ Fǎ (中华人民共和国税收

征收管理法) [Tax Collection Management Law] (promulgated by the Ninth National People’s

Congress, April 28, 2001, effective May 1, 2001), ch. 1, art. 1-2, http://www.gov.cn/banshi/2005-

08/31/content_146791.htm.

253

Xinxiang Shi Yun Gong Mao Youxian Gongsi Bufu Beigao Wei Hui Shi Difang Shuiwu Ju Wei

Dishui Fa (2009) 005 Bao “Shuiwu Xingzheng Chufa Juedìng Shu” He Wei Dishui Fa (2010) 005 Hao

“Shuiwu Xingzheng Chufa Jueding Shu” Yishen Xingzheng Panjueshu, (新乡市运工贸有限公司不服被

告卫辉市地方税务局卫地税罚（2009）005 号《税务行政处罚决定书》和卫地税罚（2010）005 号

《税务行政处罚决定书》一审行政判决书) [Xinxiang Yungongmao Ltd. v. Weihui City LTB Re (2009)

005 and (2010) 005 Punishment], (Henan Weihui City Ct.) (on file with author).

254

Id.

255

Id.

256

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 95

“Notice of Tax Deficiency and Penalty,” but the appellate court affirmed

without engaging in any detailed legal discussion of these technicalities.

257

Zhoukou Huilin Zhiye Ltd. v. Zhoukou City LTB is another case where

a damaged business-government relationship resulted in administrative

litigation.

258

The plaintiff, a real estate developer, held close personal

relationships with former leaders of Zhoukou City.

259

The plaintiff worked

on an infrastructure project in Zhoukou to which the municipal government

promised capital investment.

260

However, instead of capital investment, the

government decided to grant the plaintiff substantial tax benefits to cover the

cost of the project due to a fiscal shortage.

261

Yet before the project was

completed, the developer’s political allies left local politics due to job

changes and criminal prosecutions for corruption.

262

After the project was

completed, the plaintiff negotiated with the local LTB about the promised

tax benefits, but the negotiation went slowly.

263

The loss of political

protection likely explains the delay by the LTB in approving the tax benefits

promised by the former local leaders. The plaintiff then engaged in self-help

and reported zero revenue gain to the LTB for year 2008.

264

The LTB

responded immediately by assessing a tax deficiency and imposing heavy

257

Xinxiang Shi Yun Gong Mao Youxian Gongsi Su Wei Hui Shi Difang Shuiwu Ju Shuiwu

Chuli Jueding Yi An Ershen Xingzheng Panjueshu, (新乡市运工贸有限公司诉卫辉市地方税务局

税务处理决定一案二审行政判决书) [Xinxiang Yungongmao Ltd. v. Weihui City Ltb], (Xinxiang

City Interm. Ct.) (on file with author).

258

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian

Si Yue Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi

Bu Yu Shouli Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月

三十日作出的周地税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou

Huilin Zhiye Ltd. v. Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author).

259

Hong Xin,

河南一开发商

“

非典型逃税

”

领

亿元天价罚单

[A Henan Developer's

"Extraordinary Tax Evasion" Penalty of 400 Million Yuan], 法制日报 [L

EGAL DAILY] (Feb. 11 2010),

http://unn.people.com.cn/GB/14775/21684/10972241.html.

260

Id.

261

The method may also reflect the government’s intention to bypass the public bidding procedure

required for usual public projects.

262

Zhanghaiqin Fan Shouhuì Zui, Jue Caichan Laiyuan Buming Zui Yi An, (张海钦犯受贿罪、巨额

财产来源不明罪一案) [Zhang Haiqin for Corruption], (Henan High Ct.) (on file with author) (plaintiff’s

legal representative was also suspected for bribery). See generally,

河南省十届人大代表范学林涉嫌行贿

将逮捕

[Tenth National People’s Congress of Henan Province will arrest Fanxue Lin for alleged Bribery],

ENAN PEOPLE (Sep. 28, 2007, 7:53 AM), http://henan.people.com.cn/news/2007/09/28/223934.html.

263

Hong Xin, 河南一开发商 “ 非典型逃税” 领 4 亿元天价罚单[A Henan Developer's

"Extraordinary Tax Evasion" Penalty of 400 Million Yuan], 法制日报 [L

EGAL DAILY] (Feb. 11, 2010),

http://unn.people.com.cn/GB/14775/21684/10972241.html.

264

Id.

96 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

penalties that exceeded RMB 400 million (USD 63 million).

265

The owner

of the company was arrested and charged with criminal tax evasion.

266

The plaintiff then filed a petition for administrative reconsideration.

267

The petition was rejected on the alleged basis that the plaintiff failed to pay

the deficiency, which under current law is a precondition for administrative

reconsideration of tax-related issues.

268

The plaintiff then sued the

reconsideration body for the LTB.

269

The plaintiff produced the minutes of

the municipal government meeting, which noted in writing that the costs

incurred in the project should be covered by tax deductions.

270

The plaintiff

argued that its investment should therefore be equivalent to the assessed

deficiency and sufficient to satisfy the payment requirement for

administrative reconsideration.

271

The court found that the minutes did not

constitute a valid legal basis for tax deduction.

272

Given the political

complexity of the case and the amount at stake, the court must have been

reluctant to involve itself in the dispute and readily upheld the decision of

the administrative reconsideration body, leaving the plaintiff without legal

recourse.

Given the high stakes and lack of alternative resolution channels due

to the change in local leadership, the plaintiff sued the LTB and several other

powerful local government agencies.

273

As noted earlier, though the

265

Id.

266

Id.

267

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian

Si Yue Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi

Bu Yu Shouli Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月

三十日作出的周地税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou

Huilin Zhiye Ltd. v. Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author).

268

Shuìwù xíngzhèng fùyì guīzé ( 税务行政复议规则) [Tax Rules for Administrative

Reconsideration] (promulgated by the State Administration of Tax Bureau, Dec. 15, 2009, effective

April 1, 2010), http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/9563669.html.

269

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian Si Yue

Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi Bu Yu Shouli

Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月三十日作出的周地

税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou Huilin Zhiye Ltd. v.

Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author).

270

Id.

271

Id.

272

Id.

273

Zhoukou Hui Lin Zhiye Youxian Gongsi Yu Zhoukou Shi Guotu Ziyuan Ju Zuochu De Zhou Tu

Fa Jue Zi (2009) 5 Hao Xingzheng Chufa Jueding Yi An, (周口汇林置业有限公司与周口市国土资源局

作出的周土罚决字（2009）5 号行政处罚决定一案) [Zhoukou Huilin Zhiye Ltd. v. Zhoukou Bureau of

State Land Administration], (Zhoukou City Chuanhui Dist. Ct.) (on file with author); Zhoukou Hui Lin

Zhiye Youxian Gongsi Yu Zhoukou Shi Renmin Zhengfu Zhouzhengtu (2009) 132 Hao Xingzheng

Jueding Yi An, (周口汇林置业有限公司与周口市人民政府周政土（2009）132 号行政决定一案)

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 97

probability of prevailing in the trial court was minimal, the plaintiff might

have held some hope for the intervention from the appellate and provincial

high courts.

274

The plaintiff’s case, however, rests on a very narrow legal

basis. The promise of tax benefits recorded in the meeting minutes

contradicts the Law on Tax Administration,

275

limiting the chance of reversal

by a higher court.

The wealthy developer in this case had accumulated significant

political capital before the onset of the confrontations with the LTB and

other government agencies.

276

The close ties between the developer and the

previous local leaders, which contributed to his early business success,

turned against him when he lost political support and had to rely on the

judiciary for protection. Had there been more transparency in his interaction

with the local government and stronger legal basis for his claim, the result

might have been different, as illustrated by the following case.

In Liu & Yang v. Guangshan County Finance Department and its

retrial, the plaintiffs were also in the real estate business.

277

In July 2008, the

plaintiffs won a public auction to develop commercial real estate on a lot in

Guangshan County.

278

In September 2009, the county department of finance

levied a tax of RMB 355,110 (USD 56,000) over the two plaintiffs for

occupation and use of arable land.

279

The plaintiffs contended that the tax

was levied erroneously because they purchased the land-use right from the

county government, which had already converted the land from agricultural

use to commercial and construction use. Plaintiffs also claimed that the

Provisional Rules re Taxes for Occupation and Use of Agricultural Land and

its implementation rules jointly issued by the State Council and the STB

stipulated that the county government, as the party responsible for the

[Zhoukou Huilin Zhiye Ltd. v. Zhoukou Municipal Government], (Zhoukou City Chuanhui Dist. Ct.) (on

file with author).

274

See Hong Xin, supra note 263. The provincial high court accepted the plaintiff’s petition for

review, but has not responded.

275

See Zhōnghuá rénmín gònghéguó shuìshōu zhēngshōu guǎnlǐ fǎ (中华人民共和国税收征收管理

法) [Tax Collection Management Law] (promulgated by the Ninth National People’s Congress, April 28,

2001, effective May 1, 2001), http://www.gov.cn/banshi/2005-08/31/content_146791.htm.

276

Hénán shěng shí jiè réndà dàibiǎo fànxuélín shèxián xínghuì jiāng dàibǔ (

河南省十届人大代表

范学林涉嫌行贿

将逮捕

) [Henan Provincial People’s Congress Deputy to be Arrested for Bribery],

ENAN PEOPLE (Sept. 28, 2007), http://henan.people.com.cn/news/2007/09/28/223934.html.

277

Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng Ju

Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务征

收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial], (Henan Guangshan

County Ct. 2010) (on file with author).

278

Id.

279

The tax is still collected by the finance department in some localities.

98 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

conversion, should pay the tax.

280

Citing the STB Notice Regarding Certain

Issues in the Collection of Land Occupation Tax, a normative document, the

defendant county finance department argued that the party in actual use of

the arable land should be liable for the tax.

281

The trial court ignored the

conflict between the applicable law and the STB normative document (the

judge actually determined that the two were consistent) and ruled against the

plaintiffs.

282

Instead of appealing the trial court decision, however, the plaintiffs

applied for the procuratorate to lodge a protest, contending that the trial

court relied on dubious evidence and applied the law erroneously.

283

The

appellate court agreed with the procuratorate and sent the case back to the

county court for retrial.

284

A different panel of trial judges acknowledged its

mistake and ruled in favor of the plaintiffs.

285

This case contrasts with Zhoukou Huilin Zhiye Ltd. v. Zhoukou City

LTB.

286

In Liu & Yang, the plaintiffs won a bid at a public auction to

develop a lot whereas in Zhoukou Huilin the plaintiff was designated by a

local leader to invest in the infrastructural project.

287

The local governments

levied heavy taxes on plaintiffs in both cases,

288

but the plaintiffs in Liu &

280

See Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng

Ju Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务

征收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial], (Henan Guangshan

County Ct. 2010) (on file with author).

281

Id.

282

Id.

283

Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng Ju

Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务征

收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial], (Henan Guangshan

County Ct. 2010) (on file with author).

284

Id.

285

Id.

286

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian Si Yue

Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi Bu Yu Shouli

Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月三十日作出的周地

税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou Huilin Zhiye Ltd. v.

Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author).

287

See Hong Xin, supra note 263.

288

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian Si Yue

Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi Bu Yu Shouli

Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月三十日作出的周地

税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou Huilin Zhiye Ltd. v.

Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author); Yuanshen Yuangao

Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng Ju Shuiwu Zhengshou Xingzheng

Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务征收行政纠纷一案) [Liu & Yang

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 99

Yang faced less serious charges than the plaintiffs in Zhoukou Huilin.

289

Though it is unrealistic to completely rule out corruption in the public

auction, it would certainly take more for the local state to challenge the

legality of the auction procedure than the private deal in Zhoukou Huilin.

When disputes with the local governments involving substantial

stakes arose, the plaintiffs in Liu & Yang were able to rely on formal law for

remedy whereas the plaintiff in Zhoukou Huilin found formal law against its

interests.

290

Though in both cases the local courts ruled in favor of the

defendant local government agencies, the plaintiffs in the former solicited

the assistance of both the procuratorate and the appellate court.

291

Zhoukou Huilin, however, the plaintiff’s prospect of success was more

uncertain because higher courts, if reviewing the trial decision strictly in

accordance with the law, would be unlikely to reverse the decision.

D. Powerful Allies in the Political System

As demonstrated by the reversal of trial court decision in Liu & Yang,

the state is not monolithic. Power tends to be more fragmented at the

municipal and provincial level, where the government structure is complex

and extensive, and agencies have narrow and specialized jurisdictions. It is

therefore possible for taxpayers to maintain good relationships with certain

power holders and at the same time be antagonistic towards the tax agencies.

Though Chinese courts exhibit systemic bias in favor of companies with

political connections,

292

that bias is less serious when both disputants are

v. Guangshan County Finance Department-Retrial], (Henan Guangshan County Ct. 2010) (on file with

author).

289

Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng Ju

Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务征

收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial], (Henan Guangshan

County Ct. 2010) (on file with author).

290

Zhoukou Hui Lin Zhiye Youxian Gongsi Bufu Zhoukou Shi Difang Shuiwu Ju Er Jiu Nian Si Yue

Sanshi Ri Zuochu De Zhou Dishui Fu Bu Shou Zì (2009) Di 1 Bao Shuiwu Xingzheng Fuyi Bu Yu Shouli

Jueding Shu Yi An, (周口汇林置业有限公司不服周口市地方税务局二○○九年四月三十日作出的周地

税复不受字（2009）第 1 号税务行政复议不予受理决定书一案) [Zhoukou Huilin Zhiye Ltd. v.

Zhoukou City LTB], (Zhoukou City Chuanhui Dist. Ct.) (on file with author).

291

Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian

Caizheng Ju Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山

县财政局税务征收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial],

(Henan Guangshan County Ct. 2010) (on file with author).

292

Michael Firth, et al., The Effects of Political Connections and State Ownership on Corporate

Litigation in China, 54 J.

OF LAW AND ECON. 573 (2011).

100 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

powerful or have powerful allies.

293

Fearing to offend either party, judges

will carefully address issues raised by both, as illustrated in both the Liu &

Yang retrial and the following case, Shanghai Dazhong Auto Nanyang Sales

and Service Ltd. v. Nanyang STB.

1. Politically-Connected Individuals Use the Law to Protect and Extend

Their Interests

In Shanghai Dazhong Auto Nanyang Service Ltd. v. Jiang Sujian,

294

the plaintiff company had a history of contested ownership. Originally

owned and managed by the regional military division, the company went

through a management buyout in 2003 to implement a state policy.

295

Jiang,

the officer who had managed the company before the sale, purchased a

majority of the offered shares with a loan of RMB 3.7 million from Wang.

296

The loan agreement stipulated that Jiang would transfer 80% of the

purchased shares to Wang, but continue to serve as board director for three

years after the buyout.

297

Disputes arose when Jiang refused to transfer the shares to Wang.

Instead of suing Jiang for breach of contract, Wang presented the loan

agreement to the local bureau of industry and commerce, which allowed him

to change the corporate ownership structure and to appoint himself board

director.

298

Though his approval was legally required, Jiang did not know of

these changes until he lost control of the company.

299

In December 2004,

Jiang filed an administrative lawsuit against the local bureau of industry and

commerce, seeking revocation of the new business license and restoration of

the previous one.

300

The trial court ruled in favor of Jiang.

301

Both the

defendant and Wang appealed the decision to the provincial high court,

which reversed the trial court decision.

302

As noted earlier, an appellate

293

Ji Li, When Are There More Laws? When Do They Matter? Using Game Theory to Compare Laws,

Power Distribution, and Legal Environments in the United States and China, 16 P

AC. RIM L. & POL'Y J.

335, 347 (2007).

294

Shanghai Dazhong Qiche Nanyang Xiaoshou Fuwu Youxian Gongsi, Jiangshujian Yin

Qinquan Jiufen Yi An Ershen Minshi Caiding Shu, (上海大众汽车南阳销售服务有限公司、姜书建

因侵权纠纷一案二审民事裁定书) [Shanghai Dazhong Auto Nanyang Service Ltd. v. Jiang Sujian],

(Nanyang Interm. Ct.) (on file with author).

295

Id.

296

Id.

297

Id.

298

Id.

299

Id.

300

Id.

301

Id.

302

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 101

decision, though final in theory, may be further challenged through a petition

for a retrial.

303

Jiang filed such a petition, and the high court reviewed and

reversed its own earlier judgment.

304

Armed with the favorable high court judgment, Jiang went to the local

Bureau of Industry and Commerce to negotiate the restoration of the original

business license for Nanyang Auto.

305

Wang, informed of Jiang’s

whereabouts, sent a group of people to harass him.

306

Jiang was beaten in

the government building, for which Wang was arrested and jailed for seven

days.

307

Unsatisfied with the “harsh” punishment, Wang filed an

administrative lawsuit against the local police.

308

The trial court found

sufficient evidence to uphold the police’s administrative action.

309

Wang

then appealed and the appellate court affirmed.

310

2. Fearing Both Parties, the Court in Nanyang Auto Conducted a

Careful, Balanced Analysis

Having participated in numerous civil and administrative lawsuits at

all levels of the provincial judiciary, Wang understood how the Chinese legal

system operated in practice.

311

He also had allies in the local state,

evidenced by the assistance he received from the Bureau of Industry and

Commerce and the nominal punishment he received for organizing an

assault on Jiang in a government building.

312

Well-connected individuals

303

See Zhōnghuá rénmín gònghéguó xíngzhèng sùsòng fǎ (中华人民共和国行政诉讼法 )

[Administrative Procedure Law] (promulgated by the Seventh National people’s Congress, April 4, 1989,

effective Oct. 1, 1990), art. 62.

304

Qian Wu & Ning Wang, Nanyang Admininistrative Suit Settled after Five Years, Nanyang Bic

Lost (

南阳民告官案

年之后尘埃落定

南阳工商局败诉

), HENAN LEGAL REP. (河南法制报) (Dec. 25,

2009) , http://news.shangdu.com/101/2009/12/25/2009-12-25_300054_101.shtml.

305

Shanghai Dazhong Auto Nanyang Service Ltd. v. Jiang Sujian (上海大众汽车南阳销售服务有限

公司、姜书建因侵权纠纷一案二审民事裁定书), (Nanyang Intermediate Court) (on file with author).

306

Wang Guihua v. Nanyang Public Security Bureau Wancheng Branch (王贵华诉南阳市公安局宛

城分局不服行政处罚一案一审行政判决书), (Nanyang City Wancheng District Court) (on file with

author).

307

Id.

308

Id.

309

Id.

310

Wang Gui Huawei Zhian Xingzheng Chufa I An Ershen Xingzheng Panjueshu (王贵华为治安行

政处罚一案二审行政判决书), [Wang Guihua Security Administrative Punishment for the Case of Second

Instance Administrative Judgments], (Henan Nanyang Intermediate Ct. 2010) (on file with author).

311

See Gallagher, supra note 228, for a general empirical discussion of the effect of personal

experience of litigation on the inclination to sue.

312

See Shanghai Dazhong Qiche Nanyang Xiaoshou Fuwu Youxian Gongsi, Jiangshujian Yin

Qinquan Jiufen Yi An Ershen Minshi Caiding Shu (上海大众汽车南阳销售服务有限公司、姜书建因侵

102 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

such as Wang are largely immune to extra-judicial agency retaliation;

therefore, when the local STB sent Nanyang Auto a notice of deficiency,

Wang reacted by applying for administrative reconsideration.

313

The

reconsideration body nullified the local STB’s assessment of deficiency,

citing insufficient consideration of all relevant evidence.

314

After amending

its calculation, the local STB sent Nanyang Auto another deficiency letter,

which was then upheld by the reconsideration body. Nanyang Auto,

controlled by Wang,

315

then filed an administrative lawsuit against the local

STB.

316

When the trial court rendered a decision that was not entirely in its

favor, Nanyang Auto appealed.

317

The appellate court sent the case back for

retrial.

318

Upon retrial of this tax-related administrative case, the court

conducted a thorough analysis of relevant facts and laws.

319

Of the five

major issues disputed between the two parties, the focus was on two issues:

1) whether the local STB could determine tax deficiency based on

transaction slips bearing the signatures of Nanyang Auto staff and

2) whether the penalties levied were legal in procedure.

320

The court

rendered a judgment that appeared to be only partially favorable to the

plaintiff in that the court upheld three STB decisions.

321

However, the

plaintiff was actually victorious because the court sided with Nanyang Auto

on the two major issues.

322

The court approved the trial court adjudicatory

committee’s judgment, indicating an exercise of caution.

323

权纠纷一案二审民事裁定书) [Shanghai Dazhong Auto Nanyang Service Ltd. v. Jiang Sujian], (Nanyang

Intermediate Ct. 2011) (on file with author); Wangguihua Su Nanyang Shi Gongan Ju Wan Cheng Fenju

Bufu Xingzheng Chufa Yi An Yishen Xingzheng Panjueshu (王贵华诉南阳市公安局宛城分局不服行政处

罚一案一审行政判决书 ) [Wang Guihua v. Nanyang Public Security Bureau Wancheng Branch],

(Nanyang City Wancheng District Ct. 2010) (on file with author).

313

Yuangao Shanghai Dazhong Qiche Nanyang Xiaoshou Fuwu Youxian Gongsi Bufu Beigao

Nanyang Shi Guojia Shuiwu Ju Shuiwu Xingzheng Zhengshou Chufa Yi An De Yishen Xingzheng

Panjueshu (原告上海大众汽车南阳销售服务有限公司不服被告南阳市国家税务局税务行政征收处罚

一案的一审行政判决书) [Plaintiff Shanghai Volkswagen Sales & Service Co., Ltd. Nanyang Nanyang

City, State Revenue Against the Defendant Tax Administrative Penalties Levied a Case of First Instance

Administrative Judgments], (Henan Provincial High Ct. 2009) (on file with author).

314

Id.

315

Id.

316

Id.

317

Id.

318

Id.

319

Id.

320

Id.

321

Id.

322

Id.

323

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 103

Unlike the defendant tax agency in Liu & Yang, the STB appealed the

decision in Nanyang Auto.

324

The practice of signing slips was common in

the auto service industry and the slips were often the only written evidence

of a transaction.

325

If the trial court decision was upheld, the SATs would

inevitably incur significant costs in proving underreported revenues by auto

service providers. The appellate court reversed the trial court decision over

the validity of the evidence used by the STB.

326

Nanyang Auto, however,

was relieved from any penalty for underpaying taxes.

327

The reason for

nullifying the penalty was completely procedural. The penalty was nullified

because it was not delivered with a notice of the taxpayer’s right to a

hearing.

328

This is in strong contrast to other judgments pertaining to issues about

procedural legality. In cases where plaintiffs pointed out defendant tax

agencies’ procedural flaws in carrying out their duties, the court either

bypassed the issues or treated them as innocuous.

329

Yet in a case where a

politically-connected plaintiff had abundant litigation experiences, support

from within the state, and resources to distribute, procedural issues were

crucial.

E. High Transaction Costs

Settlement may also be unattainable if the substantial interests of a

third party are involved in a dispute and its resolution is a zero-sum game

between the taxpayer and the third party. Such situations have a much

higher transaction cost for negotiating a settlement.

324

Shangsu Ren Nanyang Shi Guojia Shuiwu Ju Yin Yishen Yuangao Shanghai Dazhong Qiche

Nanyang Xiaoshou Fuwu Youxian Gongsi Su Yishen Beigao Nanyang Shi Guojia Shuiwu Ju Shuiwu

Xingzheng Chuli Chufa Jiufen Yi An Ershen Xingzheng Panjueshu (上诉人南阳市国家税务局因一审原

告上海大众汽车南阳销售服务有限公司诉一审被告南阳市国家税务局税务行政处理、处罚纠纷一案

二审行政判决书) [Nanyang STB v. Shanghai Dazhong Auto Nanyang Sales and Service Ltd.], (Henan

Nanyang Intermediate Ct. 2009) (on file with author).

325

Id.

326

Id.

327

Id.

328

Id.

329

See, e.g., Zhengshou Bo Yu Youse Jinshu Luliao Youxian Gongsi Yu Zhengzhou Shi Zhongyuan

Qu Guojia Shuiwu Ju Yi An (郑州博宇有色金属炉料有限公司与郑州市中原区国家税务局一案)

[Zhengzhou Boyu Ltd. v. Zhengzhou Zhongyuan District STB], (2009) (on file with author); Xinxiang Shi

Yun Gong Mao Youxian Gongsi Bufu Beigao wei Hui Shi Difang Shuiwu Ju Wei Dishui Fa (2009) 005

hao “Shuiwu xingzheng chufa Jueding Shu” Yishen Xingzheng Panjueshu (新乡市运工贸有限公司不服

被告卫辉市地方税务局卫地税罚（2009）005 号《税务行政处罚决定书》和卫地税罚（2010）005

号《税务行政处罚决定书》一审行政判决书) [Xinxiang Yungongmao Ltd. v. Weihui City LTB Re

(2009) 005 and (2010) 005 Punishment], (Henan Weihui City Ct. 2011) (on file with author).

104 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

In Wang v. Zhengzhou 27 District STB Investigation Bureau, a

professional whistleblower reported tax evasion of an electronics store and

disagreed with the subsequent taxes and penalties imposed by the defendant

tax agency.

330

The court granted the defendant tax agency’s motion to join

the electronic store as a third party in the case.

331

The store management had

significant stakes in trying the case because the same commercial practice

had been reported by other whistleblowers.

332

The high transaction costs for

settling a case involving third parties with high stakes in going to trial

diminished the chance of a negotiated settlement.

Another example of high transaction costs preventing settlement is

Hengxin Real Estate Development Ltd. v. Jiyuan LBT, in which the plaintiff

entered into a contract with two other parties (individual A and company A,

where individual A is 99% shareholder of company A) to invest in a real

estate development project.

333

In exchange for the plaintiff’s capital

investment, individual A agreed to cede control of company A to the

plaintiff.

334

Upon closing, the plaintiff received possession of all the

company seals, licenses, and registrations.

335

Not long after the deal, the

partnership broke and the plaintiff ceased its investment.

336

In order to

regain control, Company A published an advertisement in a local newspaper

claiming that it had lost the company’s seals and registration documents.

337

The publication was a necessary precondition for the company to obtain new

registrations.

338

Alerted by the advertisement, the plaintiff reported to the

defendant LBT its possession of the registration and requested that the

agency not issue new registration documents to company A.

339

The agency

allegedly agreed to investigate.

340

However, when company A applied for

330

Yuangao Wangpenghui Su Beigao Zhengzhou Shi erqi Qu Guojia Shuiwu Ju Jicha Ju Shuiwu

Xingzheng Chuli Yi An Yishen Xingzheng Wenshu (原告王朋辉诉被告郑州市二七区国家税务局稽查

局税务行政处理一案一审行政文书) [Wang v. Zhengzhou 27 District STB Investigation Bureau], (Henan

Zhengzhou 27 District Ct. 2011) (on file with author).

331

Id.

332

Jiaguoqiang Su Henan Sheng Guojia Shuiwu Ju Bufu Fuyi Jueding Yi An Yishen Xingzheng

Panjueshu (贾国强诉河南省国家税务局不服复议决定一案一审行政判决书) [Jia v. Henan Provincial

STB], ( Henan Zhengzhou Jinshui District Ct. 2011) (on file with author).

333

Yuangao XinXiang Shi Hengxin Fangdichan Kaifa Youxian Gongsi Su Beigao Jiyuan Shi Difang

Shuiwu Ju Shuiwu Dengji Banfa Zhengzhao Yi An Yishen Xingzheng Panjueshu (原告新乡市恒信房地产

开发有限公司诉被告济源市地方税务局税务登记颁发证照一案一审行政判决书) [Xinxiang City

Hengxin Real Estate Development Ltd. v. Jiyuan LTB], (Henan Jiyuan Ct. 2011) (on file with author).

334

Id.

335

Id.

336

Id.

337

Id.

338

Id.

339

Id.

340

Id.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 105

new registration, the agency not only approved it but also allowed changes

to the corporate registration that nullified the initial contract between the

plaintiff and company A.

341

The plaintiff sued the LBT for approving the registration changes and

asked the court to revoke the new registration.

342

The court ruled against the

plaintiff, noting that the contractual agreement between the plaintiff and the

tax agency was not binding and that the agency did not violate any

procedural or substantive law in approving the registration changes.

343

The

plaintiff in this case was located in a different city from the LTB and the

failed investment was its one-time interaction with the defendant’s

jurisdiction.

344

Therefore, it was unlikely that the defendant LTB would

retaliate against the plaintiff. A trial was probably the only viable option

given that the action concerned a third party (company A), substantial

interests were at stake, and the zero-sum nature of the dispute. Furthermore,

real estate developers command substantial political and economic

resources, enabling them to hire counsel and mount legal challenges to local

government officials.

In sum, the substantive survey of the tax-related administrative

lawsuits in Henan Province from 2009 to 2011 illustrates the major reasons

behind a complainant’s decision to go to trial. The cases show a strong

judicial bias favoring the tax agencies that, coupled with the high costs of

agency retaliation, explains the acute reluctance to sue tax agencies in China.

However, if a party can prevent or evade the retaliation, litigation may be a

preferred option when substantial interests are at stake and other channels

prove costly or unavailable. Because of the limits to a tax agency’s power

and discretion, such defense to retaliation may exist in situations where the

complainant expects no future interaction with the agency, owns little

taxable income or assets in the agency’s jurisdiction, or has powerful allies

in the political system. In addition, even when a party is not resistant to

retaliation, a damaged relationship with tax agencies can lead to litigation if

high stakes are involved. In that case, the hostility has shut down non-

judicial channels to resolve conflicts, and litigation adds little extra costs for

the complainant. Moreover, general factors from conventional trial selection

theories, such as high transaction costs and disputants’ optimism, apply as

well. The cases analyzed in this part substantiate these arguments and

illustrate how the theoretical factors work in different factual settings.

341

Id.

342

Id.

343

Id.

344

The Plaintiff is registered in Xinxiang City and the defendant’s jurisdiction is in Jiyuan City.

106 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

VII. C

ONTRIBUTIONS OF THE RESEARCH

This part briefly discusses the contributions of this study to three

literatures: tax administration in China, administrative litigation in China,

and the selection of cases for trial.

A. Tax Administration in China

Professor Cui points out that the current tax administration in China

operates on a feeble legal basis. Taxpayers in general prefer interacting with

tax agents to obtain information about tax law compliance and enforcement,

and few go to court to resolve disputes.

345

As noted earlier, a mere 405

lawsuits were filed in 2011 against tax agencies in all of China.

346

Even

fewer cases were filed in 2009 and 2010—293 and 398 respectively.

347

Furthermore, plaintiffs withdrew most of the lawsuits. This study offers a

few explanations for the general reliance by Chinese taxpayers on informal

institutions, such as personal interactions with tax agents, instead of courts,

for tax compliance and dispute resolution in China, and the difficulties for

the two paths to converge.

For reasons listed below, current interactions between taxpayers, tax

agents and the courts reflect an equilibrium that resists swift changes. The

equilibrium is conditioned on: 1) taxpayers failing to comply with tax laws

and regulations, 2) tax agents enjoying great flexibility in administration and

facing low risk of punishment for abusing their discretion, and 3) courts

enforcing the law loosely and with strong bias in favor of the tax agents.

Several structural factors determine the quasi-legal equilibrium for taxation

in China.

First, from a taxpayer’s perspective, full compliance with Chinese tax

law is costly due to conflicting and ambiguous legal authorities (e.g., Liu &

Yang and Nanyang Auto), gaps between business practice and what is

required by the law (e.g., Nanyang Auto and Zhoukou Huilin), and high

formal tax burdens. As noted by a local tax agent, “most companies would

go under if they had to pay all the taxes required by law.”

348

Moreover, tax

evasion is pervasive.

349

345

See Wei Cui, supra note 37.

346

See SUMMARY OF FIRST INSTANCE ADMINISTRATIVE LAWSUITS IN CHINA, supra note 4.

347

See Haibo He, supra note 9.

348

See Qian Wang & Xuena Li, supra note 65.

349

Jinyan Li, Tax Transplants and Local Culture: A Comparative Study of the Chinese and Canadian

GAAR, 11 T

HEORETICAL INQUIRIES IN LAW 655, 683 (2010).

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 107

From the angle of tax agents, on the other hand, wide discretion is

necessary for tax administration because of their multiple concerns with

local business development, meeting revenue targets, personal connections

with the taxpayers, and rampant tax evasion. Exercising this discretion often

results in lax enforcement or violations of the law.

350

Meanwhile, when balancing noncompliance by taxpayers and

violations of law by tax agents, weak Chinese courts easily side with the

latter, finding their violations minor and innocuous or completely

sidestepping the issues (e.g., Zhengzhou Boyu Ltd.). In addition, the gap

between business practices in China that de-emphasize formality on the one

hand and the formal evidentiary, and procedural rules required for litigation

on the other, curbs the role of the courts and provides reluctant judges with

easy exits from adjudicating difficult administrative lawsuits (e.g., Zhoukou

Huilin).

As illustrated by the trivial number of tax-related administrative

lawsuits filed each year, tax administration and dispute resolution are quite

stable. If a shift to a law-based equilibrium is considered a desirable policy

goal, the state should coordinate changes to all the three parties and the

institutional contexts in which they act, including: 1) a reduction of formal

tax burdens and clarification of legal authorities that will reduce compliance

costs for taxpayers, 2) preventing post-litigation retaliation by tax

agencies,

351

and 3) encouraging judicial activism and independence in

deciding administrative cases.

Though the equilibrium is stable, this study nonetheless suggests that

certain institutional conditions will nudge China towards a more law-

oriented society. As illustrated by the contrast between the Liu & Yang case

and the Zhoukou Huilin case,

352

private Chinese companies can lower their

risks by conducting business in compliance with basic laws and regulations,

350

Wang Xiang-kun, Wǒguó shuìwù zhífǎ zhōng cúnzài de wèntí jí duìcè yánjiū (我国税务执法中存

在的问题及对策研究) [Enforcement of Tax Problems and Countermeasures: Research on Problems and

Countermeasures in China Tax Administration], C

HINA LAW INFO, http://www.cftl.cn/show.asp?a_id=6861

(last visited October 14, 2013).

351

Plaintiffs in any tax-related administrative lawsuits should receive heightened protection from

abuse of power by defendant tax agencies and their related parties. For instance, if a taxpayer sues a LTB

and the case is fully adjudicated at the taxpayer’s insistence, the law should require any non-random audits

of the taxpayer in the following two years to be pre-approved by an independent review body.

352

See Yuanshen Yuangao Liuyongjian, Yang Feng Su Yuanshen Beigao Guangshan Xian Caizheng

Ju Shuiwu Zhengshou Xingzheng Jiufen Yi An, (原审原告刘永建、杨锋诉原审被告光山县财政局税务

征收行政纠纷一案) [Liu & Yang v. Guangshan County Finance Department-Retrial], (Henan Guangshan

County Ct. 2010) (on file with author). The taxpayers obtained its business opportunity through public

bidding and were able to prevail in a suit against local government upon retrial. In comparison, the plaintiff

in Zhoukou Huilin did not comply with the legal procedure in obtaining business and found the law against

him.

108 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

especially if the companies expect to operate long-term and face

unpredictable political support. As the Chinese economic structure

transforms and more business entities adopt a long-term time trajectory, law

will play a more important role in corporate transactions and business

interactions.

One may wonder what is holding the tax agents back from excessive

predatory acts, given their wide discretionary authority and the lack of

political accountability and judicial supervision. As noted earlier, hierarchy

and second-party monitoring institutions play certain role in restraining the

tax agents. An equally important factor is the regional competition for

investments and local leaders’ efforts in generating growth, which is critical

to their career prospect.

353

Due to page limit and the focus of this study, this

article will not expand on the discussion. Suffice it to say that empirical

evidence from this study clearly suggests that the Chinese judiciary plays, at

most, a marginal role in facilitating tax administration in accordance with

the law.

B. Administrative Litigation in China

This study also contributes to the literature on administrative litigation

in China by adding new empirical evidence about the dynamics of suing

powerful tax agencies. First, an interesting common feature of the court

decisions and judgments analyzed in this article is the engagement of legal

counsel by defendant tax agencies. As noted earlier, defendant government

agencies hire lawyers more frequently than the plaintiffs. With state

agencies being their major clients, administrative law attorneys, when

representing the plaintiffs, cannot constantly be zealous guards of their

client’s legal interests, and may persuade the plaintiffs to settle even when a

trial would be more beneficial. Moreover, even though legal representation

may be responsible for more sophisticated judicial deliberation, it does not

appear to have significantly improved plaintiffs’ chances of winning.

354

In addition, the study finds certain groups to be exposed to a smaller

risk of extra-judicial agency retaliation, which is crucial to judicial

resolution of grievances against government officials in China. First, there

353

SUSAN H. WHITING, THE CADRE EVALUATION SYSTEM AT THE GRASS ROOTS: THE PARADOX OF

PARTY RULE, IN HOLDING CHINA TOGETHER: DIVERSITY AND NATIONAL INTEGRATION IN THE POST-DENG

ERA (Barry J. Naughton & Dali L. Yang eds., 2004).

354

See Ji Li, supra note 9, at 31. The marginal role and effect of lawyers in representing the plaintiffs’

interests is consistent with an earlier empirical study finding that lawyer density has negative impact on the

rate of administrative lawsuits in China. However, such a conclusion should be viewed with caution

because tried cases differ systemically from the settled ones.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 109

appears to be an emerging group of urban residents, professional

whistleblowers, who frequently use the judiciary for personal gain.

Compared to an average Chinese, they file significantly more administrative

lawsuits.

355

The cases analyzed in this article suggest that such profit-

motivated administrative litigation may have some positive effects on

rationalizing local governance. However, because lawsuits filed by the

whistleblowers are driven mainly by profits, their subject matter is limited to

disclosure of government-held information critical to the calculation of their

rewards. None of the lawsuits will likely lead to more judicial oversight of

powerful state agencies when their core interests are at stake.

Immunity to agency retaliation may also come from limited future

interaction. Both high population mobility and agency specialization create

more one-time interactions between residents and a specific agency.

Therefore, we will likely observe a growing number of administrative

lawsuits as a result of the economic development and accelerating

urbanization in China.

Parties to disputes with government officials may also be relatively

immune to extra-judicial retaliation if they have ample political resources.

356

Though local courts exhibit strong judicial bias in favor of defendant state

agencies, they face heightened pressure to be impartial when the plaintiffs

have powerful allies within the political system. In such situations, judges

will often stay close to the law to mitigate the risk of being punished post-

trial by the losing party. For this reason, decentralization of political power

will provide a more benign environment for the adjudication of

administrative lawsuits.

C. The Trial Selection Theories

The findings of this study also contribute to the literature on the

selection of cases for trial. As noted earlier, the Priest/Klein model predicts

a central tendency for the plaintiffs to achieve a win rate of 50% in tried

cases, and that most tried cases are “close cases.” The asymmetric

355

Renleliang Su Zhengzhou Shi Guojia Shuiwu Ju Jicha Ju Buluxing Fading Zhize Yi An Yishen

Xingzheng Panjueshu (任乐亮诉郑州市国家税务局稽查局不履行法定职责一案一审行政判决书) [Ren

v. Zhengzhou STB Investigation Bureau], (Henan Zhengzhou 27 District Ct. 2012) (on file with author).

356

Shangsu Ren Nanyang Shi Guojia Shuiwu Ju Yin Yishen Yuangao Shanghai Dazhong Qiche

Nanyang Xiaoshou Fuwu Youxian Gongsi Su Yishen Beigao Nanyang Shi Guojia Shuiwu Ju Shuiwu

Xingzheng Chuli Chufa Jiufen Yi An Ershen Xingzheng Panjueshu (上诉人南阳市国家税务局因一审原

告上海大众汽车南阳销售服务有限公司诉一审被告南阳市国家税务局税务行政处理、处罚纠纷一案

二审行政判决书) [Nanyang STB v. Shanghai Dazhong Auto Nanyang Sales and Service Ltd.], (Henan

Nanyang Intermediate Ct. 2009) (on file with author).

110 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

information theory, in contrast, predicts that only cases where the informed

defendant expects to prevail will go to trial. The empirical findings of this

study, though limited by the small sample size and possible missing cases,

are consistent with the asymmetric information theory. In addition, the

asymmetric information model better reflects the real world situation in

China.

Though the asymmetric information theory predicts a win rate that

approximates the empirical finding of this article, the interpretation of the

logic has to be adjusted to the context of Chinese judicial politics. The

original model implicitly treats the court’s decision standard, even if biased,

as an exogenous factor against which the parties apply their facts.

357

When

applied to administrative lawsuits in China, however, the model should

incorporate the fact that the decision standard is often a variable of the

power balance between the two parties. So instead of the informed

defendant knowing the cases he will win and selecting them for trial as

prescribed by the original model, the defendant government officials in

China, when sued, may refuse to settle for various non-judicial reasons and

then press the local court to render them a favorable verdict. In other words,

existing models based on litigation experiences in the United States or other

countries with an independent judiciary are over-simplified and insufficient

if applied directly to the Chinese context or the context of another country

with a dependent judiciary, such as Vietnam.

358

In addition to asymmetric

information, the model should incorporate asymmetric political power

between the disputants to be a more useful analytical tool for research on

trial selection in China.

359

VIII. C

ONCLUSION

By reviewing all tax-related administrative lawsuits in Henan from

2009 to 2011, this study unveils a few reasons for the puzzling persistence of

357

Lucian A. Bebchuk, Litigation and Settlement under Imperfect Information, 15 RAND J. OF ECON.

404, 406 (1984).

358

An empirical study of selected civil cases in China also finds inconsistencies with the Priest/Klein

prediction. See Yingmao Tang & Liugang Sheng,

中国司法执行难的计量分析

” [A Quantitative Study of

the Difficulties in the Enforcement of Court Judgment in China], 4 法律和社会科学[L

AW AND SOC. SCI.]

1(2011).

359

While such efforts by the SCP and regional high courts to publish court decisions are

commendable, it should be made clear that tried cases are not a representative sample of all lawsuits. For

lawsuits against government officials, the high win rate for the defendants renders the disclosure of court

decisions less useful as clarification of ambiguities and conflicts in legal authorities, deterrence for future

violations by defendant agencies, or encouragement for more administrative lawsuits. To achieve such

policy goals, settled cases need also be disclosed to the public.

JANUARY 2014 ADMINISTRATIVE LAWSUITS AGAINST TAX AGENCIES IN CHINA 111

some lawsuits against powerful agencies in China. Individuals and

companies with limited extractable resources, powerful allies in government,

and substantial stake in litigation are more inclined to sue, especially when

transaction costs of alternative resolution are high.

This article adopts an institutional rational choice approach, taking

into consideration the political and legal contexts in exploring how Chinese

resolve their disputes against powerful state agencies. This approach has its

obvious limitations. For instance, not all aggrieved parties sue for material

interests. An earlier study suggested that some plaintiffs in China will invest

much more in an administrative lawsuit than they expect to receive if

prevail.

360

Several of the disclosed lawsuits against tax agencies also suggest

factors beyond expected costs and benefits in the persistence to sue.

In Li v. Luohe STB, for example, the plaintiff litigated repeatedly at

the trial and appellate level against local STB bureau for an insubstantial

amount of vehicle tax.

361

After the appellate court upheld the trial court

decision,

362

the plaintiff filed another complaint over the same dispute, with

slightly different wording.

363

The trial court refused to docket the case. The

plaintiff, instead of accepting the ruling and paying the deficiency, appealed

the decision. The appellate court affirmed the trial court holding yet again.

The tax deficiency could hardly justify the efforts by the plaintiff.

In addition to the limitations of the theoretical approach, the small size

and the regional restriction of the sample cases caution broad and definitive

conclusions. Though the cases analyzed in the article should represent the

pool of tried administrative lawsuits against tax agencies in Henan Province,

it is possible that omissions and errors in publishing the court decisions and

judgments will cause biases in the sample, especially if the omissions are

systematic, e.g., judgments against tax agencies were excluded. But even if

the biases lower the plaintiffs’ win-rates, the rate for the unbiased sample

will probably remain low given the current basis of zero.

360

Qinghua Wang, supra note 9, at 532.

361

Lijunan Su Luohe Shi Guoshui Ju Xingzheng Bu Zuowei Shangsu Yi An Ershen Xingzheng

Caiding Shu (李军安诉漯河市国税局行政不作为上诉一案二审行政裁定书) [Li v. Luohe STB-Appeal],

Luohe City Intermediate Ct. 2009) (on file with author).

362

Lijūn'ān su luòhé shì guóshuì jú xíngzhèng bù zuòwéi shàngsù yī àn èrshěn xíngzhèng cáidìng shū

(李军安诉漯河市国税局行政不作为上诉一案二审行政裁定书) [Li v. Luohe STB Appeal], (Luohe City

Intermediate Court) (on file with author).

363

Lijunan Bufu Yan Chengqu Renmin Fayuan (2011) Yan Xing Chu Zi di 38 Hao Bu Yu Shouli

Qisu Xingzheng Caiding Shangsu Yi An Ershen Xingzheng Caiding Shu (李军安不服郾城区人民法院

（ 2011）郾行初字第 38 号不予受理起诉行政裁定上诉一案二审行政裁定书 ) [Li for Case

Registration], (2009) (on file with author).

112 PACIFIC RIM LAW & POLICY JOURNAL VOL. 23 NO. 1

In comparison, extending the findings to other provinces may be more

problematic. Though Henan Province is arguably representative of China in

many aspects, such as its population size, there remains significant regional

variation in administrative litigation.

364

Once other provincial high courts

begin to implement the SPC policies on judgment disclosure, more cross-

regional data will be available, the study of which should make the findings

of this study more robust to various regional differences. Furthermore, the

arguments presented in this study will be greatly strengthened if they can be

evaluated against cases where parties opt not to sue tax agencies even

though all the conditions described above are satisfied.

In spite of these limitations, the study presents a comprehensive and

in-depth analysis of a relatively unbiased sample of administrative cases

against a powerful agency in China. Theories derived from the study should

be applicable to administrative litigation in other areas. Factors that enable

Chinese citizens to sue a powerful agency should have even strong effects

on lawsuits against less powerful ones. For instance, it should not be a

surprise to find professional whistleblowers sue an environmental protection

agency (a weak government agency) in China for information disclosure or

nonfeasance, if their income depends on the disputed agency performance.

The findings of this study make valuable contributions to our knowledge

about tax administration, administrative litigation and trial selection in the

Chinese context.

364

See Ji Li, supra note 9, at 12.