The Peril of Cliches: a Chinese “totality of facts” approach?

Cliches are bad because they are products of lazy, careless thinking. At worst, cliches are culpable for the horrible linguistic crime of inaccurate expression.

I smelled, with respect, such a crime in a Big-4 accounting firm's commentary on the Chinese government's then newly-issued legislation (State Administration of Taxation of China (“SAT”) Announcement [2012] No.30):

“It is encouraging to see that [the Chinese tax authority] suggest to the local tax authorities that they should not narrowly focus on certain individual factors in determining the beneficial ownership of dividends; instead they should take a “totality of facts” approach on a case-by-case basis”1 (emphasis mine)

The blunt employment of the expression “totality of facts” stemming from the English common law in an article about the Chinese law reminds me of a beginner of English trying to impress his teacher with some fancy hard words in an otherwise typo-riddled, grammatically unsound essay.

As its effect of trying to impress backfired, the expression is also wrongly adopted. Let's first look at what “totality of facts” really means.

What “totality of facts” means

In the Hong Kong salaries tax case CIR v George Andrew Goepfert, Macdougall J explained the term as follows:

“There can be no doubt therefore that in deciding the crucial issue, the Commissioner may need to look further than the external or superficial features of the employment. Appearance may be deceptive. He may need to examine other factors that point to the real locus of the source of income, the employment.

It occurs to me that sometimes when reference is made to the so called ‘totality of facts’ test it may be that what is meant is this very process. If that is what it means then it is not an enquiry of a nature different from that to which the English cases refer, but is descriptive of the process adopted to ascertain the true answer to the question that arises under section 8(1).” (page 237) (emphasis mine)

 

In the Hong Kong profits tax case CIR v Magna Industrial Company Limited, Litton V-P approved the “totality of facts” approach by the lower court as follows:

“This was, in essence, the Board of Review's approach. At para 7.23 of the stated case the Board said:

'This is a case of a trading profit and the purchase and the sale are the important factors. We place on record that we have included in our deliberations all of the relevant facts and not just the purchase and sale of the products. Clearly everything must be weighed by a Board when reaching its factual decision as to the true source of the profit. We must look at the totality of the facts and find out what the Taxpayer did to earn the profit.' (emphasis mine)

No criticism can be made of this approach. Nor has it been suggested that the findings of fact made by the Board were not based upon evidence adduced before it. If the Commissioner's appeal on point of law were to succeed it must be because the Board had misunderstood the law in some relevant particular or because, on the facts found, the only reasonable conclusion was that the profits in question arose outside Hong Kong: Edwards v. Bairstow [1956] AC 14.”

In a nutshell, the “totality of facts” approach describes an enquiry process to take into consideration all relevant facts and factors to find the true answer to a question, not to be deceived by appearance.

What the Chinese tax authority meant

But is this the same approach the Chinese tax authority intended to employ? I refer to the original Chinese law (Article 1 of SAT Announcement [2012] No.30, or “Announcement 30”):

“When ascertaining the status of beneficial ownership of a resident of a contracting jurisdiction, comprehensive regards should be had to every factor listed in [an article of a previous law] ...” 2 (emphasis mine)

On the one hand, the “Announcement 30” approach is similar to the English “totality of facts” approach in HK tax cases in that both describe an enquiry process to grasp the substance of individual cases, not to be fooled by its form. 

On the other hand, the “Announcement 30” approach is different in its methodology, in that the “factors” have already been fixed in black and white in the relevant law (that is, the 6 “adverse factors”). In the HK tax cases I cites earlier, however, the relevant factors will turn on the facts of each individual case and therefore have not been ascertained.

As a result, as the factors in the “Announcement 30” approach have been fixed and limited, it is in theory more lenient than the original English “totality of facts” approach.

Differences in methodologies aside, linguistically the word "facts" connotes a much wider scope than "factors", contrary to what the SAT's intention as expressed in Announcement 30. In that sense the common sensical, linguistic scope of "factors" is commensurate with the legal scope of those two approaches.

This leads to my suggested alternative: “totality of factors”.

Footnotes:

1. https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/china-tax-alert-1305-10-dividends-tax-treaty-benefits-v1.pdf

2. "一、在判定缔约对方居民的受益所有人身份时，应按照国税函[2009]601号文件第二条规定的各项因素进行综合分析和判断，不应仅因某项不利因素的存在，或者第一条所述“逃避或减少税收、转移或累积利润等目的”的不存在，而做出否定或肯定的认定。" （http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/12003183.html）