A tax controversy may arise in Macau for various reasons, but usually it is a consequence of a tax assessment made by the tax authority (DSF – Direcção dos Serviços de Finanças) which the taxpayer wishes to challenge, or as a result of an additional tax assessment following a tax audit.
All types of matters can give rise to tax controversies. Nevertheless, issues related to the payment of stamp duty (SD), notably SD due on the transfer of real estate property – which in Macau is taxed under the SD Regulations – and on lease agreements, as well as issues related to the payment of corporate income tax (ICR – Imposto Complementar de Rendimentos), are the most common causes of tax disputes between taxpayers and the DSF.
Macanese law does not allow the DSF to issue advance tax rulings at the request of taxpayers. The taxpayers may consult the DSF regarding a certain envisaged operation, but all information is provided on a non-official basis. This means that the avoidance of tax controversies is made at a subsequent level, notably at the time a formal request for information is sent to the taxpayers or a tax audit is being conducted by the DSF. For that purpose, it is very important for the taxpayers to keep good clean records and to have a positive approach whenever the DSF requests information about a specific situation.
Macau has recently adopted legislation (Law 21/2019 of 26 December 2019, which entered into force in 2020) amending the ICR Regulations and the Regime of Exchange of Information on Tax Matters (REIT). The main aim of such amendments is to follow the principles and guidelines of the Organisation for Economic Co-operation and Development (OECD) on international collaboration to fight tax avoidance resulting from base erosion and profit shifting (BEPS).
New definitions were introduced in the ICR Regulations, eg, the definition of ultimate parent entity (UPE) and permanent establishment (PE). The PE definition existed only in a few tax treaties for the avoidance of double taxation entered into by Macau, but not in the local law. A UPE is defined as an entity that is part of a multinational group of enterprises that:
As long as the total income of the UPE, reflected in the consolidated financial statements, is equal to or greater than MOP7 billion, the UPE will be required to prepare and present documents to the DSF:
The documentation and information contained in the above are to be kept for a period of seven years. The DSF will also be entitled to exchange financial and banking information about the UPE automatically with other jurisdictions, pursuant to the REIT.
In addition, in November 2019 Macau and Hong Kong signed a tax treaty for the avoidance of double taxation, which entered into force on 1 January 2021. This new tax treaty (the seventh tax treaty entered into by Macau) includes some of the latest developments on anti-abuse provisions (BEPS) and provides for an expeditious procedure for exchange of information on a bilateral basis between the two special administrative regions of the People's Republic of China.
Additional tax assessments may be disputed by the taxpayers through an administrative or a judicial claim.
Generally, the filing of an administrative claim does not suspend the deadline to file a judicial claim; thus, if the taxpayer does not wish to lose the opportunity of challenging the additional tax assessment in court, it may be necessary to file the two claims almost simultaneously, or to opt for the administrative or the judicial claim. Recently, some amendments to the SD Regulations were enacted (Law 24/2020 of 30 December 2020), which altered the procedure in the specific case of stamp duty: since the entry into force of these amendments on 30 March 2021, the dispute must begin with an administrative claim to the director of the DSF, followed by a necessary hierarchical appeal to the chief executive of the Macau Special Administrative Region, and only afterwards will the taxpayer be entitled to file a judicial claim to the relevant court.
The administrative and the judicial claims do not suspend the execution procedure in case the taxpayer does not pay the tax that was additionally assessed. There is no legal way to suspend the execution procedure, even after it is initiated. The taxpayer has to pay and wait for the outcome of the administrative/judicial claim, or run the risk of having his or her assets seized and ultimately sold by the DSF.
The taxpayer may also have to face an infringement procedure and subsequent imposition of a fine in relation to the additional tax assessment. The imposition of fines may be challenged through the referred-to administrative and/or judicial claims.
There are no specific rules on tax audits and no specific tax audit process in Macau. The tax audits are conducted mainly on an informal case-by-case basis.
The recent amendments to the ICR Regulations and to the REIT that entered into force in 2020, introducing in the legislation new provisions following the OECD recommendations on BEPS, may in the future bring a new approach by the DSF regarding tax audits on entities that qualify as UPEs and, therefore, have to meet the new requirements set forth by the law, notably with respect to the tax files and related documentation that such entities will have to keep and submit to the DSF.
The DSF usually contacts the taxpayer whenever it considers that the information in the tax return requires any clarification or is not sufficient. The taxpayer is required to answer in writing, within the deadline fixed by the DSF. If the answers are not deemed satisfactory, the DSF may conduct a tax audit ending most probably in an additional tax assessment. The statute of limitation on income taxes is of five years, counting from the end of the year in which the income was incurred. The law does not provide for the suspension or interruption of the statute of limitations period whenever a tax audit is being conducted. Nevertheless, it is worth noting that, even though there is no time limit set by the law for its completion, a tax audit in Macau is usually conducted within a very short period of time, ie, normally a few weeks or months.
As a rule, tax audits occur in the DSF’s headquarters. However, the law sets forth that the DSF officers have powers to displace themselves to the taxpayers’ premises to make the inspections that they deem necessary for the purpose of controlling the accuracy of the information and documentation supporting the tax returns.
The matter that usually calls the attention of the tax auditors is the deduction of expenses, notably costs with the employees, payments to external service providers, amortisations, payments to the management or to the shareholders (other than dividends), and expenses that have no documents/invoices supporting them. The DSF usually requires that the taxpayers provide written evidence supporting the deductibility of such expenses.
There is no evidence on how the recent amendments to the laws and the possibility of exchanging information with the tax authorities from other territories or countries will impact on future tax audits. There have been no recent significant developments regarding this matter, probably due to the COVID-19 pandemic.
During a tax audit it is important to keep a positive approach and to respond correctly to the DSF auditor. The records, books and supporting documentation should be well kept and any requests for information should be addressed promptly and in a correct manner, in order to prevent a disagreeable outcome (notably an additional tax assessment and/or penalties for tax infringements).
Following a notification of additional assessment received from the DSF, the taxpayer may opt to file an administrative or a judicial claim. However, submission of an administrative claim does not suspend the deadline to file the judicial claim, meaning that, in practice, most times the taxpayer cannot wait for the decision in the administrative claim if he/she/it does not wish to lose the opportunity of filing a judicial claim.
Recent amendments to the SD Regulations, which entered into force on 30 March 2021, brought a different approach of the legislator to this issue: if the taxpayer wishes to challenge a stamp duty assessment, he/she/it will now have to mandatorily file an administrative claim, followed by a hierarchical appeal, and only after this may the judicial phase be initiated. One should note that the transfer of real estate, as well as lease agreements, are taxed in Macau under the SD Regulations.
The notification to the taxpayer containing the tax assessment (or additional tax assessment) should be made through registered mail. Notification is legally deemed received by the taxpayer, for the purpose of filing an administrative or judicial claim, on the fifth working day counting from registration (Saturday is a working day in Macau). The deadline to submit the administrative claim is 15 days from receipt of the notification. The claim should be lodged with the same entity that made the tax assessment or additional tax assessment. The discussion of eventual penalties should follow the same procedure and deadlines as described in this section.
The tax statutes do not provide a deadline for the tax authorities to decide an administrative claim lodged by a taxpayer. Thus, it is necessary to apply the provisions of the Administrative Procedure Code (APC), pursuant to which an administrative claim should be decided in 15 days. Since the administrative claim does not suspend the deadline to submit a judicial claim, and taking into account that the deadline to lodge a judicial claim is 45 days from receipt of the notification of the assessment, the taxpayer may lodge first an administrative claim and, if the tax authorities do not issue a decision within the referred 15 days, or if they issue an unfavourable decision, he/she/it has until the end of the 45-day deadline to lodge a judicial claim. In any case, even if the taxpayer does not file a judicial claim but files an administrative claim, he/she/it is entitled to a formal decision by the tax authorities.
The APC sets forth (again, the tax statutes are silent in this respect) that the absence of a decision of the administrative authority only allows the assumption of a tacit negative decision after a period of 90 days – the authors' opinion is that this provision should also apply to tax cases. After the referred-to 90-day period (or after an explicit decision) the taxpayer will have the option to present a hierarchical appeal to the chief executive of the Macau SAR within a two-month deadline. If the taxpayer so wishes, he/she/it will also have the option of filing a judicial claim with the administrative court requesting that the tax authorities issue a formal explicit decision on the administrative claim – but only after the 90-day period to form a tacit negative decision has lapsed.
Pursuant to the APC, the hierarchical appeal should be decided in 30 days; this may be extended in certain cases to a maximum of 90 days. After this deadline, a tacit negative decision may be assumed, which will allow the taxpayer to file a judicial claim requesting the issuing of a formal explicit decision on the hierarchical appeal.
Neither the decision on the administrative claim nor the decision on the hierarchical appeal may be judicially challenged by the taxpayers.
With respect to the SD, as from 30 March 2021 the situation is different: the administrative claim, as well as the subsequent hierarchical appeal, are mandatory, they should be filed prior to any judicial claim that the taxpayer may wish to lodge. Thus, they suspend the deadline to lodge a judicial claim.
A judicial claim may be filed by the taxpayers who wish to challenge in court a certain tax assessment or an additional tax assessment. The deadline is 45 days from receipt of the notification of the assessment or, in the case of SD, from receipt of the notification of the decision in the hierarchical appeal, issued by the chief executive of the Macau SAR. The competent court is, generally, the Administrative Court (first instance). However, in the case of SD the competent court to render a decision at first instance is the court of second instance – taking into account that the decision in the hierarchical appeal that is being challenged was issued by the chief executive of the Macau SAR.
The claim shall be presented in writing, signed by a lawyer, and shall be submitted directly to the relevant court or sent by registered mail, in which case the date of submission will be considered the date of the mail registration.
The taxpayer shall submit the claim to the central services of the relevant court. The claim must contain all arguments of fact and of law, as well as all documentation and elements of proof that the taxpayer considers necessary to support the arguments. All witnesses must be correctly identified in the claim, and a power of attorney appointing a lawyer to represent the taxpayer will have to be provided. Along with the submission of the claim, the taxpayer must request the payment of the initial court fees. After this payment is made, the DSF will be summoned by the court to contest within 20 days. Within this time, the DSF must also submit the administrative case file to the court. Following receipt of the defence, the court will summon the public prosecution to present its view on the case within eight days.
After the evidence submission phase, which may include a hearing for questioning the witnesses, the court invites the claimant (the taxpayer) and the defendant (the DSF) to produce written arguments if they so wish, within 20 days for the claimant and a subsequent deadline of 20 days for the defendant. Subsequently, the public prosecution is summoned to produce a statement on the case. The court shall then issue its final decision.
The documentation presented to the court is very important in substantiating the taxpayer’s arguments, and therefore should be carefully chosen. It must be presented at the same time as the claim submitted by the taxpayer. The judicial tax process is mainly a written process; therefore, the hearing of witnesses is exceptional, and the court often decides not to hear them. In that sense, the witnesses are less important than the documents and written arguments supporting the taxpayer’s position.
In tax litigation in the administrative court, the burden of proof lies with the party that invokes a certain fact in its favour.
Non-compliance with tax obligations is qualified as administrative infringements, not as tax crimes. The law in Macau does not typically establish tax crimes. This does not mean that a certain conduct by the taxpayer cannot be qualified as a criminal offence. However, this criminal offence shall be judged in a criminal court, where the burden of proof follows the usual principle that it shall rest with the public prosecution.
There is not much scope to prepare strategies in judicial tax cases. As already mentioned, all information, documentation and argumentation must be provided at the time the claim is submitted to the court. The law does not allow the taxpayers and the tax authorities to enter into arrangements or agreements to terminate the lawsuit. The only option is for the taxpayers to withdraw the claims or for the DSF to recognise the taxpayers’ rights.
Litigation in Macau rarely involves international tax issues. The Macanese courts usually take the jurisprudence of the Portuguese courts into account, since Macau and Portugal share the basic principles of their legal systems and the laws are very similar. However, Portugal has made significant changes in its tax statutes in the last decades, whereas Macau still follows the old tax system that has been in place for a long time, save for some exceptions. Thus, the present decisions of the Portuguese courts are not very relevant to present-day taxation matters in Macau.
The Macanese system has three tiers of courts before a judgment may be considered definitive. The court of first instance for tax matters is the Administrative Court (TA – Tribunal Administrativo). Depending on the value of the controversy, the taxpayer may submit an appeal to the court of second instance (TSI – Tribunal de Segunda Instância). Again, depending on the value of the controversy, an appeal may be submitted to the Supreme Court (TUI – Tribunal de Última Instância).
The entity against which the TA has ruled, the taxpayer or the DSF – or both, if the TA has ruled partly against both – may appeal to the TSI, provided that the value of the controversy is greater than MOP15,000. If the value is less, the judgment is definitive at first instance. An appeal to the TUI from a decision of the TSI may be lodged if the value of the controversy is greater than MOP1 million; if not, judgment will be definitive at second instance.
In the cases where the TSI rules at first instance – eg, judicial claims from a decision of the chief executive of the Macau SAR, notably regarding hierarchical appeals on SD matters – the taxpayer or the tax authorities may appeal to the TUI if the value of the controversy is greater than MOP15,000.
Appeals to the TUI on tax issues may only be grounded on matters of law, not on matters of fact.
The entity that wishes to appeal has ten days from the date of notification of the decision at first instance to file a simple request for appeal. The appeal shall be lodged at the court of first instance. After being notified that the appeal was accepted, the appellant will have 30 days to present the arguments (of law and of fact), and the other party (the respondent) will have 30 days to present his or her counter-arguments (counting from the date on which the other party was notified of the presentation of the arguments by the appellant). The arguments of the appellant must be well drafted and must contain conclusions. Along with the presentation of the arguments, the appellant must request the payment of the court fees. The respondent will also have to pay court fees. Subsequently, the court summons the public prosecution to present its view on the case within 14 days.
The appeal suspends the decision taken at first instance.
There will be no hearings at the courts of appeal (TSI and TUI).
Currently, the TA has only one judge, meaning that the final ruling will be issued by this judge.
At present, the TSI has nine judges. Each case is assigned to a panel formed by three judges, one of which will be the judge-rapporteur. The decisions are rendered by the majority of the three judges.
The TUI has three judges, and the decisions are rendered by the majority of the same.
There are no ADR mechanisms for tax disputes in Macau, nor are such mechanisms expected to be created in the near future.
Please refer to 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.
Tax disputes cannot be settled through mediation or arbitration in Macau.
The law in Macau does not provide for the possibility of requesting binding advance information and ruling requests from the DSF. All prior information obtained from the DSF must be considered as non-binding.
Please refer to 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.
Please refer to 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.
Additional tax assessments may give rise to tax infringement procedures against the taxpayers, if the tax authorities consider that a certain conduct of the taxpayer qualifies as a tax infringement.
The tax infringements are treated in Macau as administrative offences, meaning that any penalties are applied by the tax authorities. The taxpayers will have the opportunity of challenging the fines imposed by the DSF through an administrative claim or a judicial claim, as referred to in 3. Administrative Litigation and 4. Judicial Litigation: First Instance. Obviously, a certain conduct may qualify as a criminal offence, in which case the criminal courts will be competent to judge such offences.
The administrative infringements may be challenged by the taxpayers through administrative or judicial claims. If the conduct qualifies as a criminal offence, the judgment will be held in a criminal court.
The infringement procedure runs separately and is treated as an independent procedure from the additional tax assessment procedure. Of course, the tax authorities may wait for the outcome of the additional tax assessment procedure before applying the penalty for the tax infringement. They need, however, to be mindful that the statute of limitation period for administrative infringements is two years.
The tax authorities are required to initiate the tax infringement procedure as soon as they notice that a tax infringement has been committed by the taxpayer. If, during the investigation, the tax authorities consider that a crime has been committed (eg, falsification of documents to support costs or expenses that were really not incurred by the taxpayer), they should make a formal communication to the public prosecution, so that a criminal process may be initiated.
As mentioned in 7.1 Interaction of Tax Assessments with Tax Infringements, 7.2 Relationship Between Administrative and Criminal Processes and 7.3 Initiation of Administrative Processes and Criminal Cases, the penalties imposed by the tax authorities as a result of a tax administrative infringement process may be challenged by the taxpayer before the administrative court (the TA). It is the same court that decides the legality of the tax adjustment/assessment, even though the two lawsuits run separately. Before imposing a fine, however, the tax authorities must give the taxpayer the opportunity to defend himself/herself/itself.
If there is a crime, the criminal court is competent to judge the taxpayer, not the TA.
The tax statutes set forth that a taxpayer that voluntarily discloses the tax infringement that was committed is entitled to a reduction to half of the applicable fine. Accordingly, the amount of the applicable fine will be doubled if the taxpayer has committed the same tax infringement more than once.
In Macau it is not legally acceptable to enter into agreements with the tax authorities in order to prevent or stop a criminal trial.
Tax offences are qualified as administrative offences in Macau. There are no specific tax crimes in the law. If the conduct of a taxpayer qualifies as a criminal offence, he or she will be judged by a criminal court. Generally, decisions adopted by the criminal court of first instance may be subject to appeal before the TSI.
In theory, tax assessments challenged by the taxpayers may give rise to administrative tax cases or criminal cases, as already mentioned in 7. Administrative and Criminal Tax Offences. Notwithstanding, there is no knowledge of transactions and/or operations under the GAAR, SAAR, transfer pricing rules or anti-avoidance rules that have been or are being challenged in Macau. Normally, the taxpayers and the DSF reach a compromise before initiating court proceedings.
Please refer to 7.8 Rules Challenging Transactions and Operations in this Jurisdiction. Macau currently has seven tax treaties in place with the following countries: Belgium (which has not yet entered into force), Cape Verde, Mainland China, Hong Kong SAR, Mozambique, Portugal and Vietnam. Historically, there is no knowledge of any litigation due to additional tax assessments/adjustments in a cross-border situation.
Please refer to 7.8 Rules Challenging Transactions and Operations in this Jurisdiction and 8.1 Mechanisms to Deal with Double Taxation. There is no jurisprudence available in this respect.
Please refer to 7.8 Rules Challenging Transactions and Operations in this Jurisdiction and 8.1 Mechanisms to Deal with Double Taxation. There is no knowledge in Macau of challenges to international transfer pricing adjustments.
Advance pricing agreements (APAs) are not used in Macau.
Please refer to 7.8 Rules Challenging Transactions and Operations in this Jurisdiction and 8.1 Mechanisms to Deal with Double Taxation. There is no knowledge in Macau of any litigation relating to cross-border situations.
Macau is not a party to the MLI. Also, there are no arbitration clauses in any double taxation treaties (DTTs) signed by Macau.
Please refer to 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs). Macau is not a party to the MLI. Also, there are no arbitration clauses in any DTTs signed by Macau.
Please refer to 9.1 Application of Part VI of the MLI to Covered Tax Agreements. Macau is not a party to the MLI. Also, there are no arbitration clauses in any DTTs signed by Macau.
Please refer to 9.1 Application of Part VI of the MLI to Covered Tax Agreements. Macau is not a party to the MLI. Also, there are no arbitration clauses in any DTTs signed by Macau.
Please refer to 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs). Macau is not a party to the MLI.
Please refer to 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs). Macau is not a party to the MLI.
The most common legal instrument to settle international tax disputes in Macau is the exchange of information, which is governed by Law 5/2017 of 12 June 2017. Under the provisions of that law, Macau may exchange information with other jurisdictions with which it has signed tax treaties or entered into arrangements. Macau has signed seven DTTs – please refer to 8.1 Mechanisms to Deal with Double Taxation – and has signed tax information exchange agreements with the following jurisdictions: Argentina, Australia, Denmark, the Faroe Islands, Finland, Greenland, Guernsey, Iceland, India, Ireland, Jamaica, Japan, Malta, Norway, Sweden and the United Kingdom, and is negotiating agreements with Germany and New Zealand.
Whenever necessary, the taxpayers hire independent professionals, as lawyers, to initiate procedures if they are facing additional tax assessments by the tax authorities. As the Macau SAR has its own professionals, they do not usually hire independent professionals.
Administrative litigation is not subject to the payment of fees or costs. In certain cases, however, if the administrative claim does not succeed, the taxpayer may be requested to pay an additional cost of up to 5% of the tax that is due.
The court fees are paid pursuant to a list and vary depending on the value of the controversy. The minimum fee payable is MOP400 for a tax claim with a value of up to MOP4,000. Payment is made in two instalments.
The successful party is entitled to a refund, but interest does not accrue to the refunded amount.
The taxpayer cannot request any type of indemnity in case of success, save for the payment of interest if the tax has been paid in advance.
Since taxpayers in Macau cannot opt to use alternative dispute resolution mechanisms, there are no costs related to alternative dispute resolution.
Up to the end of February 2021, the number of tax court cases pending in the TA was 18. Information on the value of the cases is not available.
Information on the different taxes of the cases under judgment is not available.
Information regarding the parties that succeed in litigation is not available.
It is important for the taxpayers to keep clean records, to keep the documents supporting the costs/expenses for at least the statute of limitation period, to answer the tax auditors’ queries clearly and to provide them with all the information and documentation requested. It is also of the utmost importance to be assisted by professionals (lawyers, auditors) from the beginning of the discussions.
Introduction: General Overview of the Macau Tax System
Macau is a special administrative region of the People’s Republic of China (the "Macau SAR”), created pursuant to Article 31 of the People's Republic of China’s Constitution and enacted on 20 December 1999, following the handover of Macau’s administration. Its fundamental law – defining its political, economic and legal system – is the Macau Basic Law, which includes several provisions on the Macau tax system. Pursuant to the principles of continuity and a high degree of autonomy set under the Macau Basic Law, the Macau SAR has kept its tax system fundamentally unchanged since the Portuguese administration. Its structural tax laws were approved in the final years of the 1970s and, despite legislative amendments, their fundamental architecture remains unchanged, regardless of being noticeably outdated.
As set forth under the Macau Basic Law, the Macau SAR adopts an independent tax system based on a low taxation policy; it has full autonomy to approve its tax laws and the state does not collect any taxes in Macau.
All taxes are subject to the principle of legality, which implies that all tax laws need to be approved by the Macau Legislative Assembly and that the Macau government is not allowed to produce laws to create or amend taxes, although the legislative process is dependent on a proposal to be submitted by the latter.
The key taxes provided under Macau law can be summarised as follows.
The Macau tax system on income is therefore essentially characterised by its schedular nature. The income derived from professional activities is taxed under professional tax, whereas income derived from commercial and industrial activity is taxed under complementary tax. The assessment of the taxable profit is determined differently for the two groups of taxpayers:
The low taxation policy, however, does not apply to the revenue to be obtained from concessions, which is, according to the Basic Law, subject to a special regime. The financial needs of the Macau SAR largely depend on taxes collected from gaming revenues (in the pre-pandemic years, the gaming revenue generally exceeded 80% of the total ordinary income of the government) and, as such, the taxation of the gaming concessions is at a much higher rate, which is currently 35% over the gross gaming revenue.
Most taxes are collected on the basis of the taxpayer’s obligation to self-assess and declare tax triggering events. This applies to practically all taxes, with the exception of urban property tax and industrial tax, which, in any event, require certain reporting statements by the taxpayers.
Recent amendments to the tax system
In recent years, the Macau SAR has increased the pace of the production of new tax agreements and amendments to its tax laws. Since 2011, the Macau SAR has entered into 15 tax information exchange agreements and in 2019 completed its eighth double taxation agreement. Several amendments were introduced to the stamp duty law in 2011, 2012, 2018 and 2020, and to the CTL in 2019; the offshore regime was cancelled; and a new law was approved to provide for a general legal regime on the exchange of tax information. With the exception of the most recent stamp duty law reform, which aims to modernise and improve stamp duty taxation, these changes are fundamentally driven by the aim of complying with international standards and obligations to limit tax erosion as well as to enact particular government policies, such as curbing real estate prices.
The annualisation of tax laws
Notwithstanding the crystallisation of the fundamental structure of Macau's tax laws, significant adjustments are annually made to the tax system through the government's annual budget law and other administrative decisions. Such laws and administrative acts have become an important source of tax law and provide for relevant adjustments to the tax system. These adjustments are generally introduced as tax benefits and have been providing increasingly important tax relief, and include:
Although these benefits are formally valid for each fiscal year only, they have not only been continuously renewed, but their scope has been significantly expanded and other benefits added. For example, the industrial contribution tax has been waived since 2002 and since the current gaming concessions were granted in 2002, the Macau SAR has continuously exempted, on an annual basis, gaming concessionaires’ income from gaming activities from complementary tax. The nature, scope and constancy of these benefits mould the tax system’s characteristics and play an important role in the private sector’s business choices and investments in Macau.
Apart from excise duty and road tax, the competent authorities for which are the Economic and Technological Development Bureau and the Institute for Municipal Affairs respectively, all other taxes fall under the competence of the Macau Finance Bureau.
Recent Increase of Tax Controversies and Tax Litigation
The number of tax litigation cases has reduced in Macau, which can be explained not only by the jurisdiction's size but also by the low taxation policy and the tax surplus generated from gaming taxes. However, especially since 2014, a considerable increase in tax disputes has been observed, some of which have led to landmark court decisions that have crafted some of the recent changes to the tax laws. Although complete statistics are not available, the number of tax cases in the Administrative Court alone jumped by 1,000% from 2013 to 2014. An analysis of the most recent court decisions suggests that such a spike in tax disputes results from a more active role by the tax authorities in the audit and assessment of taxpayers' statements.
The most relevant recent tax controversies relate fundamentally to stamp duty, tourism tax, motor vehicle import tax and complementary income tax.
Stamp duty controversies
Recent disputes relating to stamp duty fundamentally concern whether certain transactions and documents were subject to stamp duty. Some of the most relevant decisions in recent years relate to the taxation of contracts for the grant of use of spaces in shopping centres. The tax authority has taken the initiative to tax the agreements executed between the promoters, operators or managers of shopping centres and retailers as lease agreements, which are subject to stamp duty at a rate of 5% over the rent payable for the duration of the agreement.
Especially for agreements relating to shopping malls located in so-called integrated resorts, the consideration payable by the retailers is, in many cases, astronomical, which implies a hefty tax burden. Such assessments, however, were subsequently annulled by the Court of Second Instance (and later confirmed by the Court of Final Appeal) on the basis that grant of use agreements cannot be considered as lease agreements and, pursuant to the principle of legality, they should not be subject to taxation. These decisions inspired the most recent reform of the stamp duty law, which was amended to expressly include the taxation of contracts for the grant of use of spaces in shopping centres.
In other landmark disputes, the Macau Finance Bureau has decided to levy stamp duty on the adjudication of any assets in auction sales, irrespective of the transfer of such assets effectively taking place. According to the private auction regulations, the transfer of the title to the assets put up for auction would only occur after the execution of a sale and purchase agreement and after full discharge of the consideration due.
The Finance Bureau has decided that taxation would occur on adjudication, which would correspond to the decision by the auctioneer to award the assets to the highest bid, irrespective of the effective transfer of the property of such assets. The Court of Second Instance has also decided to annul the tax assessment and the decision was confirmed by the Court of Final Appeal. Similarly, the matter was addressed in the amendments to the stamp duty law, which now expressly state that the triggering event of the stamp duty payable for adjudication in private auctions (and other public sales) is the acceptance by the adjudicating entity of the highest bid, irrespective of the assets being effectively transferred.
Tourism tax controversies
Several of the recent disputes that were submitted to courts concerning tourism tax relate to its tax reach; in particular, to the definition of complementary hotel services for tax purposes. Tourism tax applies over the price of the specific services provided by hotels and similar establishments (as defined in law), health clubs, saunas, massage parlours and karaoke venues. Hotel-specific or typical services are legally referred to as accommodation and “other complementary services”, with the exception of telecommunication and laundry services.
The expression “other complementary services” leaves broad room for interpretation and since 2015, the Macau Finance Bureau has taken a closer look at the tax statements submitted by taxpayers and has considered that certain ancillary services provided by hotels, their subsidiaries or other related companies should also be subject to tourism tax. These included, in some cases, transportation services, limousine services, bookings of flights and tickets for shows with other entities, and entertainment or amusement services provided in hotel facilities. With few exceptions, the courts have taken a particularly broad interpretation of the “complementary services” associated with the hotel business, hence upholding the tax authority’s assessments in these matters in most cases.
Complementary tax controversies
A number of disputes relating to complementary tax are mostly related to its assessment; in particular, to the corrections introduced by the tax authority to deductible costs or to taxable income. Some of the most notable controversies arise from the tax authority considering the variable remuneration payable by a retailer under a grant of use contract, which consisted of a (high) percentage of the profits resulting from its business not being tax deductible, due to the particular contractual arrangement being intended to evade complementary tax, despite there being no express anti-tax law evasion provisions in the Macau legal system. This position was upheld by the Court of Second Instance in October 2020.
Other relevant disputes relate to the scope and extension of the complementary tax exemption annually granted to gaming concessionaires. Certain entities have argued that their income deriving from certain contracts executed with gaming concessionaires should be exempted from complementary tax, as such income should be covered by the exemption provided to the gaming concessionaires. The tax authority has assessed the taxable profit of these entities and corrected the taxable profits to include such income, which quintupled their tax results in some cases. The courts have confirmed the tax exemption provided to the gaming concessionaires is purely subjective and does not exclude taxation over the income itself deriving from the gaming operations.
Recently, the Macau Finance Bureau has adopted a peculiar interpretation of an exceptional tax benefit introduced by the annual budget law to provide additional relief to businesses due to the economic impact of the COVID-19 pandemic. Such benefit consisted of a tax deduction of MOP300,000 to the tax amount payable after-tax computation in relation to the 2019 fiscal year. As a result of the operation of such tax benefit, the said tax authority has, in practical terms, cancelled a deduction to the taxable profits allowed under the CTL to avoid economic double taxation, which ultimately resulted in a tax aggravation to the taxpayers. The matter has been submitted to the courts, but no decisions have yet been issued.
Cross-border exchange of information and mutual assistance between tax authorities
In 2017, Macau approved Law 5/2017, which sets a general legal framework for the exchange of tax information with other regional and international tax jurisdictions. Such effort was complemented with the amendments to the CTL in 2019, which aimed to implement measures against tax base erosion and profit shifting (BEPS), and by the execution of a significant number of tax information exchange treaties. Together, they form the legal framework for cross-border exchange of information and co-operation between tax authorities. This system provides for the:
As a result, in the course of 2019 and 2020, the use of cross-border information exchange and mutual assistance among tax authorities increased significantly, which had an impact on tax audits and exchange of information. Such impact is expected to translate in the short term into an increase of administrative and judicial litigation.
Taxpayers’ Rights and Recourse: Administrative and Judicial Appeals
Taxpayer’s fundamental rights and protections
The taxpayer’s interests are protected not only by the possibility of disputing the tax authorities’ decisions, but also by a number of legal provisions and principles that limit the authorities’ actions.
The rule of law
The principle of legality referred to above is transversal to the entire administrative and tax system. This principle carries strict implications for the tax system:
Furthermore, any and all actions taken by the government authorities are generally subject to a legality principle: the administration in general, and the tax authorities in particular, can only act if authorised and within the limits prescribed by law.
The right to be informed
Taxpayers have the right to be notified of any decisions that may affect their rights and interests protected by law. On the other hand, the tax authorities have the duty to explain and to provide the reasons for their decisions to taxpayers. This combination is intended to allow the taxpayers to effectively be informed and understand any tax decisions concerning their rights and interests, and, ultimately, to dispute such decisions.
The right to take part in the tax assessment
The fundamental stage of any tax liquidation process is the assessment of the taxable income or tax value of the relevant transactions or assets subject to taxation. The taxpayers are generally granted the right to, directly or through representation, participate in the process of determination of the tax base. The particular manner that allows such participation varies from tax to tax. For some taxes, such as income taxes, such participation derives from the taxpayers’ initiative to submit the tax statements. For stamp duty and property tax, such participation is guaranteed through the appointment of a taxpayer’s representative to the valuation committees.
Furthermore, in all cases, the taxpayer is guaranteed the right to seek a review of the assessment made by the tax authority, through administrative and judicial means. The administrative review is made by specialised committees that, in theory, have the expertise to deal with the specific issues relating to the assessment.
Statutes of limitation
The assessment of any taxes is subject to statutes of limitation, which are generally five years. This means that the tax authority will not be able to initiate and collect any taxes after expiry of the statute of limitation. Recent changes to tax laws intend to effectively extend such statutes of limitation for certain transactions, such as in relation to stamp duty applicable to lease and grant of use agreements, in which case the statute of limitation period only commences after the agreements expire.
The obligation to pay any taxes assessed within the statute of limitation period is subject to a larger statute of limitation period of 20 years, as recently decided by the Court of Second Instance.
The Macau legal system provides a general right for individuals and private corporations to seek a judicial review of all decisions taken by the administration that may affect them. Naturally, this includes the taxpayer’s right to dispute the tax authorities’ decisions relating to tax matters.
There is, however, no unified regime for tax disputes. The rules and procedures for taxpayers to contest and challenge the tax authorities’ decisions relating to tax matters are provided in the laws that set and regulate each tax. This makes the system quite complex and, in certain cases, inconsistent, creating a prolonged phase of administrative litigation and a de facto division in the judicial system, where both the Administrative Court (which is a court of first instance) and the Court of Second Instance serve as courts of first instance, depending on the tax and type of decision involved.
In virtually all tax disputes, an administrative litigation phase mandatorily precedes the judicial review. The government administration is fundamentally organised under a hierarchical structure and, as a matter of principle, an administrative decision can only be judicially challenged after the administrative process becomes definitive; ie, once the decision can no longer be further reviewed within the administration’s structure. This means that taxpayers are required to exhaust the administrative review procedures before the matter can finally be submitted to the courts. The administrative recourse path, however, is different depending on the type of decision taken by the tax authority.
Arbitration is not available for tax disputes under Macau law.
Due to the administration’s duty to act strictly within the law, the tax authorities are not allowed to enter into any settlements or contractual arrangements regarding tax matters.
Enforcement of tax debts
The process for enforcement of tax debts is a source of many controversies under Macau law. The Fiscal Debts Enforcement Code (FDEC) is dated from 1951 and remains materially in force, being used as the legal regime applicable to the coercive collection of tax debts, but only to the extent that its legal provisions do not infringe the sovereignty of the People’s Republic of China and are not contrary to the Macau Basic Law and other laws enacted by the competent Macau authorities.
Its application is therefore not easy to administer, not only because it is a completely obsolete and anachronous law, requiring a massive effort of adaptation and interpretation to the current times to ensure private entities can effectively exercise their opposition rights, but also because the process of determining which provisions are contrary to other Macau laws is not, in many cases, simple. The direction taken by the courts in this respect is not always clear, which makes the system precarious. For example, the Court of Second Instance has ruled that tax debts are subject to a higher ordinary statute of limitation (20 years) than common debts under the Civil Code (15 years), due to the provisions of the FDEC having a specific nature in relation to those of the Civil Code. Yet, in another ruling by the Court of Second Instance, the court has found that the reversion of tax debts against the directors of the company set forth under the FDEC does not apply due to being found contrary to general law, specifically the provisions of the Macau Commercial Code.
Tax debts can be enforced directly by the Macau Finance Bureau, which has the authority to directly order the seizure or apprehension of private property, monies and other rights or entitlements and proceed directly to their public sale. The taxpayer may oppose the enforcement based on limited grounds. Issues strictly relating to the tax assessment can only be disputed under the administrative and judicial recourse means referred to above. The law provides for two opposition mechanisms, one being the opposition by “simple application”, in which the taxpayer does not have to appoint legal counsel, and the other the so-called opposition by “embargoes”. Both need to be submitted within ten days from the service of notice of the enforcement proceedings and are decided by the Administrative Court.
The opposition by simple application is limited to certain straightforward grounds, such as the debt being paid or having fallen under statutes of limitation. Embargoes allow the taxpayer to use all the grounds allowed under the opposition by simple application and more, including the illegality of the taxation based on the fact that the type of tax or its collection is not authorised by law, forgery of the documents that serve as title for the enforcement and to dispute the seizure of any assets, due to their title being the subject of controversy or simply not belonging to the taxpayer.
Penalties: Criminal and Administrative Penalties
The sanctions framework is also regulated separately for each type of tax, which typify singly the different types of infringements of tax laws.
Notwithstanding the disparity of laws regulating the matter, the key types of tax infringements relate to:
Subject to certain requirements, both corporations and individuals can be liable for the payment of fines and in certain tax laws, there is joint and several liability of certain individuals that participate in the offence. This includes the directors and other de facto administrators of corporations, as well as other representatives and auxiliaries.
In spite of several references to criminal liability, the only penalties applicable pursuant to tax laws are fines, with the exception of a crime of disobedience stipulated in the stamp duty law, which applies to those who may prevent tax authority officials from entering or remaining at the premises of the establishments, offices and other locations for the purposes of conducting audit inspections. The law also does not provide for the possibility of such fines being converted into imprisonment sentences if they are not paid, which strongly suggests that the penalties specifically provided under the tax laws are of an administrative nature only.
The fines applicable are usually set within certain fixed value ranges provided in the law, the specific amount depending on the seriousness of the offence. In other cases, the law provides that the fines may range between the amount of the tax and a multiple of such amount. In the case of stamp duty, for example, the range can go from one to ten times the amount of the tax due for certain infringements, including the failure to pay the tax due in a timely fashion.
Administrative penalties are applied by the relevant tax authority.
However, several criminal provisions provided under the Criminal Code may apply in the context of tax matters, such as document fraud. Any potential criminal infringement depends on prosecution by the Public Prosecutor and will be tried by the criminal courts under a due process.