Modernised industry regulation
China's economic transformation demands the continual
upgrade of the national regulatory framework, as the economy
shifts from simple processing to advanced services and
manufacturing, and a modernised financial system evolves to
support this.
China's private equity (PE) and venture capital (VC)
industry has grown exponentially in recent years. This has been
driven by the growth in demand for alternative channels,
outside the largely state-controlled banking sector, for the
financing of innovative, new enterprises. It has also been
propelled by the growth in pools of private wealth seeking more
diverse investment opportunities. To facilitate this, the State
Council (cabinet) held a public consultation (which closed on
September 30 2017) on the draft Interim Regulations for the
Administration of Private Investment Funds to replace the
existing 2014 measures. The draft regulations set out how the
China Securities Regulatory Commission (CSRC) will regulate PE
funds, what they may invest in, who may invest in them, who may
manage them and the rules governing promotion and the raising
of funds. It should be noted that the China tax rules governing
PE and VC funds are in a state of rapid evolution. Guidance
published in June 2017 clarified asset manager VAT
administration obligations, and guidance in July 2017 set out
how enhanced corporate income tax (CIT) and individual income
tax (IIT) incentives are available for VC investment in
innovative small and medium-sized enterprises (SMEs) at seed
capital and start-up stages. The China PE/VC tax and regulatory
frameworks will continue to develop at an accelerated pace.
Many of China's privately owned enterprises (POEs),
especially in the blossoming SME sector, rely heavily on
finance guarantee companies for the capital to operate and
expand their businesses. From October 1 2017, new
Administrative Regulations on Supervision of Financing
Guarantee Companies took effect, replacing the existing 2010
rules. The new regulations focus in particular:
- On ensuring that financing guarantee
companies have adequate capital;
- That they have arrangements in place for
other companies to assume their obligations, under
outstanding guarantee contracts, where the original guarantor
is dissolved; and
- That they refrain from self-dealing with
owners or from engaging in business activities unrelated to
their core guarantee business.
Oversight of payments and asset ownership
In line with other countries around the world, China is
seeking to get a much better handle on the ownership of assets
and conduct of payments by residents, partly to limit money
laundering risk but also to tackle tax evasion more
effectively.
On September 1 2017, China's Administrative Measures on
Trust Registration, issued by the China Banking Regulatory
Commission (CBRC), came into effect, requiring Chinese trust
companies to register trust products that they have issued,
including details of the beneficial owners of such products.
The CBRC and other government authorities are set to have
access to these records – it remains to be seen how
much access the tax authorities would have, however. There is a
global trend towards establishing obligations for the
registration of the beneficial ownership of trusts with public
authorities, with the EU and OECD both developing relevant
frameworks. While the proposals in some EU countries look to
establish public registers of trust ownership, the Chinese
trust register does not yet go this far.
In August 2017, the People's Bank of China (PBOC) set new
rules for non-financial institutions providing online payment
services to clear their transactions through a centralised
national clearing house, starting from June 2018. This would
catch in particular mobile payments made using the extremely
popular Alipay and WeChat Pay services, which are progressively
replacing cash and card payment throughout China. It might be
noted that the draft Tax Collection and Administration (TCA)
Law, expected to be finalised in 2018, requires Chinese
financial institutions to bulk report, on a spontaneous basis,
taxpayer bank transactions exceeding certain thresholds to the
Chinese tax authorities. Centralisation of mobile payment
clearing would facilitate a similar tax reporting move.
China is set to bring a huge amount of additional tax
relevant data on tap over the next two years. This fuels a big
data-driven approach to tax audit targeting and taxpayer credit
ratings, which is facilitated by major technology and systems
investments by the Chinese tax authorities in recent years. The
trust beneficial ownership and payment reporting measures
outlined above cross over with the 2018 commencement of the tax
data exchange under the OECD common reporting standard system,
and a TCA Law measure requiring e-commerce platforms to submit
a tax report on online trader activity. A transformation of the
China tax compliance landscape is on the cards for the coming
years.
Strengthened network of international tax agreements
China's tax and regulatory modernisation is supported by
ongoing enhancements to its network of international tax
agreements.
In June 2017, China signed the OECD Multilateral Instrument
(MLI) for the rollout of the BEPS changes to its tax treaties.
This initially provided, through a matching mechanism, for
updates to 46 of China's treaties, including those with most of
China's major OECD trading partners, such as Japan, Korea,
Germany and the UK, but excluding the US. As more of China's
treaty partners sign up to the MLI and set out their treaty
update preferences, the number of China's tax treaties set for
update will grow. Since June, MLI signing/updates by Nigeria
and Norway have led the number of China treaties updated by the
MLI to rise to 48 by October 2017. This continued expansion has
key consequences for business and investment activity with
China.
From September 1 2017, a China-Netherlands bilateral social
security agreement will be in effect. This allows for seconded
staff to just pay social security contributions in one, as
opposed to both countries. With the increased integration of
China and foreign business operations, China has been rapidly
building up its network of such agreements – nine have
been signed with Germany, South Korea, Denmark, Finland,
Canada, Switzerland, Netherland, France and Spain. China is
also negotiating further agreements with Belgium, Serbia, Japan
and Romania, with more to follow.
Khoonming Ho (khoonming.ho@kpmg.com)
and Lewis Lu (lewis.lu@kpmg.com)
KPMG China
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421
Website: www.kpmg.com/cn