Checklist of hot China tax issues for MNEs in 2018
28 November 2017
In 2018, multinational enterprises (MNEs) should in particular be on alert for the following anticipated China tax developments.
- New withholding tax guidance –
Following the October 2017 issuance of State Administration
of Taxation (SAT) Announcement 37, foreign investors should
monitor how the rules will be implemented in practice. This
is particularly important for M&A transactions involving
indirect transfers of Chinese assets. Indirect transfers,
which may be taxable under Announcement 7, also continue to
be an M&A planning challenge due to uncertainties with
capital gains calculations and qualification for internal
group restructure relief. M&A investors need to monitor
the interaction of Announcement 37 with Announcement 7 and
carefully structure their investments going forward.
- Reinvestment rules in China –
In July 2017, the State Council proposed a new incentive rule
that would defer the imposition of withholding tax on
dividends paid out of China, where the amounts were
reinvested in 'encouraged projects' in China. Investors who
are considering reinvesting their investment returns in China
should monitor further developments from the SAT on which
industries are covered and how these rules will be
- Claiming tax treaty benefits under BEPS
– China has introduced various rules in respect of
claiming tax treaty relief under China's double tax
agreements (DTAs) including the limitation on benefits (LOB)
rule and the principal purposes test (PPT). Foreign investors
investing into China therefore have to ensure that their
investment structures meet the minimum substance
requirements, and that appropriate supporting documentation
is maintained to withstand any potential challenges from the
tax authorities. The impact of these new rules will become
more apparent when making tax treaty relief claims in
For more information, contact John Gu, KPMG China M&A
tax practice leader, firstname.lastname@example.org.
- Increased VAT audits and queries
– With the VAT reforms having been implemented for
more than 18 months now, the tax authorities are expected to
significantly increase their enforcement efforts. Businesses
are strongly encouraged to carry out health checks to
identify any shortfalls in their VAT compliance and
processes. This is especially important for businesses that
implemented changes following the recent VAT reforms, given
that the time period was short and errors occurred.
- Use of data and analytics in managing VAT
risks – With recent enhancements to the
Golden Tax System, the tax authorities are increasingly able
to use data and analytics to identify potential VAT errors
and anomalies. Data and analytics solutions, such as KPMG's
Tax Intelligence Solution, can assist in identifying and
rectifying those errors and anomalies, including reconciling
data between business enterprise resource planning (ERP)
systems and the Golden Tax System.
For more information, contact Lachlan Wolfers, KPMG China
indirect tax practice leader, email@example.com.
- National reform changes customs audit and review
process – In 2017, the China customs
authorities undertook a national reform that significantly
changed the national customs organisational structure. It is
expected that more frequent and targeted customs audits will
be performed, as adoption of data analytical tools allow
better monitoring of the accuracy of enterprise declarations.
Enterprises importing/exporting goods into/from China need to
enhance their internal control procedures and ensure customs
declarations are accurate.
For more information, contact Eric Zhou, KPMG China trade
and customs practice leader, firstname.lastname@example.org.
- New treaty and permanent establishment (PE)
guidance – In June 2017, China signed the
BEPS Action 15 multilateral instrument (MLI), committing to
update nearly half its existing tax treaties with effect from
2019/2020. In anticipation of the addition of new PPT
articles to many of China's treaties, the SAT is set to
release new treaty guidance in 2018. This may bring some
long-awaited clarity to the application of treaty relief for
foreign investor income from China. At the same time, while
China did not elect to update its PE articles through the
MLI, the much anticipated PE guidance is also set for release
in 2018. As both securing access to treaty relief and
managing PE exposures are key issues for structuring
operations and investment cross-border into China, investors
are advised to monitor closely for this new guidance. They
should prepare to adapt documentation, management protocols,
and investment and operational structures, where
- Common reporting standard (CRS)
– The automatic exchange of information (AEOI) by
China under the OECD CRS framework will commence in 2018. The
Chinese tax authorities have already invested heavily in big
data analysis capabilities, are effectively pooling data from
across government agencies, and are set to bring more
taxpayer information, e-commerce and domestic financial
institutions on tap with the upcoming new Tax Collection and
Administration Law. The CRS information received from next
year is thus likely to be quickly deployed in targeting
taxpayers for audit and in building taxpayer credit ratings,
and so businesses need to be aware of sharply heightened
enforcement going forward.
For more information, contact Chris Xing, KPMG China
international tax practice leader, email@example.com.
- Increasing individual income tax (IIT)
enforcement on overseas sourced income –
The Chinese tax authorities are making much greater use of
tax information exchange mechanisms, and this will increase
further with the anticipated implementation of CRS by China
from 2018. In this context, the compliance of Chinese
nationals with their China tax filing obligations for their
overseas income is set to become an ever more important focus
area for the Chinese tax authorities. This is particularly
true of overseas employment income derived by outbound
expatriates working overseas on Belt and Road Initiative
(BRI) projects. Chinese enterprises consequently need to plan
ahead and carefully manage their employees' IIT
- IIT reform – In 2018, tackling
inequality will be a key Chinese government policy goal and
the IIT reform could play a key role in these efforts. As the
final IIT reform is highly anticipated to be introduced in
2018, enterprises should continue to monitor for further
developments and be prepared to implement necessary
For more information, contact Michelle Zhou, KPMG China
global mobility service practice leader, firstname.lastname@example.org.
- Preferential research and development (R&D)
tax policies – Technological innovation has
become a driving force for China's continued economic growth.
China's preferential R&D tax policies are key to
fostering and facilitating the implementation of
innovation-driven enterprise development strategies.
Enterprises engaged in R&D should proactively monitor the
changes to R&D tax policies, ensuring that these can be
leveraged to enhance enterprise core competitiveness, while
managing tax compliance risks.
For more information, contact Bin Yang, KPMG China
R&D tax practice leader, email@example.com.
- Environment Protection Tax (EPT) Law
– The 13th five-year plan (from 2016 to 2020) sets
out a Chinese government 'green development philosophy'. As a
crucial element of the government's environmental strategy,
the EPT was instituted in late 2016, to replace the previous
pollution discharge fees, and will apply from January 1 2018.
The EPT is expected to increase the cost burden of polluting
behaviour, and is intended as a significant deterrent for
polluting emissions. Further guidance is anticipated and
affected enterprises should keep a close eye on policy
developments, and quickly assess the EPT business
- Milestone resource tax (RT) reform
– Effective from July 2016, the Chinese government
reformed and expanded the scope of RT impositions. The
reforms transitioned RT from a volume basis tax to an ad
valorem basis tax, abolished local resource
consumption-related charges and fund contributions, and set
uniform tax rate ranges and tax incentives. Following the
abolition of the previous local charges on resource
extraction and use, RT has become the sole national tax
levied on the use of mineral resources, and affected
enterprises need to ensure they factor the changes into
business planning and processes.
For more information, contact Jessica Xie, KPMG China
resource tax practice leader, firstname.lastname@example.org.
- New guidance on royalty and service
charges – In March 2017, the SAT issued the
long awaited Announcement 6, which covers substantive
transfer pricing issues, royalty fees and intragroup
services. Intragroup service charges are set to become even
more of a key focus area for the tax authorities in China.
This is particularly the case for 'non-beneficial' or
shareholders' services, service charges from low-substance
entities, or charges paid to low-tax jurisdictions. Taxpayers
can expect greater scrutiny on royalty fees, and on charges
deemed not commensurate with benefits generated for the local
entity. In respect of secondary marketing intangibles, with
the final 'P' added to the OECD's development, enhancement,
maintenance, protection, exploitation and promotion (DEMPEP)
concept for the attribution of economic ownership of
intangibles, China is expected to focus on (secondary) local
marketing intangibles generated by significant promotional
activities in China, and the incremental profits expected
from such activities.
- Mutual agreement procedure (MAP)
– With more transfer pricing controversies on the
horizon, post-BEPS, the effectiveness of dispute resolution
mechanisms becomes highly relevant for MNEs. The expected
outcome from BEPS Action 14, and the peer review to which
China is subject, is expected to be an increase in the
effectiveness of MAP and a reduction in the number of
unresolved cases after a two-year period.
For more information, contact Cheng Chi, KPMG China
transfer pricing practice leader, email@example.com.
- Digital e-commerce – As China
continues to digitalise, the Chinese tax authorities will
increasingly embrace technology tools and digitised processes
that will improve the tax administration system and the
efficiency of tax collection. Taxpayers can expect certain
deficiencies in the rules governing the taxation of digital
economy activity to be amended in the near future. This
should provide a fairer tax environment for digital players
vis-à-vis those in the traditional
For more information, contact Sunny Leung, KPMG China
e-commerce practice leader, firstname.lastname@example.org.
- Thousand enterprises initiative (TEI)
– Since the launch of the TEI initiative in
October 2015, the Chinese tax authorities have been
collecting data from the TEI-covered enterprises and
performing analyses to understand the business and tax risks.
Drawing on this accumulated data and the analysis conducted,
it is expected that the Chinese tax authorities will make
even more effective use of tax risk indicators (by industry)
to identify tax risks. Taxpayers can therefore expect an
increase in tax risk enquiries or tax investigations by the
Chinese tax authorities in 2018.
- Tax risk assessment model used by tax authorities
– The Chinese tax authorities have been
rapidly building a tax risk assessment model with a set of
tax risk indicators and benchmarking ranges. In April 2017,
the SAT issued Announcement 10, which provides taxpayers with
an optional tax service to automatically identify and correct
their tax calculation errors in advance of formally
submitting their corporate income tax (CIT) annual filing
returns. With the Chinese tax authorities introducing various
measures, such as automated cross-checking of VAT filing
returns, taxpayers can expect tax authorities to bring more
transparency to taxpayers on how tax risk assessments are
performed in the near future.
For more information, contact Tracy Zhang, KPMG China tax
management consulting leader, email@example.com.