A Sisyphean task? – Tax plays catch up with China’s rapid digitalisation
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

A Sisyphean task? – Tax plays catch up with China’s rapid digitalisation

Sponsored by


The increasing size and sophistication of China’s digital economy, as well as the rapid expansion of Chinese digital economy enterprises into foreign markets, is highlighting a range of complex tax issues, and the importance of policymaker efforts to resolve them. Khoon Ming Ho, Conrad Turley, Sunny Leung, and Mimi Wang explore the issues.

In last year's seventh edition of China Looking Ahead, the digital economy (DE) chapter, China's 1.38 billion mobile phone users can't be wrong: Tax and the digital economy, looked at many of the China tax compliance and administrative issues arising for new digitalised business models operating in the China market. This year's DE tax chapter, while updating on these matters, also looks to go wider. We look at the challenges facing Chinese DE enterprises with their outbound expansion, and the broader long-term implications of efforts at international level, to agree a new global tax framework updated for the challenges of digitalisation.

It should be noted briefly that terminology in this space is tricky. The term 'digital economy' is ambiguous and potentially misleading. As the OECD stated in its 2015 BEPS Action 1 report, "the digital economy is becoming the economy itself". Drawing a boundary between the digital economy and the traditional economy can be arbitrary. As such, the preferred term, also in recent OECD documents, is 'digitalisation'. Businesses can be said to fall along a spectrum from more highly digitalised to less digitalised, in the degree of digitalisation of their products, services, their internal processes and organisational structures, and the nature of the markets in which they operate. This being said, in common language, when people speak of 'digital economy enterprises' (DE enterprises) it is generally understood as a reference to businesses whose core offering is a digital product or service, or a digital platform. At the summit of these enterprises are, in China, the BAT enterprises (Baidu, Alibaba, and Tencent) and, in the west, the FAANG enterprises (Facebook, Apple, Amazon, Netflix, and Google). As such, we use the terms digitalisation, digitalised, and DE enterprises, alternately in this chapter, as the context requires.

With these considerations as a backdrop, this chapter looks at the following themes:

  • An overview of structural developments in China's digital economy; this is crucial for understanding the emerging tax challenges;

  • Building on last year's chapter, an overview of the key tax compliance and administrative issues for digitalising businesses operating in China;

  • Issues facing China's digital economy enterprises, as they expand overseas, particularly in ASPAC countries; and

  • The continuing global efforts to create a new international tax framework, overhauled to deal with digitalisation, and considerations for China.

Tax-relevant structural developments in China's digital economy

In understanding the practical issues for businesses operating within China's digital economy, and cross-border from and to China, as well as the considerations before tax policymakers, an overview of structural developments in China's digital economy is essential. We refer below to data set out in reports from the China Academy of Information and Communications Technology (CAICT), the Ministry of Industry and Information Technology (MIIT), and the China Internet Network Information Centre (CINIC), as well as a useful 2017 report from the McKinsey Global Institute (MGI), entitled 'Digital China: Powering the Economy to Global Competitiveness'. We firstly set out China economy-wide digitalisation developments before moving to the specific cross-border developments:

  • China's digital economy was estimated to account for 30% of GDP in 2016, and to rise to 35% by 2020, per CAITC and MIIT. In this regard the statistics refer to the supplanting of physical stores through e-commerce, the growing share of mobile payments in overall transaction volumes, the growth in the production of various information and communications technology (ICT) products and services, including software, as a percentage of GDP, and the reorganisation of numerous markets, such as for transportation services, around sharing economy models.

  • The level of digitalisation of China's economic sectors varies widely. Consumer services and retail are more highly digitalised than in the leading western countries, but industrial sectors see lesser degrees of digitalisation and automation.

  • The online proportion of China retail is now 16.6%, a much higher percentage than the US at 9%. It is at an equivalent level to the UK, which shows the highest rate of online retail penetration among the developed countries. Given the size of China's economy, China now accounts for more than 40% of global e-commerce, equalling the EU and US combined.

  • A key driver of the digitalisation of consumer and retail was the underdevelopment of the pre-existing physical retail infrastructure, and high inefficiency of the sector. This meant that new digital platforms could steal a march on traditional players, as Chinese consumption power rapidly increased, particularly in smaller cities where online players made many products and brands available for the first time. This was helped by the high willingness of Chinese consumers to adopt new technologies in their retail behaviour, including e-commerce and mobile payments. Government efforts to foster e-commerce volumes further are linked to the broader programme of shifting the economy from a reliance on low-cost, export-driven manufacturing, to a basis in domestic consumption and services activity.

  • As noted, the growth of online retail has been paralleled, and supported, by the growth of mobile payments. This has been driven by the very widespread ownership of smartphones in China, now more than half the population, and a distinct preference for accessing the internet through mobile interfaces, which is set to account for virtually all online payments by 2020. In consequence of these dynamics, the China mobile share of e-commerce stands at 70%, versus 30% in the US. The use of mobile payments for offline transactions (online-to-offline, O2O), has now become ubiquitous in China, with 83% of Chinese internet users using O2O. With all manner of goods and service providers now accepting mobile payments, it is no surprise that 68% of Chinese internet users use mobile payments versus 15% in the US, and that the value of China mobile payments stands at 11 times the US level.

  • This ubiquity of mobile payment adoption in turn facilitates the digitalisation of other sectors of the economy, where the inefficiencies of incumbent operators allows new digital players to jump over them, or compel them to develop their own digital offerings and improve services. The high inefficiency of the transport sector has led to rapid adoption of ride sharing platforms; the number of taxi-hailing app rides in Beijing is now eight times the number in New York. Financial services and healthcare are now also being transformed. Government statistics project the sharing economy will reach 10% of GDP by 2020, and 20% by 2025.

  • On the other side of the coin, for industry, China's labour productivity in many sectors is still only 15% to 30% of the OECD average. China's manufacturing, which accounts for 25% by value of the global total, has productivity at 20% of developed country levels. This means substantial potential for digitalisation and automation driven improvement, a key focus of the government's 'Made in China 2025' and 'Internet Plus' programmes. It is noted that the progressive rollout of digital procurement, predictive maintenance, smart energy and inventory management, should all increase the cost efficiency of manufacturing, quite apart from the greater adoption of robots. Indeed, as part of the government's allied Internet Plus initiative, a target has been set to automate 80% of Guangdong province's manufacturing, by 2020.

  • The digital transformation of Chinese economic sectors is being underpinned to a great degree by the services and ecosystems of China's BAT powerhouses. These arguably play a far more crucial role in the Chinese digital economy than the FAANG enterprises do in the West:

  • The BAT companies have effectively become 'critical infrastructure' for the Chinese economy. For example, Alibaba's e-commerce platforms, with 60% of the domestic e-commerce market, support approximately 10 million active sellers.

  • Both Tencent and Alibaba have, at the core of their offerings and their relationship with their customer base, 'superapps' providing services relating to payments and finance, shopping, transport, social media and messaging, health, entertainment, dining, education, and much more. It is noted that Chinese users may spend the bulk, if not all, of their online time within these ecosystems, which cater to all their needs, whether the services are provided by Tencent and Alibaba, or by their third party business partners within the superapp ecosystem. Baidu has also built an extensive ecosystem around its search engine.

  • The attractiveness and ease of use of these ecosystems has, for example, underpinned the degree to which mobile payments have come to dominate in China; the two principal mobile payment apps, Alipay and WeChat Pay, being central parts of the Alibaba and Tencent superapps. It also explains how an Alibaba affiliate came to manage China's largest money market fund, Yu'e Bao, based on balances in Alipay accounts.

  • The diversity of contact points with users means that the richness of the data derived by these firms is considered to exceed that of the FAANG companies, given the relative narrowness of their operations. Indeed, the recent expansion by FAANG companies into parallel sectors (e.g. Amazon into food retail), has been remarked on as a measure of 'catch up' with the broader scope of the BAT companies.

  • With such data, the BAT companies are in a position to provide crucial support, through data partnerships, to firms wishing to enhance their products or their targeting, optimise their supply chains, or determine the optimal geographic distribution of their stores. In addition, for sectors in which richness of data will be key to building full profiles of customers, such as for health tech solutions, the BAT firms clearly have an outstanding advantage. To take another example, Alibaba has taken a lead role in offering social-credit scores for individuals and businesses, basing this on superapp-derived information on ability to pay, credit history, and social network activity.

  • The BAT companies also provide nearly half of the venture capital (VC) funding in China, in stark contrast to the position in the west where the FAANG companies play a far more limited role. This steers the Chinese VC sector towards investment in digital technologies such as big data, artificial intelligence (AI), and fintech companies, as well as giving them extremely valuable support with their vast data pools. Indeed, it is no wonder that Chinese fintech unicorns account for more than 70% of the value of fintechs worldwide.

  • In addition to the above, the BAT companies also play a key role in spearheading the outbound expansion of Chinese digital economy players into overseas markets, as noted in the next section.

Understanding the developments outlined above is critical to understanding the tax issues delved into further below. The tax characterisation issues for sharing economy and other digital services become of ever greater importance when these now make up such a huge share of total economic activity; the impacts in terms of value-added tax (VAT) and individual income tax (IIT) are particularly important.

The centrality of the BAT enterprises as facilitators of commerce, with so many traders selling, and payments processed, through their platforms, explains why the tax reporting provisions of the new E-Commerce Law have attracted so much attention.

The remarkable gap between the high level of digital advancement of China's consumer sectors, and relative digital backwardness of manufacturing and other sectors, provides a context in which the BAT firms, which built their success on the consumer side, can now 'cross-pollinate' and contribute to advances in other industries. Certainly the VC-driven innovation backed by the BAT companies will be relevant in this regard.

It also provides a context for the recent raft of enhancements to the tax incentives for advanced equipment investment (i.e. expensing of items less than RMB 5 million ($720,000)), the raised ceiling for staff education expense deductions (2.5% to 8%), the special IIT treatment for 'breakthrough bonuses' to scientists, the enhanced VC tax incentives, and the increased research and development (R&D) super deductions.

The cross-border dimensions of China's digital economy

China's digital economy has multiple evolving cross-border dimensions, and understanding these is crucial to understanding the tax issues:

  • Cross-border e-commerce made up 20% of China's foreign trade in 2016, the bulk of which is business-to-business (B2B). At the same time, cross-border business-to-consumer (B2C) e-commerce is steadily increasing, with 35% of Chinese online shoppers having bought products from overseas in 2015, and more than 5,000 cross-border e-commerce platforms now in existence.

  • The increase in volumes has been rapid; B2C imports made up only 4% of the China B2C market in 2013 but this has now exceeded 10%, and is headed for 12% by 2020.

  • An important framework element in the development of B2C e-commerce has been the establishment of special e-commerce zones through which imports and exports are directed, ensuring that VAT, consumption tax, and customs duties are collected on inbound B2C activity (at incentivised reduced rates), while also facilitating efficacious clearance. In August 2018, China's State Council approved the setup of 22 further pilot cross-border e-commerce zones, bringing the total number to 35, showing further commitment to this approach.

  • Another notable development has been the degree to which Chinese digital service exports have taken off. While China is better known as a goods export powerhouse, and runs an overall service trade deficit, the country runs a substantial and expanding digital services export surplus.

  • In terms of digital service imports, one impactful regulatory development is the continuing rollout of the Cybersecurity Law. As this includes key provisions in relation to data localisation, requiring certain personal data to be stored and processed onshore and setting restrictive procedures for its transmission outside China, this will undoubtedly lead foreign digital service providers to move operations and infrastructure onshore. This has already occurred in relation to cloud services, and might be thought likely to also impact on app platforms. These developments have clear knock-on tax implications, and involve complex structuring considerations, given the continuing limitations on foreign invested entities being involved in certain sectors of the China digital economy.

  • On the cross-border investment front, there has been a massive flow of capital to key foreign markets, with the BAT enterprises in the vanguard. Developments have been particularly notable in Southeast Asia, for example:

  • Alibaba has invested in Lazada, the leading e-commerce platform throughout Indonesia, the Philippines and other Southeast Asian countries with 550 million customers;

  • Tencent's overseas acquisitions have made it into the world's biggest games company;

  • Alipay and Wechat Pay (Tencent) already cater extensively to 120 million Chinese tourists travelling abroad each year, and debiting their RMB balances for payments settled in local currency;

  • Tencent also recently obtaining a licence to offer WeChat Pay services in Malaysia in local currency, its first such local currency venture overseas; and

  • Didi Chuxing, which accounts for more than 80% of China's ride sharing market, is now expanding into Australia, as well as Mexico and Brazil.

Other Chinese digital economy players have been opening up new markets overseas, such as the Mobike bike sharing app across Europe, though some commentators question whether the more restrictive US and European investment climate will dissuade some overseas technology acquisitions by Chinese digital economy players.

It might also be observed that the BAT company-backed China VC capital industry has been making major overseas investments, rising to 14% of global VC investment outside China in the 2014 to 2016 period.

This overview makes clear why, with e-commerce imports surging, related tax and customs collection mechanisms, bonded zone clearance regimes, and potential permanent establishment (PE) exposures, are so important. The data localisation moves hint at how structures for supplying digital services to China will need to change in future, with associated tax consequences. The rapid moves by BAT and other Chinese DE enterprises into other markets make clear why a stable and consistent set of international tax rules, updated for digitalisation developments, are so important for Chinese enterprises and policymakers. We now turn to the specifics of these issues.

Key tax compliance and administrative issues for digitalising businesses in China

Tax compliance and administrative issues faced by digitalising businesses in China are many and varied.

Regulatory and tax rules outpaced by digitalisation

While China's economy has digitalised rapidly, particularly in the consumer space and with the rise of the sharing economy, tax rules and guidance have barely kept up. As China's economy remains heavily regulated, the tax authorities have historically paid close regard to business activity regulatory classifications in deciding appropriate tax treatments.

So, for example, there is a lack of clarity over the VAT treatment of the commission income of ride sharing platforms. Such platforms could originally have registered as providers of information technology services with the government authority handling enterprise business registrations (now the State Administration for Market Regulation, SAMR), supporting the application of VAT at the 6% rate. However, after driver liability and ride safety considerations prompted new regulations, obliging platforms to register with the Ministry of Transport, many tax authorities switched to demanding VAT application at the transport services rate, currently 10%.

As noted above, platform models are radically restructuring the Chinese economy, including sectors such as health and finance, meaning that the form in which such services are delivered, and the players involved, will see rapid change and innovation; continuous 'fine-tuning' of the legal obligations and status of platforms can well be anticipated. Given the interplay between regulatory classifications and tax rules, the need for clear tax guidance will become ever greater.

Traditional tax administration needs to catch up with the shift to a platform economy

As explained in last year's chapter, officially-issued tax invoices (fapiao) play a central role in China's tax administration. Enterprise payments will be ineligible for corporate income tax (CIT) deductions without a 'general fapiao', and no input VAT credit will be obtainable without a 'special fapiao'. While recently a number of local tax authorities have initiated pilot programmes allowing traders to register to issue electronic fapiao, for the most part businesses still need to shuttle to tax offices to obtain paper fapiao. The cumbersome nature of the processes, and the traditionally relaxed attitude of many small businesses to tax compliance, has meant that a lot of selling activity has been conducted without fapiao issuance and tax payment.

For platform businesses, particular issues arise because the tax authorities can, in certain instances, look to treat platform operators who typically function simply as transaction intermediaries as transaction principals. In consequence, they may view customer payments as gross receipts of the platform operator, rather than acknowledging that the platform commission is just an element of this amount. Tax authorities can have various justifications for this, such as regulations treating ride sharing platforms as liable for service quality, service platforms holding themselves out in marketing or contractual documents as master service providers, and certain platforms issuing, on customer request, fapiao for the full amount of consideration paid. The net result is that VAT and CIT burdens may indeed fall on the gross receipts of the platform business, as it may not be possible to get fapiao from the unregistered platform traders or service providers (e.g. taxi drivers) to secure VAT input credits and CIT deductions. The bigger e-commerce platforms do, it must be said, require traders to provide business licence and tax registration records on setting up a shop on their platforms, but this cannot be said of the thousands of smaller platforms.

Another factor that further complicates the issue is the domestic monetary policy restrictions on so-called 'double clearing accounts'. This refers to the circumstances under which the platform collects the proceeds from the end customers (first clearing), and then after deducting its commission/service fee, remits the net payment to the traders (second clearing). Technically, unless the platform has obtained an online payment licence (which is actually extremely rare), it is otherwise prohibited to conduct transactions that involve the use of double clearing accounts. Hence, many e-commerce platforms are under pressure to transform from a pure intermediary platform to a buy/sell principal in form.

All this being said, a number of developments may be set to substantially regularise the situation in coming years. The new China E-Commerce Law, which enters effect from January 2019, includes a provision to oblige all platforms to report on the activities of traders and service providers to SAMR and the tax authorities, which should push these towards higher compliance. The implementation of this provision will very likely be relying on the finalisation of the new Tax Collection and Administration (TCA) Law (currently still under drafting), so it may be later in 2019 that the precise outcomes are known.

At the same time, the Shenzhen tax bureau, supported by Tencent, in summer 2018 rolled out a pilot blockchain invoicing system that fully integrates transaction parties, payment service providers, WeChat invoice delivery, and the tax authorities. Using decentralised blockchain technology, an unalterable transaction record will lie behind the automatic generation of digital fapiao, triggered whenever a trader makes a sale, and a customer pays (usually using WeChat Pay or Alipay). The customer can then use the digital fapiao received over WeChat for claiming relevant tax deductions, with the tax authority having received real-time information on all steps of the process of sale, payment, and tax deduction claim.

Assuming such systems prove robust on pilot, their convenience could well drive widespread registration by traders for the service. Indeed it may also be noted that the draft new TCA Law plans to oblige all financial institutions, and potentially other payment providers, to mass report transaction information, linked to taxpayer identification numbers (TINs) to the tax authorities. With tax authority big data analysis capacities allowing for matching and cross-checking of billions of transactions, and with supporting initiatives such as taxpayer social credit rating set to further influence tax compliant behaviour, it is anticipated that the platform tax administration-related issues, outlined above, should be progressively resolved over time. However, this is far from the limits of platform tax challenges.

Platforms as tax intermediaries?

The manner in which platform operators have driven the disintermediation and disaggregation of existing supply chains means that, as some economists have described it, the 'invisible hand' of the market, based on price signals, is being replaced by the guiding hand of platform algorithms. The latter guides buyers and sellers towards their optimal matches and transactions, ultimately determining overall economic outcomes. Consequently, between the old dichotomy of the free market, on one hand, and the planned economy, on the other, one can speak of the 'planned markets' of the platform-led economy. The question with which tax authorities everywhere are wrestling, is whether this also means that platforms should play a role as intermediaries, in the collection of tax and assisting the tax authorities.

At a policy level, apart from the trader information reporting requirements in the E-Commerce Law and the e-commerce import reporting obligations set out in 2016's SAT/GAC Circular 18, it does not appear, at present, that Chinese policymakers plan to impose more extensive obligations on platform operators. Circular 18 did provide for expedited customs clearance for e-commerce imports where platforms facilitated customs duty, VAT and consumption tax collection for traders, but this was a voluntary arrangement.

This being said, some local tax authorities have actively pursued platform operators to withhold tax from platform participants. The issue has arisen, for example, in relation to ride sharing platforms being pursued for withholding of IIT from drivers' fares. This is asserted on the same basis as mentioned above; that the platform is viewed in some sense as an economic principal, and the drivers therefore as employees. Getting to a satisfactory outcome on this issue is complicated by the fact that the existing IIT Law makes full compliance very unappealing. Essentially the drivers could have their income taxed at a flat rate, but with their deductions capped at 20% of income (far less than their actual costs), or pay progressive rates and need to have sophisticated accounting, and fapiao support, for actual expenses (which is beyond their abilities). Unsurprisingly, many forego compliance, hence the tax authority's inclination to get the platforms involved in IIT collection. This issue clearly cuts across the entire spectrum of services provided in China's rapidly expanding 'gig' economy, driven by the disintermediation and disaggregation forces of platform economics.

As it happens, and as elaborated in the chapter, One giant step forward in Chinese IIT reform, China is putting the finishing touches to a wholesale IIT reform. While this would substantially lift the entry threshold for IIT for the self-employed, it would not, of itself, simplify the IIT calculation and administration process for gig workers. This being said, perhaps the answer lies, in the medium term at least, with the tax record generation and information reporting innovations mentioned above. Driver tax expense records and fapiaos could be underpinned by the nationwide roll-out of the Shenzhen tax authority blockchain example above. Furthermore, the forthcoming platform tax information reporting requirements might facilitate tax authorities to pre-fill tax returns for gig workers, as is already done in other countries. It might be noted that the 2018-issued SAT Announcement 28 goes some distance to clarifying and modernising on-file tax record requirements for taxpayers, including use of e-invoices, and this further supports businesses and individuals on their road to greater tax compliance and associated tax certainty.

Cross-border digital economy issues in practice

As noted above, the volumes of cross-border e-commerce and digital service activity into China has been increasing rapidly. Various government policies have sought to encourage this, in connection with the goal of shifting China to a consumption and services driven economy. However, incompleteness and ambiguity in the tax and regulatory framework lead to continuing issues.

Withholding tax (WHT)

Guidance is lacking on the appropriate WHT treatment for various digital services provided cross-border into China. For example, with no specific guidance on cloud services, many local authorities can seek to place related fees under the domestic law WHT categories of leasing income or licence fees, and then preserve this treatment under the royalty article of China DTAs. In other cases services characterisation may be accepted, and no WHT imposed. This inconsistency of treatment creates challenges in administration, contracting and in obtaining double tax relief.


Foreign exchange controls continue to lead to challenges for both relatively straightforward, as well as more complex business arrangements. Supplies of software cross-border into China provide an illustration. Sale of software into China would, in principle, not result in CIT WHT leakage, but in order for purchase payment out of China to meet foreign exchange authority mandated bank processing requirements, proof of import through customs needs to be provided. This is clearly not relevant for software, so the payment may be labelled as a licence fee, and WHT suffered, simply to fulfil these archaic forex requirements. At a more sophisticated level, multinational enterprises (MNEs) in advanced sectors, including digital economy businesses, may want to arrange cross-border technology development collaborations that call for transfer pricing (TP) profit splits to be applied. However, forex rules do not facilitate payments being made in relation to profit split adjustments, so complicating sensible commercial arrangements.


Chinese PE guidance, while it draws on elements of the OECD guidance, does not cover server PE cases. The government has made moves to open up certain sectors of China's digital economy to foreign enterprises, but at the same time the new Cybersecurity Law demands the storage and processing of personal data onshore, and limits data transfer offshore. In this context, foreign players are compelled to build up their onshore server capacity – this is usually achieved in conjunction with Chinese business partners, typically leaving the foreign enterprises without direct interest in the servers, but with a measure of control over their usage and deployment. This leaves open technical questions on whether the authorities will later pursue the foreign enterprises for tax on a server PE basis.

Also in the PE space, foreign traders through web platforms are concerned about agency PE exposures. These could arise where the enterprise has marketing support related parties in China. While China has not adopted the BEPS PE updates, which widen the scope of agency PE, Chinese tax authorities at regional and local level have followed the BEPS developments with interest and can look to apply agency PE more broadly in a manner that could leave existing structures exposed. In the same vein, at the same time as China has been facilitating e-commerce imports with the proliferation of new special e-commerce zones, there are concerns that the authorities might, in the BEPS spirit, go more aggressively after bonded zone warehouse operations with fixed place PE assertions.

VAT for digital exports

As noted above, China is running an expanding digital services surplus. Incentives, such as the advanced technology service enterprise (ATSE) regime, which provides a reduced CIT rate for service outsourcers, are aimed at further fostering this. However, at the same time, VAT zero-rating only applies in very limited circumstances. VAT exemption may be obtained where certain services can be shown to be consumed outside China (itself complex in a digital services context) but none of the input VAT will be recoverable in such cases. These cross-border VAT issues are central tax policy concerns for China's major digital economy players.

Overseas tax issues for China's 'going out' digital economy enterprises

As noted above, it is widely agreed that the major global DE players are the US FAANG and China's BAT companies, and these are actively competing in several world regions. Southeast Asia and India, and increasingly Africa, are noted as key 'battlegrounds' for these enterprises. However, it might be observed that compared to the experience of the FAANG companies, whose initial overseas expansion in the 2000s was in the context of a relatively stable international tax environment, China's BAT enterprises are making their initial overseas expansion against the backdrop of numerous countries adopting unilateral DE tax measures. These have the potential to create substantial complexity and compliance challenges, given both the heterogeneity of such measures and the fact that Chinese 'go out' enterprises are still in the process of building up their tax team capabilities and experience.

Taking a sampling of Asian tax jurisdictions in which Chinese DE enterprises are active:

  • India: India has a full spectrum approach to taxing cross-border DE activity. In addition to broadly applied CIT WHT rules, which catch many cross-border digital service supplies, 2016 saw the introduction of a 6% equalisation levy on digital advertising services, and 2018 the institution of a 'virtual PE' concept, with the significant economic presence (SEP) rule. This is in addition to India's adoption of the BEPS PE updates through the multilateral instrument (MLI), and the steady expansion of the existing PE threshold via court cases, including the endorsement of a virtual service PE concept. In September 2018 it was announced that Indian e-commerce marketplaces would be required, from October 2018, to withhold 2% of the GST payments on sales by third party retailers, under a 'split payments' measure. This requires GST registration in every Indian state of relevance.

  • Indonesia: A variety of intermediary platforms have been reportedly under pressure from the authorities to (i) register PEs, or set up local subsidiaries, and pay CIT on their commission fees, and (ii) to collect and remit a 1% tax on the full value of transactions conducted through their platforms – this is done with a view to collecting the VAT and CIT perceived as being underpaid by traders/service providers through the platforms. The authorities have also been working on (yet to be finalised) rules which would compel the registration of a tax branch, on pain of having the enterprise's website blocked. It is noted that Indonesia has also opted for the BEPS PE updates through the MLI.

  • Australia: The Multilateral Anti-Avoidance Law (MAAL) of 2015, together with the diverted profits tax (DPT) of 2017, present complex and challenging new provisions for CIT enforcement of particular relevance to e-commerce businesses. This is alongside Australia's early move to make intermediary platform operators jointly liable for VAT of platform traders and service providers. Australia has also opted for the BEPS PE updates through the MLI.

  • Taiwan: Foreign providers of e-services are obliged to register for CIT and VAT in Taiwan. In B2B cases the tax filing obligations fall, in the first instance, on the foreign enterprises. In the B2C case it is the platforms that are obliged to withhold CIT and account for VAT. Net basis CIT is however provided for, with allocable expense deductions allowed and it may also be possible to argue that a portion of Taiwan revenues relate to functions conducted overseas.

These developments are emulated in other Asian jurisdictions, with Vietnam, the Philippines, Malaysia and Pakistan widening WHT application to digital supplies, and Japan, Korea and New Zealand moving on BEPS PE adoption through the MLI. Chinese DE firms need to contend, in addition to such novel tax rules and enforcement approaches, with heightened enforcement efforts on more mainstream tax rules. The number of reported cases of PE and TP challenges for Chinese companies in India and other Asian jurisdictions is testament to this. A wide spread of Asian jurisdictions have also moved to adopt destination-based VAT rules for digital services and have sought to catch low-value tangible imports in the VAT net. As can be seen from the examples above, platforms are increasingly being drawn into intermediary tax collection obligations.

The diversity and complexity of new DE tax rules in Asia is mirrored in Europe, where Chinese DE firms are also increasingly active, and newly also in Latin America and Africa. The US is also throwing up complexity with the sales tax changes for DE firms, following on from the Wayfair case. The complexity that Chinese DE firms need to keep on top of is consequently rising at a hard-to-manage pace.

These developments occur in parallel with increasing numbers of cases in which the Chinese tax authorities have been reported to have applied the domestic controlled foreign corporations (CFC) rules against overseas operations of Chinese 'go out' enterprises; this is discussed further in the chapter, Tax opportunities and challenges for China in the BRI era.

In the round, Chinese DE enterprises, and particularly platform businesses, face an increasingly challenging tax environment, demanding particularly astute tax management.

Updating the international tax framework for digitalisation

As noted above, considerable efforts are being invested at global level to revamp international tax rules to deal with the tax challenges of digitalisation. The 124 jurisdictions of the OECD Inclusive Framework (IF) on BEPS have set an ambitious timeframe of 2020 to agree a global consensus solution. This may involve modifications to the existing jurisdictional nexus and profit allocation rules – indications of the shape of any such changes may even start to become apparent in 2019.

Already, in March 2018, the IF released an interim report on the tax challenges arising from digitalisation (interim report). This was published at the same time as both the EU Commission set out proposals for resolving the digitalisation tax challenges, and the UK government issued an updated position paper on the same issues; the Australian government followed with its own discussion paper in October 2018. The basic upshot of all these efforts, explicitly acknowledged in the Interim Report, is that there is, as yet, no consensus between countries on either the long-term solution for updating international tax rules, or interim measures for addressing perceived tax revenue losses arising while the long-term solution is in development.

The essential contours of the global debate and of possible solutions, in brief, are as follows:

  • On interim measures, the usage of turnover taxes (whether termed as equalisation levies, excise taxes, digital services taxes (DSTs), or otherwise) is highly contested. India and a number of EU countries (notably France, Italy, and Spain), have been strong advocates. The UK also, in October 2018, announced its planned adoption of a DST from 2020 if no global solution can be found by then. They argue that without these levies on the revenues of major DE enterprises (with the focus clearly on the FAANG enterprises), market competition will be distorted, and tax revenues relating to value creation in their countries will be lost. Many other countries, including the US and China, have however expressed concern about the distortive impact of such taxes. As gross basis taxes, designed to operate outside the scope of treaties, they necessarily lead to double taxation and may undermine the economic benefits of digitalisation. Various other countries, such as Germany, have repeatedly shifted forwards and back on their support for such taxes; this lack of decisiveness one way or another, and the need within the EU for unanimity on tax measures, has meant that the likelihood of success of the EU's interim measure proposals has been a matter of running debate throughout 2018.

  • For the long-term solutions, countries still take different views on what they consider to be the issue requiring resolution. Some countries still consider that the double non-tax, and distorted competition issues, remain only partly resolved after the BEPS work; they consider that the design of the tax and digitalisation long-term solution needs to address this. Other countries consider that the BEPS measures will ultimately succeed, when fully rolled out, in addressing the double non-tax issues. They consider that the focus of the tax and digitalisation long-term solution must necessarily be on a 're-thought' allocation of taxing rights between countries, under revised international tax rules, which takes on board new value creation dynamics.

  • This thinking then feeds into the suggested solutions put forward by countries. Countries which consider that the double non-tax/distorted competition issue remains to be addressed have mooted ideas of minimum taxation (whether from residence or source country directions, or both) which ensure a global minimum effective tax rate on income; an OECD Tax Talk on October 16 indicated that Germany and France advocated such a measure. Countries concerned about distorted competition have also put forward proposals for very broad digital PEs, such as those put forward by the EU Commission and by India, which would capture cross-border provision of a very wide array of digital services; and in India's case, also supplies of tangible goods via digital interfaces. These broad digital PE concepts are driven by a line of thinking that where a foreign enterprise has a general level of involvement in the economic life of a country, including maintaining sustained and purposeful relationships and interaction with local customers, then the country of the customers should have a right to tax them.

  • By contrast, those countries with more faith in BEPS to solve double non-tax issues, and who consider the rebalanced allocation of taxing rights to be the main issue, have put forward more narrow and focused proposals. However, these can also differ very substantially on the details.

  • The UK government paper has become the 'flag bearer' for the idea that users, as distinct from consumers, may under certain highly digitalised business models make a very substantial contribution to value creation, and that tax rules need to adapt to factor in this dimension to value creation. Essentially, users can be viewed as 'integrated' into enterprise value creation processes, perhaps to the extent that they might even be viewed as 'quasi-employees'. For social media, search engine and intermediation platform 'network-driven' business models, intense user engagement and content generation is seen to be crucial to the existence of the business, which leverages user data and network effects to create value. The UK paper therefore suggests that part of the residual profits of a group enterprise would be attributed to user contributions, the proportion varying depending on the relative significance of this for the business model in question (i.e. more for social media models, less for intermediation platforms).

  • It has been indicated by OECD and US officials, in public seminars and on the recent OECD Tax Talk, that the US has also tabled a proposal for discussion at the IF, which could allocate a greater share of an enterprise's global profits to market countries. While little has been publicly disclosed on this to-date, some commentators have suggested that the US approach might link customer-based intangibles of the enterprise to the location of the customer base. Further to this, part of the residual profits of the group enterprise might then be allocated to the countries to which these market-linked intangibles are attributed, in other words, to the countries at which marketing and sales efforts are directed. It is not clear whether this approach would also introduce some form of virtual PE, or would be limited to altering profit attribution rules where traditional physical presence PE (or a subsidiary) already exists. In any case, the approach would appear to go broader than just highly digitalised businesses, and could be relevant for many businesses with a strong reliance on marketing intangibles.

  • Indeed, this points to another key dividing line between countries, which was explicitly highlighted in the Interim Report, that some countries consider that the issues pertain to digitalised businesses and new measures should be scoped accordingly, while other countries consider that, with the entire economy digitalising, any new profit attribution or nexus rules should not be ring-fenced to digitalised businesses.

  • Beyond CIT, a further element of international work, also at OECD/G20 level, is on VAT/GST and the question of whether platforms should have tax information reporting or even tax collection obligations. The outcomes of this work stream remain to be seen.

As regards China's stance, the relevant Chinese government authorities (the Ministry of Finance (MOF) and the State Administration of Taxation (SAT)) have not yet set out any formal 'China position' in the manner of the UK (publicly), or the US (semi-publicly). This being said, a certain amount can be inferred by drawing on information in the public domain, including tax media reports on the IF deliberations, and public DE tax seminar presentations by government officials.

It would appear that China tax policymakers consider interim measures, such as gross basis turnover taxes, sub-optimal and distortive, and not a good path forward. They might be considered to favour work on a long-term solution which has its basis in the existing international tax framework, without ring-fencing the digital economy, and which could minimise double tax outcomes and additional burdens on businesses. This would be very much in line with the repeated statements by China's top leadership, including President Xi and Premier Li, concerning China's position as a strong advocate of continued globalisation, and economic digitalisation as a key element of this. It would also make sense in view of the blossoming overseas operations of the major Chinese DE players, and their rapid innovation of new service offerings attractive to consumers in overseas markets. Apart from this, the indications are that China takes an open mind to the shape of the long-term solution proposals, emerging from the work of the IF.

It remains to be seen what comes of the IF work, with much anticipated to emerge in 2019. However, given that the complex processes are underway with the digitalisation and intangible-isation of the economy, even if consensus is reached on new rules, this will be by no means the end of the story. Continuing innovation in business models as new technologies are rolled out will no doubt demand a continuing process of updates to international tax standards; whatever changes are made in 2020 are very unlikely to be 'forever and always'.

A further key factor, separately discussed in the previous customs and international tax chapters, is the long-term impact of the continuing shift in China-US trade and economic relations. While the existing trade issues may ultimately turn out to be simply temporary, it cannot be discounted that they become a more enduring feature of the global economic landscape. As discussed in the previous chapters, businesses and policymakers will be watching closely to see if there is an emergence of a trend towards the creation of separate trading and investment spheres.

Some commentators have speculated that, at some point in the future, a 'splinternet' may arise, whereby one global internet system is dominated by the US, and a separate system by China. We are certainly not at this juncture yet, but as with other digital regulatory developments (including data localisation rules, data privacy requirements, and firewall policies), expectations of the future patterns of digital commerce may well feed into tax rule setting. The trend of these developments will be followed with interest in the coming years.

Khoonming Ho


Partner, Tax

KPMG China

8th Floor, Tower E2, Oriental Plaza

1 East Chang An Avenue

Beijing 100738, China

Tel: +86 10 8508 7082


Khoonming Ho is the head of tax for KPMG Asia Pacific. He was the vice chairman and head of tax at KPMG China. Since 1993, Khoonming has been actively involved in advising foreign investors about their investments and operations in China. He has experience in advising on issues on investment and funding structures, repatriation and exit strategies, M&A and restructuring.

Khoonming has worked throughout China, including in Beijing, Shanghai and southern China, and has built strong relationships with tax officials at both local and state levels. He has also advised the budgetary affairs committee under the National People's Congress of China on post-WTO tax reform. Khoonming is also actively participating in various government consultation projects about the continuing VAT reforms.

He is a frequent speaker at tax seminars and workshops for clients and the public, and an active contributor to thought leadership on tax issues. Khoonming is a fellow of the Institute of Chartered Accountants in England and Wales (ICAEW), a member of the Chartered Institute of Taxation in the UK (CIOT), and a fellow of the Hong Kong Institute of Certified Public Accountants (HKICPA).

Conrad Turley


Partner, Tax

KPMG China

8th Floor, Tower E2, Oriental Plaza

1 East Chang An Avenue

Beijing 100738, China

Tel: +86 10 8508 7513

Fax: +86 10 8518 5111


Conrad Turley is a tax partner with KPMG China and heads up the firm's national tax policy and technical centre. Now based in Beijing, Conrad previously worked for the European Commission Tax Directorate in Brussels, as well as for KPMG in Ireland, the Netherlands and Hong Kong.

Conrad has worked with a wide range of companies on the establishment of cross-border operating and investment structures, restructurings and M&A transactions, both into and out of China. He is a frequent contributor to international tax and finance journals including the International Tax Review, Tax Notes International, Bloomberg BNA and Thomson Reuters, and was principal author of the 2017 IBFD book, 'A new dawn for the international tax system: evolution from past to future and what role will China play?'. He is also a frequent public speaker on topical China and international tax matters.

Conrad received a bachelor's degree in economics and a master's degree in accounting from Trinity College Dublin and University College Dublin, respectively. He is a qualified chartered accountant and a registered tax consultant with the Irish Taxation Institute.

Sunny Leung


Partner, Tax

KPMG China

26th Floor, Plaza 66 Tower II

1266 Nanjing West Road

Shanghai 200040, China

Tel: +86 21 2212 3488


Sunny Leung is KPMG China's national technology, media and telecommunications (TMT) sector tax leader. She has assisted various local tax authorities to perform studies on common China tax issues that have emerged in the new digital economy, possible solutions, and the potential impact of BEPS.

Sunny has been extensively involved in advising clients on setting up operations in China, M&A transactions, and cross-border supply chain planning. She has been providing China tax advisory and compliance services to domestic and multi-national companies in the TMT, as well as traditional manufacturing and service industries. Sunny has also been providing tax due diligence and tax health check services in China.

Mimi Wang


Partner, Tax

KPMG China

26th Floor, Plaza 66 Tower II

1266 Nanjing West Road

Shanghai 200040, China

Tel: +86 21 2212 3250


Mimi Wang is a partner with KPMG's global transfer pricing services based in Shanghai, serving clients in a wide range of industries. Mimi started her transfer pricing career in London in 2005 and relocated to China in 2012.

Mimi has managed many multi-jurisdictional planning studies, documentation and has participated in the negotiation of unilateral and bilateral advance pricing agreements and audit assessments. She has experience in a wide range of transfer pricing issues, including tangibles, intangibles, intra-group services, intra-group financing, business restructurings, etc. Mimi also has significant experience in business and intellectual property (IP) valuations.

As a member of KPMG China's BEPS Centre of Excellence, Mimi is also responsible for analysing the implications of BEPS for clients with operations in China. She has delivered training to tax officials and participated in discussions with senior State Administration of Taxation (SAT) and Ministry of Finance (MOF) officials on topical transfer pricing issues.

Mimi has a bachelor's degree from the London School of Economics and is a chartered accountant with the Institute of Chartered Accountants in England and Wales.

more across site & bottom lb ros

More from across our site

Proposals by HM Revenue and Customs to raise standards in the advisory market are ‘well overdue’, one partner declared
An intimate understanding of a client’s sector is essential to winning new business, a survey of over 28,000 corporate counsel reveals
‘Auditors are failing to perform their core function’ according to a think tank; in other news, White & Case adds a tax partner in Luxembourg
An overhaul of EU import taxes could spell the end of an exemption for cheap parcels
Sharma, managing director for A&M in the United Arab Emirates, tells ITR about intense time pressures, mimicking Jurgen Klopp and what makes tax cool
AI will speed up some of the most laborious TP processes without making human input redundant, argues Hank Moonen, CEO of TaxModel
Firms with a broad geographic reach are more likely to win work, especially from global companies with high turnovers, according to survey data of nearly 29,000 corporate counsel
Australian businessman Gordon Merchant used EY’s advice to offset an A$85 million capital gain, according to the Federal Court
Griggs has been drafted in ahead of schedule as the incumbent Tim Ryan departs for Citigroup; while the Netherlands plans to scrap a 15% share buyback tax
Authorities must ensure that Russian firms do not use transfer pricing schemes to increase profits made from oil sold in different markets, advocacy organisations have argued
Gift this article