China: Implementation guidance issued for Announcement 7 indirect transfers
The Chinese State Administration of Taxation (SAT) issued Circular 68 on May 13 2015, providing guidance for the PRC tax authorities' administration and implementation of the new indirect offshore disposal rules in Announcement 7, released in February 2015. In Circular 68 the SAT provides instructions to local tax authorities in relation to the following important aspects of Circular 68 administration, including (i) issuance of an official receipt for taxpayer transaction reporting under Announcement 7; (ii) consolidated tax filing for indirect transfers at multiple locations; (iii) GAAR case evaluation at the 'verification' stage; (iv) procedures for launching GAAR investigation and adjustment; and (v) case follow-up work.
i) Receipt issuance for transaction reporting: Local tax authorities are instructed to give guidance on and encourage transaction reporting under Announcement 7 by buyers and sellers as well as by transferred Chinese entities. On receipt of reporting an acknowledgment receipt is to be issued within a reasonable period.
ii) Consolidated tax filing for indirect transfers at multiple locations: In another welcomed administrative concession to taxpayers, where a single offshore equity transfer results in the indirect transfer of Chinese taxable assets in multiple tax districts, the reporting party(s) is (are) permitted to choose a single location to effect the transaction reporting, and the chosen local in-charge tax authority would be responsible for the initial 'case verification' work in relation to the case.
iii) GAAR case evaluation at the 'verification' stage: The local tax authorities are to use, in their verification work, data from taxpayer filings and assessments, information from the tax administration of taxpayer payments overseas, share transfers and tax treaty application, as well as media reports and public securities market announcements. Where the 'verification work' analysis concludes that the transaction lacked reasonable business purposes, the responsible local tax authority's opinion and supporting analysis are to be reported, using a specific internal form, to the provincial level tax authorities for confirmation and ultimately up to the SAT for application to establish a formal investigation case
iv) Procedures for launching GAAR investigation and tax adjustment:Following the SAT determination that a case investigation should be opened the responsible tax authority has nine months to reach a conclusion. Local tax authorities' "plans for non-adjustment" or "preliminary adjustment plans" are sent to the SAT for approval.
v) For the case follow-up work:Local tax authorities are instructed to pursue tax payment, interest and penalties, with payments received to be reported up to SAT.
Overall the Circular 68 implementation guidance gives greater comfort to taxpayers that Announcement 7 will be applied in a more transparent and consistent manner. In particular, the requirement on local tax authorities to provide written acknowledgment of receipt of taxpayer transaction reporting helpfully provides more certainty to taxpayers that the discharge of their Announcement 7 obligations has been acknowledged. In addition, the permission for a taxpayer to make a single reporting to a chosen tax authority, where Chinese taxable assets in multiple tax districts have been transferred, is a positive step to remove what would otherwise be a burdensome requirement.
Although uncertainties remain surrounding the administration of Announcement 7 that call for additional clarification, Circular 68 is a significant advancement in providing administrative clarification for how the GAAR procedures are to be integrated with Announcement 7 cases.
Khoonming Ho (firstname.lastname@example.org)
KPMG, China and Hong Kong SAR
Tel: +86 (10) 8508 7082
Lewis Lu (email@example.com)
KPMG, Central China
Tel: +86 (21) 2212 3421