Checklist of hot China tax issues for MNEs in 2020
In 2020, taxpayers should be alert for the following China tax developments and trends.
Electric vehicles tax support – Electric vehicles are the future of the automotive industry. While the government subsidies that boosted the Chinese electric vehicle market in recent years are being withdrawn, a 'dual-credit system' will continue to support new energy vehicle development and a range of corporate income tax (CIT) incentives exist. These include, for high and new technology enterprises (HNTEs), a lower CIT rate of 15% (reduced from 25%) and an extended loss carry-forward period of 10 years (up from five years). This, together with the CIT super deduction for R&D expenses and other incentives, supports investment in the auto tech of the future. At the same time, auto players must have systems and protocols to ensure full compliance with relief conditions, as the tax authorities are reviewing more thoroughly whether these have been met.
Auto financing – While the China auto leasing market is still in its infancy, rapid growth is anticipated over the next 10 years. Auto financing, by enabling more competitive pricing and accelerating the car replacement cycle, boosts new car sales. Cars coming off-lease in turn drive the expansion of China's used car business. At the same time, the market is becoming more defined, with different types of players (OEM-affiliated, dealer-affiliated and internet-affiliated) and different auto financing models. The latter includes lease-loan versus standard leasing (from the product design perspective), and direct leasing versus sale and leaseback (from an operational perspective). As a rapidly expanding and increasingly diverse sector, tax challenges arise, as do opportunities to realise potential tax savings as part of a winning strategy; for example deductibility of financing cost for VAT purposes, which is a tax refund when actual VAT liability exceeds 3%.
Consumption tax (CT) reform – At present, CT on autos is generally collected from manufacturers. New reforms, announced in September 2019, would shift this obligation to wholesalers or retailers. While details are yet to be confirmed, enterprises in the auto industry should follow this closely, given the potential impact on the overall tax burden of the industry and the pricing strategy among auto market players.
For more information, contact William Zhang, KPMG China auto sector tax practice leader, firstname.lastname@example.org
Proposed land appreciation tax (LAT) legislation – A draft LAT bill was released for consultation in July 2019. Real estate sector businesses will need to closely monitor the progress of the LAT legislation in order to pre-emptively assess and manage any arising risks. Major features included within the scope of the LAT bill is the transfer of collective land use rights and real estate, and clarifications on the timing of LAT obligations and tax payment schedules.
Greater Bay Area (GBA) individual income tax (IIT) preferential policies – Fiscal subsidies will be offered to attract and retain talented foreign staff to work in nine designated cities in the GBA. These include Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing. The subsidy is calculated to reduce the effective tax burden on the eligible personal income to less than 15%, and the subsidy itself is exempt from IIT. Enterprises are already starting to respond to the incentives with the planned deployment of staff to the GBA.
Tax rulings for urban renewal in the GBA – Rapid population growth and industrialisation in recent decades means that much of the land in the GBA is already built up. Consequently, redevelopment of existing towns and industrial estates is necessary to unlock land resources for new development. Commercial arrangements to acquire the relevant land use rights can trigger complicated tax issues, and the tax authorities in the GBA have been attempting to resolve bottlenecks and ambiguities with new guidance. Many complex tax issues remain, and real estate enterprises should monitor developments with these guidance and rulings to ensure full tax compliance for urban renewal projects.
For more information, contact Ricky Gu, KPMG China real estate sector tax practice leader, email@example.com
Bank asset management businesses – To ringfence risks and drive specialisation, Chinese banking groups are being encouraged to spin off and centralise their asset management business as separate legal entities. This necessarily gives rise to tax considerations in relation to the selection of the incorporation location, portfolio transfer from banks to subsidiaries, people relocation, related party transactions and other restructuring implications.
Financial services IT innovation – Large Chinese financial institutions have been looking to carve out their IT functions into separate legal entities, with a view to centralising and commercialising technological developments. As a new IT subsidiary defines the business relationship between itself, the rest of the financial institution, and external parties, transfer pricing issues will naturally arise. The usage of R&D incentives, whether at the level of the financial institution headquarters or IT subsidiary, also need to be assessed to maximise tax benefits.
For more information, contact Tracey Zhang, KPMG China financial services sector tax practice leader, firstname.lastname@example.org
Energy and natural resources (ENR) outbound investment tax risk – China's national oil and gas companies, oil service providers and engineering, procurement and construction (EPC) enterprises, are highly active outbound investors, particular in Belt and Road Initiative (BRI) jurisdictions. Investments in new markets and a changing global tax environment are exposing them to a range of complex tax risk management issues, notably for their holding and financing structures, transfer pricing arrangements, and foreign tax credit management.
VAT refund opportunities – ENR enterprises commit significant initial capital expenditure to their projects, to which long investment recovery timeframes apply. China's VAT system, which limited the use of VAT input credits, could significantly impact on cash flow and return on investment. Recent reforms, allowing for input VAT refunds, will enable better cash management and enhanced returns on investment.
Consumption tax (CT) reform – The planned reforms will shift collection obligations on oil processing from consignment processors to wholesalers and retailers. Enterprises in the oil and gas space need to follow this closely, given the potential impact on the overall tax burden of the industry.
For more information, contact Jessica Xie, KPMG China energy and natural resources sector tax practice leader, email@example.com
Rapid change in the digital space – Companies operating in the digital space stand at a crossroads. Internationally, BEPS 2.0 is set to revamp the architecture of the tax rules for the digital economy. The existing Chinese tax, accounting and foreign exchange systems may, however, create practical challenges for their implementation in China. Domestically, the Chinese government is driving efforts to reduce taxes, modernise the tax collection system and support China's digital transformation. While the pace of change may be unsettling for many companies, it is also an optimal time to voice concerns and make suggestions, as policymakers are more willing to listen than ever before.
For more information, contact Sunny Leung, KPMG China technology, media and telecommunication sector tax practice leader, firstname.lastname@example.org