China: A closer look at tax administration reform and accelerated APA process
Lewis Lu of KPMG China considers tax administration reform in China, which is high on the government’s agenda, with milestones set for every year up to 2025.
Tax administration reform over the next five years
Following high-level announcements at the March meetings of the Chinese legislature (the 'Two Sessions') the Chinese government has been issuing a series of notices on the details of various tax reforms over the next five years.
Tax administration reform is high on the agenda, with milestones set for each of the years up to 2025, in particular:
New systems to leverage vast quantities of taxpayer data to provide tailored and customised tax services to individual taxpayers, in the place of the existing undifferentiated services;
Steps to enable all corporate and individual tax matters to be dealt with online, reducing the number and frequency of tax payments by integrating several taxes into single filings;
Simplifying tax incentive application procedures, with further moves to self-assessment; and
Tax administrative processes that rely less on paper tax invoices (termed ‘fapiao’) as the central tax administrative documents. Instead, taxpayer data feeds are to drive administrative processes to a greater extent. This will interlink with further enhancements to the credit assessment system for taxpayers.
This will require an ever-more comprehensive pooling of data between government authorities to support these changes. There will also be an update to tax legislation, including the existing tax collection and administration law, to provide a legal basis for these enhanced administrative processes.
Simplified unilateral APA procedures under consultation
China has made strides in recent years with increasing its access to its advance pricing arrangements (APA) programme, providing enterprises with reduced transfer pricing risk and increased tax certainty for their operations in China. However, businesses still face challenges, such as cumbersome negotiation and signing procedures, and they must often wait a long period of time for acceptance and review of APA applications by the tax authorities.
To address this, on March 19 2021, the Chinese State Taxation Administration (STA) proposed a simplified unilateral APA procedure to be rolled out on a nationwide basis, with a public consultation open to April 18 2021. The simplified unilateral APA procedures have already been piloted in Shenzhen and other locations in Guangdong province. KPMG China has been in the vanguard, and already successfully assisted clients in leveraging this new process to sign several unilateral APAs.
The simplified APA process reduces the APA process to three stages versus six stages under the existing general APA process. These consist of (i) application evaluation; (ii) negotiation and signing; and (iii) monitoring execution.
The simplified APA process also sets clear deadlines for the tax bureau's acceptance of APA applications and then for evaluating and negotiating the APA. Taxpayers could, in principle, complete the entire process within a nine to twelve-month period, versus an average of two years under the existing general process.
It should be noted that the simplified procedures would only be applicable to unilateral APAs, and not to bilateral and multilateral APAs. Companies must meet the following two conditions to access the scheme:
In the three tax years prior to the company's APA application, the amount of annual related party transactions is greater than RMB 40 million (approximately $6 million); and
One out of the following three criterion is satisfied:
At least three months before applying for the simplified procedure, the enterprise provides to the tax authorities a report of contemporaneous information management (pursuant to STA Announcement No. 42 of 2016) for the most recent three tax years;
An APA has been in place for the past 10 tax years, and there has been compliance with that APA; or
The enterprise over the past 10 tax years has been subject to a special tax investigation and adjustment by the tax authority, and the case has been closed.
The consultation document also clarifies that the tax authorities will not accept APA applications under the simplified process in certain situations.
COVID-19 tax incentives extended
While China’s economy has already significantly recovered from the COVID-19 disruption in 2020, the Chinese government recently extended a number of the one-off tax incentives that were due to expire at the end of 2020.
Extension to December 31 2021 is provided for the value added tax (VAT) reduction or exemption for small-scale taxpayers (0% or 1% rates in place of the usual 3%).
Special individual income tax (IIT) treatment for bonuses to medical staff and for COVID-19 protective equipment has also been extended. However other special treatments, such as the VAT exemption for public transportation and delivery services, and the extended loss carry forward period for CIT losses, wrapped up on March 31 2021.
Partner, KPMG China