China: Looking ahead in challenging times
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

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

China: Looking ahead in challenging times

Sponsored by

sponsored-firms-kpmg.png
Sunset  New

KPMG’s Khoonming Ho and Lewis Lu look at what the Year of the Pig is set to bring to the Chinese tax landscape.

The Year of the Dog in 2018 is shaping up as a remarkable period in China’s ongoing story of economic growth and transformation. The year has been marked by a shifting inbound and outbound investment landscape, trade issues with the US, major overhauls of domestic tax law and administration, and the ongoing rapid digitalisation of the economy. These are all impacting business planning considerations for foreign investors in China, as well as for Chinese multinational enterprises (MNEs) investing overseas. In the forthcoming eighth edition of China Looking Ahead, which will be issued with the December/January edition of the International Tax Review, KPMG China’s tax experts will examine the issues arising in this year, as well as exploring the prospects for the Year of the Pig in 2019.

The China economic and investment context is vital for understanding the year’s major tax trends. Following on from the recent years’ huge surge in outbound direct investment (ODI), which saw China ODI overtake China inbound foreign direct investment (FDI) in 2015 and 2016, ODI moderated substantially in 2017. Indeed, for the year to date, ODI and FDI are much more in balance than in prior years. Ministry of Commerce (MOFCOM) data released in September show non-financial sector ODI in the eight months to August was $74 billion and FDI was $86.5 billion; this represented year-on-year growth of 7.8% and 6.1%, respectively. Within these numbers, the notable trends are that:

  • FDI has continued its shift towards more advanced manufacturing and services, with a noted surge in investment in medical equipment manufacturing, and other sectors for which foreign investment restrictions have been relaxed by China;

  • In line with China government regulatory guidance, ODI shifted towards sectors with greater potential for integration and synergies with the investing Chinese enterprises. These included the automotive, health and biotech, and consumer products and services sectors. In parallel, ODI shifted away from speculative, and highly leveraged, investment in sectors such as property development, sports and entertainment;

  • Investment in Belt and Road Initiative (BRI) countries continued to grow as a proportion of total ODI. The composition of ODI in developed countries changed significantly, with a significant fall in net flows to the US. This meant that nine times more was invested in Europe than the US in the first half of 2018.

The tightening US government restrictions on Chinese inbound investment, which was partly responsible for this fall in investment, have been paralleled by the heightened trade tensions of recent months. As of late September, the US has imposed tariffs on $250 billion on Chinese exports, and China has reciprocated with $110 billion on US exports. The medium term impact of these actions on MNE global supply chains, and on Chinese economic growth, remains to be seen.

Indeed, Chinese policymakers must now take these developments into account, as they continue to effect a broader, long-term economic rebalancing agenda. Pursuant to President Xi’s outline of China’s development priorities in an October 2017 speech to the CPC Congress, the government has been seeking to address industrial over-capacity and reduce excessive leverage in the economy, while maintaining economic growth above 6%. This is in parallel with the pursuit of major goals relating to continuous ‘green development’, tackling inequality, and cultivating home-grown innovation. It is against this backdrop that the evolving China tax landscape in the Year of the Dog is to be understood.

The 15 thematic chapters of the eighth edition of China Looking Ahead explain how businesses operating cross-border with China need to factor in these developments.

Firstly, a major overhaul of the foundations of China’s tax and regulatory systems is underway. The chapter on the new Individual Income Tax (IIT) Law will explain how this key structural reform, directed at addressing income inequality and shifting the structure of China’s fiscal base, has major implications for high net wealth individuals (HNWIs), as well as global mobility tax planning implications for inbound and outbound secondment arrangements. A further chapter explains how the government’s innovation agenda, based around the ’Made in China 2025’ strategy for building industrial strength in key sectors and the Internet Plus action plan, is being underpinning by a marked upgrade to R&D tax incentives. Complementing these changes, China’s multi-year tax administrative modernisation program is leveraging big data technology and a restructured institutional framework for radically improved enforcement effectiveness. The chapter on tax transformation will note how this increased collection efficacy is also facilitating the tax administration to transition to a more mature and reasonable approach to dealing with the complex commercial issues, arising for taxpayers, in an increasingly sophisticated economy.

Secondly, the external context for China’s economic development is changing rapidly. Twin chapters will consider the dual impact of US tax reform, and the evolving international trade and customs landscape, on the global supply chains and MNE value chain structures linking China with the world. As noted above, ODI from China is rapidly changing in its complexion, with a greater focus on BRI and Europe, and a dedicated chapter will look at the relevant outbound tax implications. In view of the altered flow of inbound FDI towards more technologically advanced sectors of the Chinese economy, a further chapter will look at the impact of recently relaxed foreign investment rules, specifically for the financial sector.

Thirdly, alongside these chapters addressing areas of rapid change, attention is equally warranted for those arenas of long-standing and ongoing tax complexity for doing business in China. Two chapters will address the post-BEPS landscape for international tax and transfer pricing, with a focus on new trends and tools of enforcement. The M&A tax chapter will address the coal-face issues of tax due diligence and offshore indirect disposal rules. The outdated nature of various domestic tax rules and administrative mechanisms, in the face of new digital economy (DE) business models, is also dealt with in a dedicated chapter. This also looks to the novel tax challenges confronting China’s outbound DE investment and possibilities for compromise on new global DE tax rules.

Fourthly, the specific challenges facing the Hong Kong and Taiwan economies are addressed. Two chapters consider Hong Kong’s BEPS and transfer pricing changes, the commencement of tax information exchanges, and the impact of new accounting standards on financial institution taxation, while a separate chapter looks at Taiwan’s new digital economy tax framework.

Lastly, looking further to the future, a chapter addresses how technological innovations in the VAT space in Chinamay shed a light on how tax law and administration, as well as the tax advisory profession, could evolve into the future.

 

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article