China: China’s recent measures to comply with BEPS, CRS and the New Silk Road

Khoonming Ho	Lewis Lu

China has been progressively implementing the G20/OECD BEPS recommendations, which the Chinese government is committed to do as a G20 member. Originally, the SAT had planned for a comprehensive circular on special tax adjustments to roll out BEPS changes, and the SAT did issue a draft for consultation in September 2015. However, in what appears to be a change of plan, the SAT has instead implemented a series of separate circulars, which are more likely to follow in the coming months. For instance, July 2016 saw the introduction of updated transfer pricing (TP) documentation guidance in SAT Announcement 42 [2016]. This was followed by the October 18 2016 release of updated administrative guidance on advance pricing agreements (APAs) in SAT Announcement 64 [2016].

With regard to this new APA guidance, China has made BEPS Action 14 commitments to enhance the mutual agreement procedure (MAP) and limit tax disputes, especially as bilateral APAs form a key part of the Action 14 recommendations.

The upgraded APA guidance, alongside SAT plans for a ramp up in personnel supporting the conclusion of the MAP/APAs, serves these BEPS commitments. At the same time, the APA guidance makes clear that China plans to reinforce its existing TP approach, which has found support in BEPS Actions 8-10, and preferential admission into the APA programme is given to taxpayers who are forthcoming with in-depth value chain and location specific advantage analysis. The APA guidance also gives another good illustration of how the SAT is putting its new taxpayer risk-targeted enforcement approach at the centre of its tax administrative efforts, whereby only taxpayers with an "A" rating under the SAT's taxpayer credit rating system are granted access to the APA programme.

China's BEPS Action 5 commitments will also see it exchanging its anticipated increasing volume of APAs with other jurisdictions. These commitments sit alongside China's recent adherence to the OECD's common reporting standard (CRS) system for the automatic exchange of information (AEOI). In this connection, on October 14, the SAT opened a public consultation (until October 28) on a discussion draft of "Administrative Measures on Due Diligence of Tax-related Financial Account Information of Non-residents". The draft sets out details of the financial account information to be reported by financial institutions to the Chinese authorities for exchange with other countries, and the details and timeframes for the due diligence to be conducted by these institutions up to the end of 2017. CRS is intended to enter into effect from 2018 in China and will likely have a significant impact on taxpayers.

Apart from the implementation of the OECD BEPS and CRS initiatives, China is also continuing to pursue international tax policies linked to its own economic and strategic priorities, in particular the "One Belt-One Road" strategy for guiding Chinese outbound investments along the "New Silk Road". On August 8, China signed a new tax treaty with Romania that will offer some of the best withholding tax (WHT) rates to-date in a Chinese tax treaty. Dividends, interest and royalties are all subject to a 3% WHT, while a 0% WHT is available for dividends and interest in certain cases. The provision on capital gains is also preferential in comparison to most other Chinese tax treaties. While Romania is a relatively minor trading partner for China, the signing of the new Romania treaty comes hot on the heels of the entry into force of the new China-Russia treaty, which itself is among the most attractive Chinese treaties, with a 0% WHT on interest. This new generation of tax treaties are significantly more beneficial than the previous 'bests', such as tax arrangements with Hong Kong and Singapore. The new tax treaties with Romania and Russia thus appear to herald a new approach underpinning Chinese tax treaty policy going forward, with a preferential leaning towards countries linked with the "Belt and Road" initiative.

Khoonming Ho (khoonming.ho@kpmg.com) and Lewis Lu (lewis.lu@kpmg.com)
KPMG China
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421
Website: www.kpmg.com/cn

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