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China at the forefront of global BEPS implementation

The G20/OECD BEPS proposals are being rolled out into Chinese tax law and practice, with implications for multinational enterprises (MNEs) doing business in China. The focus of this chapter by Chris Xing, William Zhang, Lilly Li and Conrad Turley is recent and upcoming regulations and guidance which are positioning China at the forefront of global BEPS implementation

The G20/OECD initiative for multilateral cooperation to address tax base erosion and profit shifting (BEPS) culminated in the release of the 2015 BEPS Deliverables on October 5 2015. These set out certain minimum standards, agreed between the countries participating in BEPS, as well as certain best-practice recommendations, on improvements to domestic laws and tax treaties. These changes seek to enhance the integrity and fairness of the international tax system by realigning jurisdictional taxing rights with the location of value creation and the place where business activities are actually conducted.

In response, on October 10 2015, the Chinese State Administration of Taxation (SAT) issued the Chinese language versions of the BEPS reports. At the same time senior SAT officials set out their plans for China BEPS implementation in advance of China's hosting of the G20 and the Forum on Tax Administration (FTA) in 2016. In fact, China has already gone a long way towards localising the BEPS Deliverables, as the SAT has issued significant recent draft guidance on transfer pricing (TP), controlled foreign company (CFC) rules, tax treaty relief, and a rapid succession of new guidance is promised for coming months.

The BEPS Action Plan is an ambitious programme to overhaul the global tax rules to improve the fairness and integrity of the international tax system. It is the largest such undertaking since the groundwork was laid by the League of Nations in the 1920s. While the BEPS Action Plan was initiated by the G20 and carried forward by the OECD, China has been actively engaged in the BEPS tax policy formulation process. As senior SAT and OECD officials emphasise repeatedly in public statements, it is the first time that China, among other emerging economies, has sat at the table with the major OECD countries as equals in this redesign of the global tax system. China's influence on the shape of the final BEPS proposals has been much remarked upon, and the SAT is treating very seriously its responsibility to carry forward the BEPS implementation work falling to the G20 and the FTA in 2016. This is manifesting itself in the speed with which, in advance of other countries, China is integrating substantial elements of the BEPS proposals into its domestic law and treaties.

It is important to note that China will not adopt all of the BEPS proposals and will naturally tailor them to China's circumstances and needs. The BEPS changes also occur in parallel with other new tax rules, such as indirect offshore disposal rules, which do not have counterparts in the BEPS programme but which have a strong anti-abuse orientation as they seek to preserve China's taxing rights over value created in China.

The multitude of tax changes that have occurred as a consequence of BEPS are covered in different chapters in this volume. This chapter considers the BEPS Action Deliverables at a high level and focuses particularly on the China treaty, CFC and permanent establishment (PE) issues and measures arising from BEPS. The separate TP chapter entitled, China's new Transfer Pricing Guidelines and BEPS, considers both the many proposed changes to China TP rules under the new SAT public discussion draft on 'Special Tax Adjustments' (yet to be finalised at the time of writing) as well as changes to thin Capitalisation rules. Further chapters in this volume, A New Era for M&A Tax in China, and, New Challenges to Tax Risk Management in China, also set out further echo effects of BEPS on China tax practice.

The 2015 BEPS Deliverables

The chapter in last year's edition of China Looking Ahead, BEPS: China makes its mark on global tax rules and strengthens international tax enforcement, considered the contents of the original seven BEPS 2014 Deliverables reports. It looked at the impact of BEPS proposals on a new TP approach to intangibles and on new tax treaty safeguards, and contemplated to what degree the SAT might be receptive to BEPS PE and CFC proposals then under development. However it was only in 2015 that the SAT really picked up the pace in issuing new guidance and the direction of SAT BEPS policy became clearer. Given that the final BEPS 2015 Deliverables adjusted further the original BEPS 2014 reports, a full consideration of the recommendations under the 13 BEPS 2015 reports is necessary to fully appreciate their mapping into Chinese law and practice.

Digital economy (Action 1)

Reiterating the conclusions of the 2014 Action 1 Deliverable, the Task Force on the Digital Economy (TFDE) did not recommend specific, ring-fenced, digital economy tax measures. The combined effect of other BEPS actions is argued to effectively combat aggressive tax planning in the digital economy space. The relevant other actions include:

  • The Action 7 PE changes, impacting online cross-border sellers with large sales forces and/or large local warehouses in the market state;
  • The TP actions (8, 9, 10), tackling shifting of contractual risk and transfer of intangible asset returns to low tax jurisdictions;
  • The Action 6 use of treaty anti-avoidance concepts to justify applying withholding tax (WHT) to outbound digital business payments which would otherwise be treaty protected from WHT; and
  • The Action 5 clampdown on abusive intellectual property (IP) tax regimes, as well as the potential Action 3 inclusion of digital business income under CFC rules.

While digital economy BEPS issues are expected to be largely tackled through these other actions, the final Action 1 report does include VAT guidance tailored for digital business B2B/B2C cross-border supplies. What is more, the report indicates (while not advocating) that countries could consider use of specific digital economy corporate tax concepts. These are:

  • a significant economic presence nexus concept;
  • a specific digital transaction WHT; or
  • an "equalisation levy".

The TFDE is to continue work on income characterisation (for example, cloud computing), the value of data in TP analysis, and monitor digital economy tax issues.

Hybrid mismatch arrangements (Action 2)

The 2014 Action 2 Deliverable made recommendations for changes to domestic law and treaties to counter the effects of hybrid entity, instrument and transfer-driven tax mismatches. This included a set of linking, automatic rules; these are now supplemented in 2015 by an extensive series of examples. New rules are also added to ensure that treaty relief is applied appropriately in the case of 'wholly or partly fiscally transparent' entities, such as partnerships and trusts.

CFC rules (Action 3)

The report sets out a series of recommended 'building blocks' which countries may use, at their own discretion, to construct a robust set of CFC rules. No CFC minimum standard could be agreed on between the BEPS participant countries, despite US efforts. The building blocks include:

  • defining the CFC (type of entity, and type and level of control);
  • CFC exemptions and tax rate thresholds;
  • CFC income inclusion;
  • CFC income computation;
  • CFC income attribution, and
  • double tax elimination.

The potential CFC income determination approaches include:

  • categorical approaches (targeting income based on legal classification, origin from related parties, or geographic source, which may also be explicitly made to include income from digital sales/services);
  • substantive analysis (determining whether CFC income was separated from underlying substance on basis of substantial contribution of employees, a TP-linked significant functions approach, a staff/premises substance approach); or
  • an excess profits approach (covering, among other things, transfers of intangibles and risk shifting transactions).

A combination of these approaches is possible.

Interest deductions (Action 4)

The TP chapter in this volume considers the proposed revisions to Chinese thin capitalisation rules and notes that China has decided for the moment not to adopt the BEPS proposals on interest deductions. In short, BEPS proposed an earnings stripping rule which limits interest tax deductions to a percentage of earnings before interest, tax, depreciation and amortisation (EBITDA). This may be supplemented by a worldwide group ratio rule which allows increased interest deductions where the MNE group at a global level is more heavily indebted/has a greater relative interest servicing burden than the local entity. The OECD will in 2016 refine the rules further for banking and insurance. The necessity of a China Corporate Income Tax (CIT) Law amendment to roll out the BEPS rules is understood to have been a factor in SAT's decision not to adopt them.

Harmful tax practices (Action 5)

The 2015 Deliverable finalises the 2014 initial progress report prepared by the Forum on Harmful Tax Practices (FHTP). The substantial activity requirement for preferential tax regimes, proposed in the 2014 report, has been finalised with a nexus approach'. This uses expenditures on R&D activities, in the context of IP regimes, as a proxy for activity. A review of preferential regimes in OECD and non-OECD states found that all the IP regimes reviewed failed the substantial activity test and these are now being revised. The FHTP plans to next roll-out its review using the substantial activity test to non-IP preferential regimes. The parallel framework for the compulsory spontaneous inter-tax authority exchange of rulings on preferential regimes, as well as, for example, advance pricing arrangements (APAs), PE cases and conduits, takes effect with the first rulings from April 1 2016, for those countries with the necessary legal basis already in place.

Treaty abuse (Action 6)

The 2015 Deliverable refines (but does not finalise) the 2014 report, adding further notable proposals. The core proposals remain the required adoption in treaties of either or both of a 'principal purposes test' focused on the subjective tax motivations of a taxpayer and a US-style Limitation on Benefits (LOB) provision. However, the release in May 2015 by the US of a proposed new version of the US Model DTA's LOB provision has led to a postponement of the finalisation of the BEPS LOB proposal until mid-2016. It will be included in the planned roll-out of the multilateral instrument at the end of that year.

The updated treaty wording and guidance also clarifies that domestic anti-avoidance rules can be applied (without being blocked by treaties), facilitating, among other things, the application of exit taxes. In addition to the targeted anti-abuse provisions from the 2014 report, dealing with dividend, capital gains and PE-based planning, the 2015 report now also contemplates adoption of recent US anti-abuse proposals. These would deny withholding tax (WHT) relief on payments to special tax regimes or where a treaty-partner state introduces an exemption for interest, royalties or dividends after the conclusion of a treaty. These latter proposals, along with additional guidance on the applications of treaties to collective investment vehicle (CIV) and non-CIV (for example, private equity) funds, will be finalised by mid-2016.

Permanent Establishment (Action 7)

The 2015 Deliverable adjusts further and finalises changes proposed in the May 2015 BEPS PE discussion draft. The agency PE concept, which had previously turned on whether a non-resident had authorised a local market-based person to habitually negotiate/contract with local customers on the former's behalf, has now been replaced. The new rule looks at whether the local market-based person 'habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the [non-resident] enterprise'. Contracts that transfer property owned by the non-resident (or grant a rise to use that property) are now covered. This is intended to catch cases where the non-resident is not legally bound by the contract but his property is the contract object matter (for example, commissionaire structures).

The revised OECD Model Tax Convention (MTC) Commentary makes clear that the focus of the new test is on whether the local market-based person convinces, through relationship-building efforts, customers to contract. Formalities related to legal authorisation of local persons to contract, and formalistic final 'rubber stamping' approvals of contracts by non-residents, which previously provided support for a 'No PE' position, are no longer determinative. Consequently, given the de-emphasis of 'legal agency', the provision might be better regarded as a local representative PE concept, rather than as an agency PE concept. All previous references to agency PE have been removed from the Commentary. The independent agent concept is now also curtailed where the local person acts largely for foreign related parties.

Furthermore, the 'preparatory and auxiliary' (P&A) PE exemptions for specific activities (for example, warehousing, purchasing and information collection) are now to be all subject to an overriding P&A test (though this is left to country discretion) and to an anti-fragmentation test. The latter appears to amount to a de facto "force of attraction" approach under which the activities of connected enterprises at the same or separate places in the source country may be aggregated in determining if the P&A threshold has been exceeded, such that a PE exists. Finally, it is clarified that the principal purposes test (and a more mechanical rule if a country does not apply this test) should be applied to deal with 'contract splitting' strategies directed at having cross-border construction activities fall under the time limit for a construction PE.

The PE changes are represented as a key plank of the BEPS resolution of digital economy tax planning as they would treat online cross-border sellers with large sales forces and/or large local warehouses in the market state as having a local PE, dealing with existing weaknesses in the agency PE rule and P&A PE exclusions.

Transfer Pricing (Action 8, 9, 10, 13)

The 2015 TP deliverables are considered in detail in the TP chapter in this volume and reference should be had to the analysis and views in that chapter on future directions in China TP practice. Of most significance in a Chinese context are the clarifications on how to determine the contributions of MNE group entities to the value of intangible assets, the importance of local market features, and enhanced TP documentation, all now incorporated into the draft new Chinese TP guidance on 'Special Tax Adjustments', which is due to be finalised towards the end of 2015.

However, it should be noted that divergences from the recommended OECD approach may potentially be quite significant in practice. Other significant new BEPS TP guidance, on the proper allocation of contractual risk and associated returns through 'proper delineation of the transaction' and guidance on use of post-transfer profitability information in valuing hard to value intangibles, has not yet been integrated into China guidance, and SAT scepticism towards giving too much weight to contractual risk, however controlled, in allocating MNE group profits may see divergence from other countries' TP practices and potential for double taxation. The new China TP guidance also imposes severe restrictions on deductions for outbound related-party service and royalty payments, a trend already remarked upon in last year's edition of China Looking Ahead.

Mandatory disclosure rules (Action 12)

Recommendations (not a minimum standard) are set out, according to a modular framework, for the design of rules which would give the tax authorities early warning of aggressive arrangements and would deter promoters and taxpayers (both with potential reporting obligations) from entering into such arrangements in the first instance. The guidance covers 'hallmarks' of avoidance which would be the trigger for disclosure, tracking arrangements and penalties.

Dispute resolution mechanisms (Action 14)

A minimum standard has been developed for the resolution of treaty-related disputes, together with a peer monitoring mechanism, falling under the Forum on Tax Administration (FTA) Mutual Agreement Procedure (MAP) Forum. The forum will commence work in 2016, with first reports due by end of 2017. The minimum standard contains commitments to include MAP clauses in treaties and ensure taxpayer MAP access, time to complete MAP procedures (target 24 months) and avoid MAP adjustment time-barring, as well as MAP case and procedure transparency. Beyond this (non-binding) best practices are also set out, while a group of 20 Western countries have committed to mandatory binding arbitration, with the mechanism to be developed in time for its inclusion in the multilateral instrument in late 2016.

Multilateral Instrument (Action 15)

The 2014 Deliverables concluded that a multilateral instrument to update many of the world's 3,500 bilateral tax treaties simultaneously would be feasible and more than 90 countries have joined an ad hoc group (led up by China and the UK) to negotiate the instrument by the end of 2016.

'Mapping' the BEPS Deliverables to China – A rapid process with significant 'localization' to Chinese circumstances

Main themes of SAT international tax policy

On the release of the Chinese-language versions of the BEPS 2015 Deliverables, senior SAT officials noted how China's role and level of involvement in contributing to the global debate on the international tax system, as well as its practical influence in shaping that system, had undergone a sea-change since the commencement of the BEPS process just over two years ago. This occurred against a backdrop of China becoming a net capital exporter, encouraging many tax commentators to argue that China's interest lay more in de-emphasising source taxation rights (in a break from past China tax policy) and emphasising more residence taxation given the increased investments of Chinese MNEs all over the world. However, senior SAT officials have appear to indicate that China's focus remains on the strengthening of source taxation rights.

Senior SAT officials note that while China may now be, marginally, a net capital exporter, developed countries have significant accumulated capital stock overseas, which yields substantial profits from historic investments; Chinese overseas investment stock is more recent, relatively limited and has not yet yielded significant profits. What is more, while progressively more innovation is occurring in China, China still functions, within the global economic system, as a manufacturing hub; a very significant portion of foreign FDI in China relates to the processing trade. As such, the policy standpoint of the SAT appears to be that they will continue to focus on strengthening application of source taxation rules. Changes to China's economic structure, movement by China up the global value chain, and changes to the nature, composition and extent of Chinese FDI overseas will be monitored, and if circumstances favour an adjustment in China's policies at a later stage, then the SAT would likely then consider this at that time.

The manner of localisation of the BEPS Deliverables in China can best be understood against the backdrop of this SAT policy thinking and is particularly noticeable in the approach to TP. The TP chapter in this volume deals with the China localisation of the BEPS work in more detail. Nonetheless, it is worth noting here that the 'Special Tax Adjustments' discussion draft takes the position that, in determining the value contribution of MNE group entities to intangible assets (and the consequent TP profit allocations), emphasis is to be put on the 'middle value chain activities' frequently carried out by MNEs in China (for example, trial production and enablement of mass production) as well as China market-building activities. As the OECD guidance would not consider these as the most important factors for intangibles value creation, divergent TP approaches between China and other countries could ultimately lead to double taxation.

Involvement of intangible assets in transactions between local and foreign related parties, and indeed the presence of local market features (location specific advantages, or LSAs), more readily require departure from comparables-based TP methods under the new Chinese guidance than is the case under the OECD BEPS guidance. China sets out the new Value Chain Apportionment TP method to cater for such circumstances. The application of this approach is complemented by the information from the new Value Chain Analysis section in the TP local file, much as new TP information requirements on cross-border related party services fuel a tightened approach on deductions for related payments, tightening China's source country taxing rights over business profits.

Beyond TP, the new emphasis on PE is set to further raise the challenges of managing China taxation of business income from Chinese sources. The treaty developments are not so much expected to tighten Chinese anti-treaty shopping rules, as to clarify the manner of their operation. At the opposite end of the spectrum, the CFC rule enhancements introduced through the draft new 'Special Tax Adjustments' guidance are expected to bring a new rigour to Chinese residence-based taxation of Chinese MNEs' overseas operations.

BEPS as a 'turning point' for Chinese PE enforcement

The new BEPS PE concepts could, depending on the manner of their roll-out in China and their application in practice, result in challenges under the new agency PE concept for existing MNE cross-border distribution and procurement structures into China. Some foreign MNEs have in the past used offshore sales hubs in low tax jurisdictions, which liaise with their Chinese customers via onshore marketing support affiliates. Strict internal protocols and documentation trails were used to support the position that the Chinese entity staff were not authorised to negotiate and contract with Chinese customers on behalf of the foreign sales hub, and did not in fact do so. Such measures may now be insufficient under the new BEPS PE 'convincing' threshold'. Further enhanced documentation and operating protocols, adjustments to existing business practices and, in some cases, movement from the offshore sales hub model to an onshore buy-sell distributor model, may be required. The impact of the anti-fragmentation rules on multi-subsidiary arrangements (for example, China manufacturing, sales, and R&D all in separate MNE subsidiary entities) will need to be considered, as well as the impact of contract-splitting rules on dispatches of staff from multiple overseas MNE entities to China.

The SAT is understood to be committed to the roll-out of the new BEPS PE concepts. In fact, the SAT went so far as to incorporate the rules from the May 2015 BEPS PE draft proposals into the PRC-Chile DTA signed on May 25 2015, which is China's 100th DTA and its most recent. This DTA also includes innovative Chinese enhancements to the BEPS PE proposals, including an application of the BEPS Construction PE 'anti-contract splitting' provision to also cover Service PE. The SAT plan to set up a national information exchange platform so PE cases can be better tracked and processed by local tax authorities. Senior SAT officials have referred to the BEPS PE proposals as a 'turning point' for PE enforcement in China.

The SAT is also understood to be contemplating how to improve PE profit attribution guidance. Given the difficulties with the existing 'deemed percentage of sales' PE profit attribution approach, such guidance will be keenly anticipated, and the PRC-Chile DTA does move in the direction of determining PE profits based on functions, assets and risks. This being said, the SAT is expected to retain some aspects of its deemed PE profit approaches. On the whole, PE is set to become a far more challenging element of China tax management strategies.

Whether Chinese PE approaches may be further nuanced to deal with cross-border digital business into China remains to be clarified by the SAT, though senior SAT officials have repeatedly noted their interest in the BEPS significant economic presence nexus concept. It should be noted that the new Tax Collection and Administration Law, due to go into effect in 2016 or 2017, will introduce reporting requirements for online retail platforms (through which the bulk of Chinese B2C e-commerce is conducted) with respect to the companies conducting e-commerce through their platforms; this new reporting may well supply the data required to enforce such PE concepts. The BEPS reports suggest that payments for goods and services, purchased through cross-border e-commerce, though normally protected from WHT under the PE article, might be subject to WHT in an application of treaty anti-abuse rules; it remains to be seen how the Chinese tax authorities might apply such approach and how they might enforce it.

Chinese anti-treaty shopping rules clarified

China already has a rigorous approach to treaty shopping and since 2010 MNEs have frequently struggled to convince the Chinese tax authorities that their overseas treaty-benefit-claiming entities have sufficient economic substance to merit qualification for the tax authority pre-approval for DTA WHT tax relief to be applied by WHT agents.

A long-standing difficulty has been that SAT Circular 601 [2009], in setting out the Chinese interpretation of beneficial ownership for DTA relief, effectively combined together a beneficial ownership test (which in most countries is a test of control over income and the assets from which it derives) with an economic substance-focused treaty-shopping test. Application of the treaty-shopping test as an element of the beneficial ownership test, rather than as an application of the PRC general anti-avoidance rule (GAAR) prevented taxpayers from arguing their 'reasonable business purposes' in using an overseas holding/financing/IP/leasing company, as the GAAR procedures would allow them to do. These updated GAAR rules, in SAT Order 32, were discussed in detail in last year's international tax chapter.

However, this is now being rectified with the roll-out of a new DTA relief system in SAT Announcement 60 [2015]. The new DTA relief system, which took effect from November 1 2015, abolishes the DTA relief tax authority pre-approval system, providing instead that the taxpayer self-determines whether DTA relief applies, and then informs the WHT agent (or the tax authority directly where no WHT agent is involved) that it will be using the DTA relief. To facilitate the WHT agent to process the relief without taking excessive risk and uncertainty on to himself, the detailed DTA relief forms, completed by the taxpayer, set out a section of the form with information that the WHT agent will check before using the DTA WHT rate, and another separate, more detailed, section which the tax authorities may refer to in carrying out their 'follow up procedures. The WHT agent's section includes, alongside basic details of how the taxpayer satisfies the terms of the DTA, a beneficial ownership test shorn of its Circular 601 economic substance baggage, being a control test along the lines of that applied in other countries.

The tax authority follow up procedures are linked, by Announcement 60, to the use by the tax authorities of specific treaty-based anti-avoidance rules and the PRC GAAR, as governed by the GAAR procedural measures. China has, over the past few years, experimented with a few different approaches to including anti-abuse provisions in its DTAs. These have ranged from 'tax as a main purpose of the arrangement' tests in the dividend, interest, royalties and other income articles of treaties, to the use of 'miscellaneous articles' in DTAs which reserve the right to China to use its GAAR against treaty abuse, to the inclusion of straight-out treaty-based GAARs.

A possible window on how the SAT's approach may be standardised in future is provided by the PRC-Chile treaty. The SAT's statement on the release of the Chinese-language versions of the BEPS 2015 Deliverables refers to this treaty as exemplary of the post-BEPS China treaty policy. This treaty incorporates both the BEPS LOB and 'principal purposes test' approaches into a new 'entitlement to benefits' article. At the same time, the treaty foregoes the earlier approaches of including 'main purpose' tests in the dividend, interest, royalties and other income articles or the 'miscellaneous articles'. The SAT's leading role in the group developing the Action 15 multilateral instrument and China's role as host of the FTA and the G20 in 2016 may point towards an interest at SAT level in Chinese adoption of the multilateral instrument in late 2016, though it remains to be seen how this project evolves. If China does ultimately adopt the multilateral instrument then the manner in which the anti-abuse provisions are integrated into the Chile DTA may be indicative of the manner in which the SAT might look to update all China treaties.

It might also be noted that while the new DTA relief system instituted by Announcement 60 is a marked improvement on the previous system, many matters of administrative complexity remain, including the interrelationship of the new system with the foreign-exchange remittance rules.

Senior SAT officials have recently confirmed their intent to roll out anti-hybrid rules in the near future, though it must be said that, for a variety of reasons, including features of the tax law and regulatory environment, hybrid mismatch arrangements are not a prevalent feature of the Chinese tax landscape. It remains to be seen whether treaties would also be updated to facilitate the application of anti-hybrid rules. Further, the BEPS hybrid mismatch paper suggests that treaties might be updated to facilitate granting of DTA benefits to 'transparent and partially transparent' entities, such as partnerships and trusts; given the need for such DTA clarifications in China this would also be keenly anticipated.

Outbound – The new dimension in Chinese international tax practice

The Chinese tax authorities have recently begun to enforce their CFC rules in actual cases, notably the Hainan and Shandong cases in 2014. As regards the BEPS CFC 'building block' recommendations, while the SAT have largely left unchanged the definition of control in the existing Chinese CFC rules', as well as the CFC exemptions/thresholds (de minimis test and reasonable purpose test for non-distribution of CFC profits), it has co-opted the BEPS CFC attributable income guidance into the revised Chinese CFC rule guidance in the 'Special Tax Adjustments' discussion draft (yet to be finalised at the time of writing).

In this regard a BEPS categorical approach is taken with CFC income inclusion stated to be generally appropriate for:

  • dividends earned by non-securities trading companies;
  • interest earned by non-finance business companies;
  • insurance premiums earned by non-insurance companies;
  • royalties earned from related parties;
  • sales and service income earned where goods and services have been bought-in from related parties and no or low value has been added, and;
  • in a nod to the BEPS excess profits approach, excess profits derived from intangible asset or risk transfers.

This is supplemented/overlaid with a BEPS substantive analysis approach; this provides that all three of the BEPS proposed alternatives (that is, substantial contribution, TP analysis and staff/premises) may be used by the tax authorities but does not give guidance on their application or prioritisation.

Given the rapid ramp-up of tax enforcement against outbound Chinese MNEs, further SAT refinements in the final guidance on Special Tax Adjustments, and the precise application of these provisions, will be of key interest.

Into the future and recommendations

The SAT's rapid moves to implement the BEPS programme truly put it in the vanguard among the countries of the world. The finalisation of the new TP guidance and the CFC rules in the Special Tax Adjustments draft, expected by the end of 2015, to go into effect from January 1 2016 (and for some provisions, retroactively), is hotly anticipated. With the new TP documentation set to enter effect, and with China rolling-out information exchange arrangements with other countries, a new era of transparency has started.

The changes to China treaty practice are now in train, though the final shape of the SAT's model treaty anti-abuse rules is still to emerge. The workings of the new treaty relief system are still to be tested in practice. As for PE, the SAT promises a turning point – where PE enforcement is turning and how tax risk management challenges are to be managed going forward, remains to be seen.

For other BEPS actions, such as the Action 14 dispute resolution mechanisms, the spontaneous exchange system for tax rulings under Action 5 , and the Action 12 mandatory disclosure rules, the SAT has yet to clarify its position. Nonetheless, the shape of the post-BEPS Chinese international tax rules is now emerging and MNEs should start to prepare for the tax risk management challenges this will raise.

Xing-Chris

Chris Xing

Partner, Tax
KPMG China

8th Floor, Prince's Building
10 Chater Road
Central, Hong Kong
Tel: +852 2978 8965
christopher.xing@kpmg.com

Chris is the KPMG Asia Pacific regional leader for international tax. He has assisted numerous international and domestic Chinese private equity funds and corporations on tax due diligence, and a wide range of tax issues concerning cross-border transactions, corporate establishment, M&A and other corporate transactions in the People's Republic of China (PRC) and Hong Kong.

Chris has also assisted multinational corporations with undertaking investments in the PRC, restructuring of business operations and devising tax efficient strategies for implementing PRC business operations and profit repatriation strategies.

Chris is a member of the Mainland Taxation sub-committee of the Hong Kong Institute of Certified Public Accountants and is an editor of the Asia-Pacific Journal of Taxation. He is also a regular speaker and writer on tax matters, and has published numerous articles on Chinese taxation in various journals. He has also been interviewed and quoted in the New York Times and the Wall Street Journal, and on BBC World News.


Zhang-William

William Zhang

Partner, Tax
KPMG China

50th Floor, Plaza 66
1266 Nanjing West Road
Shanghai 200040, China
Tel: +86 21 2212 3415
william.zhang@kpmg.com

William is the practice leader for R&D tax and for international corporate tax in Central China and is the national tax leader for auto industry. William has been providing PRC business, tax and legal consultation and planning ideas for various multinational companies since 1997. His experience covers the range, from assisting multinational companies in formulating expansion strategy into the PRC, setting up and structuring their business operations in the PRC, fulfilling relevant registration and filing requirements to the stage of working out practical solutions to various tax issues and exploring possible tax planning ideas for the clients.

In particular, William has assisted quite a number of multinational companies in industrial markets in, for example, High and New Technology Enterprise (HNTE) application review assessments, R&D bonus deduction applicationsand tax planning for restructuring transactions and cross-border fund repatriation arrangements.

William was seconded to the international corporate tax group of KPMG's London office for one year during which he was substantially involved in various international tax projects for European companies.

He is a member of the China Institute of Certified Public Accountants and the China Institute of Certified Tax Agents.


Li-Lilly

Lilly Li

Partner, Tax
KPMG China

38th Floor, Teem Tower
208 Tianhe Road
Guangzhou 510620, China
Tel: +86 20 3813 8999
lilly.li@kpmg.com

Lilly Li is the partner-in-charge for tax in Southern China. She is based in Guangzhou and specialises in business and tax advisory services for corporate restructuring, cross-border transfer pricing, tax-efficient M&A structuring of and IPO projects.

Lilly provides PRC corporate tax advisory as well as transfer pricing services to multinational corporations and domestic enterprises. Her experiences cover a wide range of industries, for example, consumer markets, automobile, electronics and telecommunications.

Lilly has extensive experience in dealing with tax disputes and tax policy lobbying. For example, she and her team have successfully assisted 13 Asia Games Sponsors in applying for business tax exemptions with the SAT; they also assisted a number of listed groups in lobbying for tax rulings with SAT, which allows PRC companies to deduct stock option experiences before corporate income tax.

Before joining KPMG, Lilly worked in the China Tax Bureau and Australian Taxation Office in international tax administration, tax audits and transfer pricing.

Lilly is a member of Certified Practising Accountants (CPA) Australia.


Turley-Conrad

Conrad Turley

Senior Manager, Tax
KPMG China

8th Floor, Tower E2, Oriental Plaza
1 East Chang An Avenue
Beijing 100738, China
Tel: +86 10 8508 7513
Fax: +86 10 8518 5111
conrad.turley@kpmg.com

Conrad Turley is a senior manager in KPMG China's international tax practice. Now based in Beijing, Conrad previously worked for the European Commission Tax Directorate in Brussels, as well as for KPMG in Ireland, the Netherlands and Hong Kong.

Conrad has worked with numerous global private-equity groups and multinational corporations transacting cross-border into and out of China, on a wide range of tax issues. These include establishment of tax-efficient cross-border operating and investment structures, restructurings and M&A, as well extensive tax work on the liquidation of Lehman Brothers Asian operations.

Conrad is a frequent contributor to international tax and finance journals including International Tax Review, Tax Notes International, Bloomberg BNA and Thomson Reuters, and is a frequent public speaker on topical China and international tax matters.

Conrad received a bachelor's degree in economics and a master's degree in accounting from Trinity College Dublin and University College Dublin, respectively. He is a qualified chartered accountant and a registered tax consultant with the Irish Taxation Institute.


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