The Year of the Snake in 2013 ushered in a new government in China, headed by President Xi Jinping and Premier Li Keqiang. The new government has put political, economic and financial reforms at the top of its agenda over the next decade. After the Third Plenum of the 18th Chinese Communist Party (CCP) Congress that was held in Beijing from November 9 to November 12 2013, a Communiqué and Decision by Central Committee of CCP on Deepening of Key Reforms (Decision) were issued. According to the Decision, China will gradually increase the proportion of revenue from direct tax and accelerate VAT reform. China will also reform consumption tax with a view to capturing high energy-consuming and/or polluting products and selected luxury products. Other tax reform areas include consolidated individual income tax filings, real estate tax, resource tax and environment protection tax. Against that background, in this edition of China – Looking Ahead, KPMG China's tax experts explore what the Year of the Horse may have in store for foreign investors in China. It should be noted, however, that the content of this publication is not intended as predictions or forecasts of Chinese tax policies and should not be relied upon as such.
As stated in the foreword of the first edition of China – Looking Ahead (May 2011), with China having become the second largest economy in the world, a readiness for engagement with foreign tax administrations will inform the fiscal thinking and action of China. As can be seen from the chapter, BEPS – what will it mean for China?, that readiness has manifested itself in the active participation of China in this important OECD initiative. The self-confidence and assertiveness of the Chinese tax administration that goes with the country's new world status have also come through in its dealing with international tax issues such as enforcement and administration of tax treaties, which are addressed in the chapter, CIT – cross-border transactions under scrutiny. Going in hand in hand with these issues is China's approach to related-party transactions. In the chapter, Transfer pricing – Chinese authorities scaling new heights, we foresee that Chinese tax administrations will venture into new territories in terms of different TP methodologies and types of transactions, industries and sectors to focus on.
With the nationwide expansion of the pilot programme on August 1 2013, VAT reform will continue to be in the spotlight. In the chapter, VAT reforms to accelerate in 2014, with challenges lying ahead, we examine how Chinese tax authorities and indeed businesses will wrestle with the proverbial devil in the detail and how VAT reform will step up when its focus shifts from the general economy to special industries. Conversely, with more free trade agreements being entered into, Chinese Customs is making relatively quiet, but equally far-reaching progress; this is given deserved coverage in the chapter, Customs – from enforcer to enabler.
More enablers indeed are what many foreign investors are hoping for in the area of tax reliefs for M&A. Will the uncertainties and inflexibilities surrounding M&A tax regulations, such as Circular 698 and Circular 59, be reduced or removed any time soon? In the chapter, M&A relief – flickering lights at end of tunnel, we hope to share some insights on this question, and in the chapter, Private equity – exit challenges, we cover the particular difficulties encountered by private equity funds when exiting from investment projects in China.
For both existing and new investors, new free trade zones are becoming more prevalent. These developments might come as a surprise to many investors, who can be forgiven for thinking they have seen the last of the regional incentives after the 2008 tax reform, which aimed to level the playing field for investors. So in the chapter, From Qianhai to Shanghai – resurgence of regional incentives?, we examine the potential implications of these new zones for foreign investors. In contrast, with even closer economic integration between China and Hong Kong SAR, we assess, in the chapter, Hong Kong – new tax initiatives in the pipeline, how the tax policies of the Hong Kong SAR will evolve to safeguard its status as an international tax centre.
As China's tax regime becomes more mature and sophisticated, we foresee the rapid development of tax rules that cater for specific industries and sectors and the building up of specialised resources within the Chinese tax administration to implement and administer these rules. For that reason, we explore the future developments in tax policies and practices across a number of key sectors: (1) Real estate – the tax landscape in China and Hong Kong; (2) Transportation and logistics – challenges of VAT reform; (3) Healthcare industry – under closer scrutiny than ever; and (4) Auto industry – bumpy rides ahead. Last but not least, the all-encompassing issue of environmental tax policy, which will be important for the sustainable growth of the Chinese economy, is addressed in the chapter, Green tax policy – slow but steady.
In conclusion, VAT reform will proceed at full throttle in 2014 and should bring both opportunities and challenges to businesses. There can be no better advice on this than: "Be prepared!" Progress in the clarification of corporate income tax rules such as offshore indirect disposals and rollover reliefs for group restructuring can still seem frustratingly slow and uncertain to many foreign investors. Businesses should look out for a stepping up in transfer pricing audits.
Special zones such as the Qianhai Cooperation Zone and the Shanghai Pilot Free Trade Zone will raise hope on various fronts ranging from:
- renminbi internationalisation;
- the elimination of foreign exchange restrictions;
- the simplification of regulatory processes; and
- local tax incentives and subsidies
which should prompt investors to rethink the way they do business in China. However, more time should be allowed for the development of the implementation rules for these zones and the possibility that more new zones will appear cannot be ruled out. Overall, tax-wise, 2014 should be a positive year for foreign investors.
Tax Partner in Charge of China and Hong Kong SAR
Khoonming Ho is the tax partner in charge of China and Hong Kong SAR. Since 1993, Khoonming has been actively involved in advising foreign investors about their investments and operations in China. He has experience in advising issues on investment and funding structures, repatriation and exit strategies, M&A and restructuring.
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