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China: Looking ahead in a changing global environment

The upcoming 2019 edition of ‘China Looking Ahead’ comes at a precarious and symbolically charged time, with the 12-year Chinese zodiac cycle about to end and a new one about to begin. KPMG China’s Head of Tax Lewis Lu looks at what the publication will cover.

The Year of the Pig 2019 has been a striking period of evolution, both for China’s domestic economy and for its trade and investment relationships with the wider world. This has implications for the China tax environment.

China’s economy is on course for a GDP growth rate of 6.2% in 2019, the lowest in 30 years. This is providing added impetus to structural reforms that include an accelerated liberalisation of restrictions on inbound investment, and efforts to cut red tape and improve the business environment.

The number of sectors subject to foreign investment restrictions has been reduced from 63 in late 2018 to 40 at present, and down to 37 in the free trade zones (FTZs). A further six FTZs have been created to reach a total of 18 FTZs in 2019, with a raft of new tax incentives set out in parallel. A concerted campaign to reduce regulatory hurdles resulted in China’s ranking in the World Bank's 2019 Doing Business report rising from 78th to 46th out of 190 countries. 

The continuing tension in the China-US trade relationship has seen both sides announce successive batches of tariffs on imports from each other; a resolution is not yet in sight. Certain foreign and Chinese manufacturers have been examining possible restructures to their supply chains and the relocation of manufacturing facilities. Against this backdrop, China outbound direct investment (ODI) has continued to shift towards the 65 Belt and Road Initiative (BRI) countries, estimated at 21.6% of total ODI in 2018. In relation to this, a BRI Tax Administration Cooperation Mechanism (BRITACOM) was established in 2019 to address tax policy and administrative deficiencies and improve coordination.

A new cycle awaits

Against such a backdrop, this year’s forthcoming ninth edition of ‘China Looking Ahead’ will be published in the December/January edition of the International Tax Review. KPMG China’s tax experts will examine the issues that have arisen during this Year of the Pig and review the prospects for 2020, the Year of the Rat. Thematic chapters will explore issues relevant to businesses operating cross-border with China.

The key issues will include:

  • The emerging new international tax framework being developed at OECD/Inclusive Framework level, often referred to as BEPS 2.0, and its implications for China;
  • The new China trade facilitation policies being rolled out against the backdrop of the changing and challenging global trade environment;
  • A raft of new China double tax agreements which introduce BEPS PE changes and tax transparency provisions for partnerships;
  • The numerous tax challenges arising from China’s booming digital platform economy;
  • The transformed China IIT compliance environment in the wake of major reforms in 2018;
  • The evolving transfer pricing enforcement scene, with strategic and compliance implications for inbound and outbound activity;
  • Focused chapters on tax due diligence challenges for inbound M&A, structuring trends for outbound investment, increasing scrutiny of China R&D tax incentive claims, US tax developments and their impact on China-US investment, and trends in VAT system technology and design;
  • Dedicated chapters on developments in Hong Kong and Taiwan. These will cover Hong Kong’s new TP rules and challenges for fund structuring deriving from new offshore economic substance rules, as well as an overview of new incentives for capital repatriation in Taiwan.

The Year of the Pig brings to a close the twelve-year cycle of the Chinese zodiac, with a new cycle on the cusp of setting off. It remains to be seen what this portends – will we see a ground-breaking global compromise on BEPS 2.0, or a resolution to global trade issues? All will be revealed in the Year of the Rat.

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