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China Looking Ahead: A changing global environment

This 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 highlights the key topics.

The 2019 Year of the Pig 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 recently 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 Doing Business report rising from 78th to 31st out of 190 countries, from 2017 to 2019.

In the context of a challenging international trade environment, 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 by certain research institutes at 21.6% of total ODI in 2018. In parallel with this development, 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 this backdrop, in this year's ninth edition of China – Looking Ahead, KPMG China's tax experts examine the issues that have arisen during this Year of the Pig and review the prospects for the 2020 Year of the Rat. Thematic articles explore the issues relevant to businesses operating cross-border with 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.

The key issues explored include:

  • The emerging 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 permanent establishment (PE) changes and tax transparency provisions for partnerships;
  • The numerous tax challenges arising from China's booming digital platform economy;
  • The transformed China individual income tax (IIT) compliance environment in the wake of major reforms in 2018;
  • The evolving transfer pricing (TP) 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, and trends in VAT system technology and design; and
  • Dedicated chapters on Hong Kong SAR's new TP rules and challenges for fund structuring deriving from new offshore economic substance rules.

The Year of the Pig brings to a close the 12-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.

Lewis Lu

Partner, Tax
KPMG China

Tel: +86 21 2212 3421

Lewis Lu is the head of tax at KPMG China. He is based in Shanghai and specialises in the financial services and real estate industries. He specialises in formulating entry and exit strategies for these clients for the Chinese market and has assisted many foreign and domestic funds in structuring their investments in China. Lewis regularly undertakes tax due diligence and advisory engagements on M&A transactions. He also frequently assists foreign multinationals in discussing tax policy matters with the Chinese tax authorities.

Lewis is a frequent speaker at various international tax fora. He teaches international taxation for the master of taxation students at Fudan University.

He is a member of the Canadian and Ontario institutes of chartered accountants and is a fellow of the Hong Kong Institute of Certified Public Accountants.

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