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BEPS stepping into China
The BEPS project aims to create a coherent set of international tax rules to end the erosion of national tax bases and the artificial shifting of profits to jurisdictions solely to avoid paying tax. The said new strategy has 3 key elements:
- Building on developing countries’ engagement in the earlier phase of the BEPS project
- 5 regionally organised networks of tax policy and administration officials will be established to co-ordinate an ongoing and more structured dialogue with a broader group of developing countries on BEPS issues
- Addressing BEPS issues in developing countries
During the G20 summit meeting in Australia on 16 November 2014, the President of People’s Republic of China, Mr. Xi Jinping, commented that China will enhance their global tax co-operation, fight against international tax avoidance/evasion and help other developing countries or low-income countries to improve the ability of administration of tax collection. This is the first time that the head of the Chinese government has provided an official opinion on tax matters in such major national political situations.
Throughout 2014 the state level China tax authority, State Administration of Taxation (SAT), had already organised several internal meetings to discuss details of the BEPS project and how to better shape China’s approach to new tax rules when considering BEPS. During the meeting of the study group on Asian Tax Administration and Research (SGATAR) last month, the representatives of SAT also exchanged opinions with other Asian countries on BEPS, and jointly agreed to immediately set up a long term task force team under SGATAR to follow up the BEPS project.
How could BEPS influence China?
SAT is following the progress of the OECD’s global BEPS project and investigates and evaluates the issues raised by the working parties. Following the final publication of the action points, SAT will issue new tax rules. Before the implementation of the new BEPS-based Chinese tax rules, it is conceivable that SAT will use the BEPS report in the interim period to provide an unofficial reference during its tax evaluations on Chinese companies. As an example cross-border transactions and transfer pricing of MNCs will be discussed.
The following items may become more sensitive and provide further focus for the China tax authority:
- Review of the actual control versus management control of each entity under complex group structures
- Increasing permanent establishment challenges, especially regarding digital economy and e-commerce
- Business substance evidence to support the validation of related party charges during foreign remittance procedure
- Further detailed review on cross-border intercompany charges such as interest, royalties, service fees, etc
- Attention on irregular transactions between cross-border related parties, such as the transfer of intellectual property
- Specific functions (such as R&D, brand building, market penetration) and potential local intellectual property in TP studies
- Further information disclosure requirements
Considering China’s interest in the BEPS project is the general trend, multinationals in similar jurisdictions and China based corporations should:
- Keep abreast of developments in China’s new, BEPS based, tax rules
- Review the rules/status of tax collection in any jurisdiction (eg tax resident rules, controlled foreign company rules) before the set-up of new international transactions
- Review the implications of any unfinished or soon-to-be-started mergers and acquisitions to conclude whether any amendment is necessary
- Conduct an internal tax health check, especially on transfer pricing, functional analysis, internal controls and foreign exchange compliance
With careful preparation, multinationals will be able to face the new Chinese tax environment with minimum costs in terms of business operations and tax burden.
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