MODULE 2.02 CHINA OPTION

Transcription

1 THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION June 2018 MODULE 2.02 CHINA OPTION SUGGESTED SOLUTIONS

2 PART A Question 1 The royalties earned by KCo in respect of the license of the patent of medicine products to LCo shall be subject to withholding tax with a limited rate in China, according to Art.12 of China-UK Tax Treaty, on the condition that the payment of royalties is on arm s length base. If the payment of royalties is not on arm s length base, the excess part of the payments shall remain taxable according to Chinese domestic tax laws. In 2015, KCo shall be regarded to have a service PE in China, according to Art. 5(3) of China- UK Tax Treaty, because the activities carried out by its two employees in China lasted for more than 183 days. Accordingly, service fees received by KCo shall be taxable in China according to Art. 7 of China-UK Tax Treaty. If the payment of service fees is not on arm s length base, Chinese competent tax authority shall make an appropriate adjustment. In 2015, the salary received by two UK residents shall be taxed in China, according to Art. 15 of China-UK Tax Treaty, because the activities carried out by them in China lasted for more than 183 days. In 2015 and 2016, dividends paid to KCo by LCo shall be subject to withholding tax with at not more than 5% rate in China, according to Art.12(2)(a) of China-UK Tax Treaty, because KCo owns directly as least 25 (actually 50%) shares of LCo. In 2017, capital gains from alienation of shares of LCo by KCo shall be taxable in China, according to Art.13(5) of China-UK Tax Treaty, because KCo owns directly 50% shares of LCo for more than 12 month period preceding such alienation. In 2018 or after 2018, dividends paid to KCo by LCo shall be subject to withholding tax with at not more than 10% rate in China, according to Art.12(2)(c) of China-UK Tax Treaty, because KCo owns directly less than 25% (actually 20%) shares of LCo. Page 2 of 9

3 Question 2 The legal framework Article 43 of the Enterprise Income Tax Law, Article 114 of the Implementing Regulation on the Enterprise Income Tax Law, and Gonggao [2016] No. 42 issued by the SAT Types of files and their contents Contemporaneous documentation may include master file, local file and special issue file. The master file is to provide an overview of the global business operations of the MNE group to which the ultimate holding company belongs, and shall include the following information: (1) the structure of organization; (2) description of MNE s business(es); (3) intangibles; (4) financial activities; (5) financial and tax positions. Local file is to disclose detailed information on the enterprise s related party transactions, including the following: (1) Overview of the enterprise; (2) Related party relationship; (3) Related party transactions; (4) Comparability analysis; (5) Selection and application of transfer pricing method. Special issue files include special issue file on cost sharing agreements and special issue file on thin capitalization. Enterprises liable to contemporaneous documentation Any enterprise that meets one of the following criteria shall prepare a master file: The enterprise has conducted cross-border related party transactions during the tax year concerned, and the MNE group to which the ultimate holding company that consolidates the enterprise belongs has prepared a master file; or The annual total amount of the enterprise s related party transactions exceeds 1 billion RMB. Any enterprise that meets one of the following criteria during the fiscal year shall prepare a local file: The annual related party transfer of ownership of tangible assets exceeds 200 million RMB (for toll manufacturing transaction, the amount is calculated using the import/export customs declaration prices); The annual related party transfer of financial assets exceeds100 million RMB; The annual related party s transfer of ownership of intangibles exceeds 100 million RMB; or The annual total amount of other related party transactions exceeds 40 million RMB. An enterprise that enters into or implements a cost sharing agreement (CSA) shall prepare a special issue file for the CSA. An enterprise with a related party debt-to-equity ratio exceeding the threshold shall prepare a special issue file on thin capitalization to demonstrate its conformity with the arm s length principle. Conditions for the exemption of liability Enterprises with effective advance pricing agreements in place may choose not to prepare local file and special issue file with respect to the related party transactions covered by such advance pricing agreements. Page 3 of 9

4 Enterprises with only domestic related party transactions may choose not to prepare master file, local file and special issue file. Time limits A master file shall be completed within 12 months of the fiscal year end of the ultimate holding company of the enterprise group; local file and special issue file shall be completed by 30 June of the year following the year during which the related party transactions occur. Contemporaneous documentation shall be submitted within 30 days after receiving a request from the tax administrations. Enterprises that fail to submit contemporaneous documentation due to an event of force majeure shall submit the contemporaneous documentation within 30 days after the event of force majeure ceases to prevent the submission. Page 4 of 9

5 PART B Question 3 ACo shall be regarded to have a PE in China, according to Art.5 of China-UK Tax Treaty, because shall be determined to have a fixed place of business in China through the limited partnership set up jointly with BCo in China. Consequently, profits earned by ACo from the limited partnership shall be taxable in China according to Art.7 of China-UK Tax Treaty. The limited partnership that both parties established is qualified as a foreign-invested venture capital investment enterprise, which may enjoy tax incentives granted by Caishui [2015] No According to Gonggao [2015] No. 81 issued by the SAT and Caishui [2015] No. 116, BCo may enjoy a tax credit against the taxable income it obtains from the limited partnership, with an amount of 70% of its contributions injected into the limited partnership which are actually invested in unlisted small or medium-sized high-tech enterprises, on the condition that such investments have lasted for more than 2 years (24 months). ACo shall not be regarded to have a service PE in China, according to Art. 5(3) of China-UK Tax Treaty, because the activities carried out by Michael in China lasted for not more than 183 days in any 12 month period commencing or ending in the fiscal year concerned (actually 90 days per year). The salary received by Michael shall be taxed in China, according to Art. 15 of China-UK Tax Treaty, because the salary is paid by the limited partnership, even though his activities in China lasted for not more than 183 days in any 12 month period commencing or ending in the fiscal year concerned (actually 90 days per year). Page 5 of 9

6 Part C Question 4 Part 1 This is established by Article 5 of China s Implementing Provisions on Enterprise Income Tax Law. Part 2 The establishment and place set up by a non-resident enterprise in China under the Chinese Enterprise Income Tax Law includes: any type of place of business, regardless of fixed or non-fixed, preparatory or nonpreparatory, auxiliary or non-auxiliary; any services, regardless of lasting period of such services; any type of building site, construction, assembly or installation project or supervisory activities in connection therewith, regardless of lasting period of such project or activities; and any kind of business agent, having an authority to conclude contracts on behalf of the enterprise, or having an authority to store or deliver goods on behalf of the enterprise. Therefore, the scope of the establishment and place set up by a non-resident enterprise in China under the Chinese Enterprise Income Tax Law is much broader than the scope of permanent establishment under the China-UK Tax Treaty. Page 6 of 9

7 Question 5 The main business activities carried on by UK resident company are ship-buildings, not the operation of ships in international traffic, therefore the rental of bare ships carried on by the company shall not be regarded as being incidental to the operation of ships in international traffic, according to Art.8(2) of China-UK Tax Treaty. The profits from the rental of bare ships carried on by the company shall be characterized as royalties, and accordingly such profits shall be subject to withholding tax in China, according to Art.12 of China-UK Tax Treaty. The activities carried on by the RO in Xiamen shall be identified as preparatory and auxiliary activities. The RO is not a PE of the company in China and therefore is not liable to pay enterprise income tax in China, according to Art.5(4) of China-UK Tax Treaty. The UK residents shall be present in Xiamen for 5 months per year, it is possible for them to be identified his/her stay in China for a period or periods exceeding in the aggregate 183 days in any 12 month period commencing or ending in the fiscal year concerned. If it is true, they would pay individual income tax in China, according to Art.15 of China-UK Tax Treaty. Page 7 of 9

8 Question 6 All salary paid by the UK government to Peter Rust shall be solely taxed in China. Peter has been living in Shanghai with his family for many years, and shall be identified as Chinese resident for tax purposes according to Chinese Income Tax Law, even though he remains as a national of the UK. The services are also rendered by Peter in China. Under such conditions, according to Art.19(1)(b) of China-UK Tax Treaty, taxing rights of the salary for such government services shall be allocated to China. The pension paid by the UK government to Peter after his retirement from the UK consulate in Shanghai shall be solely taxed in the UK. Peter is a resident of China, not a national of China, but a national of the UK. According to Article 19(2) of China-UK Tax Treaty, taxing rights of the pension under such conditions shall be allocated to the UK. Page 8 of 9

9 Question 7 Part 1 According to Art. 6 (2) of Caishui [2009] No. 59, ECo would enjoy special tax treatments as follows: (a) the tax base related to GCo s shares acquired by FCo shall be determined according to the original tax base at the time of those shares held by ECo; (b) all income tax issues related to the transferring GCo s shares shall remain unchanged; (c) ECo shall not have income tax liability at the time of the transferring GCo s shares. Part 2 According to Art. 5 and Art. of Caishui [2009] No. 59, the transferring GCo s shares to FCo shall meet requirements and conditions as follows: 1) There is reasonable business purposes, without main purposes of reducing, exempting or deterring tax; 2) The business operations of GCo are not substantially changed within a period of 12 months after the transferring GCo s shares to FCo; 3) ECo shall make a written commitment to Chinese competent tax authority that it will not assign its shareholdings of FCo within at least a period of 3 years after transferring GCO s shares to FCo. Page 9 of 9