Top 3 new PRC tax challenges & opportunities faced by Hong Kong companies with business in China

Transcription

1 Top 3 new PRC tax challenges & opportunities faced by Hong Kong companies with business in China Presenter: Nicola Tang, Senior Manager, Tax & China Business Advisory Service HKTDC World SME Expo 年 11 月 27 日 P w C

2 Agenda 1. Claiming benefits under double tax treaties 2. Indirect transfer of Chinese equity 3. Secondment = Service permanent establishment ( PE )? 2

3 Business interaction between Hong Kong and Mainland Hong Kong Capital in/(out)flow People in/(out)flow Goods / service in/(out)flow 3

4 Service agreement / secondment? days treaty protection Investment holding structure/ cash repatriation strategy? Dividend / interest / royalty / capital gain on transfer of Chinese equity Hong Kong Tax implications? Profit alignment? - Transfer pricing policy Claiming treaty benefits? -Build substance -Tax residency certificate - Approval and record filing requirement 4

5 Part I Claiming benefits under double tax treaties 5

6 Major provisions in a typical Double Taxation Agreement ( DTA ) Tax residency Permanent Establishment ( PE ) Business profits Dividends Interest Royalties Capital gains Income from employment Methods for elimination of double taxation Exchange of information Miscellaneous Note: Special provision to Mainland-HK DTA : Domestic GAAR 6

7 Evolution of policies for non-resident tax administration new CIT Law The concept of Non-TRE 16/3/2007 Circular 801 CIT returns for Non-TRE 22/9/2008 Circular 897 Dividends paid by H share 6/11/200824/11/2008 Circular 955 Interest sourced from China Circular 114 Related party transactions Circular 47 Dividends, profits and interest paid to QFIIs Circular 6 Annual CIT filing for Non-TRE Decree 19 Contracted projects and service provision Circular 3 Passive income Circular 2 Special tax adjustments 5/12/ /2/ /1/2009 Circular 81 Treaty benefit for China sourced dividends 22/1/2009 Circular 394 WHT on dividends to Non-TRE shareholders 20/1/2009 Circular 124 Claiming treaty benefits Circular 507 Treaty benefit for royalties 9/1/2009 8/1/2009 Circular 601 Determination of beneficial ownership for treaty benefit RO/Indirect Equity Transfer/ Secondment/ Deemed Profit Rates for PE 24/7/ /8/ /9/ /10/2009 More to come 7

8 Key features of Circular 124 Approval-application and Record-filing Overview Applicable to both non-tax resident enterprises and individuals. Not going through Approval-application and Record-filing administrative procedures No tax treaty benefits granted. Effective day : 1 st of October Passive income Approval-application procedure Dividends, interest, royalties, and capital gains Authorised-approval tax bureau ( ATB ) Active income Record-filing procedure Permanent establishment ( PE ), business profits, independent personal services, and dependent personal services Filing with in-charge tax bureau 8

9 Intention of Chinese tax authorities Unify and tighten up administration for claiming treaty benefits Combat treaty shopping and abuse by reference to: - Tax resident - Beneficial ownership (control) - Limitation of benefits - Commercial purpose - Substance Collect statistics of China s tax revenue given up What is the response of Competent Authority of other jurisdictions 9

10 Challenge from Circular 124 Denial of tax treaty benefits if not going through approval-application or recordfiling Much more administrative work in China as well as in Home jurisdictions than previous practice Higher compliance standard Sensitive information to be disclosed in the forms Local practice to come What to do? Are you coming from a treaty jurisdiction? What income do you derive from China? Is tax reduction or exemption available under the treaty? Are you the genuine tax resident of your jurisdiction? Are you the beneficial owner of the China-source income? Do you have substance in Home jurisdiction? 10

11 Part II Indirect transfer of Chinese equity 11

12 Typical Chinese investment holding structure D Sales proceed A (Ultimate Hold Co) GAAR main purpose Source rule in CIT law Ex-China Own B (SPV) China C (China investee) 12

13 Chongqing case Before the acquisition Singapore Co Payment for acquiring shares in Target Concerns on implication of Chongqing case Target PRC Co B PRC Co A Singapore China Substance over Form! Isolated case? SAT position?( anti-avoidance?) How to mitigate the risk? After the acquisition Singapore Co Target PRC Co B PRC Co A Singapore China 13

14 Latest development A (Ultimate Hold Co) SAT Draft Policy: Old version vs new version Ex-China China B (SPV) GAAR ->> Source Rule Disclosure requirement ->> Substance C (Chinese investee) 14

15 Part III Secondment = Service PE? 15

16 Typical Secondment Arrangement $$ MPF / other pension schemes Home entity Hong Kong Documentation $$ $$ Shared administration charges China $$ Reimbursement of remuneration Host entity (China) 16

17 Sample survey on secondment arrangement & PE (Shanghai) 17

18 Typical secondment arrangement $$ MPF / other pension schemes Home entity $$ Shared administration charges Hong Kong China Documentation $$ $$ Reimbursement of remuneration Host entity (China) Concerns of secondment arrangement Recharge of remuneration and shared administration charges (profit?) => PE in China? No recharge => tax deductible in HK? Cash repatriation from China => pay tax in the first place? 18

19 What s next What s to expect SAT preparing guidelines for assessment Local level pending approval for remittance Suggestions 1. Substantiation of secondment arrangement with proper documentation (with supports from Home Co.) 2. Good communication with local level in-charge tax bureaus 3. Consistent strategy for group entities throughout the country Is it the end of the challenge? Are there other risks? 19

20 We stay close with our clients through providing ongoing tax advice for each stage of their business development Stage 1: Planning Stage 2: Growth Stage 3: Maturity Stage 扩张阶段 4: Expansion Preliminary planning on business model and holding structure Research and development on product and technology Initial financing Continuous refinement on technology Expand production scale Broaden market channels and establish your brand Increase of capital need Continuous development and stabilize your market position Enter new business market Look for IPO Vertical/horizontal expansion Restructuring, merger and acquisition Outbound investment How to build an optimal company structure? How to design the most efficient operation model? How to implement an effective initial financing arrangement? How to arrange for the intellectual properties? How to meet the financing needs during the stage of business growth via the most optimal tax arrangement? How to control and minimize tax exposures legally and efficiently as well as optimize tax cost? How to make use of preferential tax treatment effectively? How to regulate the relatedparty transactions and optimize the transfer pricing arrangement? How to optimize the private wealth management for enterprise founders? How to motivate employees efficiently? How to clear the tax obstacles before the listing? How to meet the tax regulatory requirement of overseas capital market? How to make provision for deferred tax and uncertain tax positions according to the accounting standards of the place of listing? How to refine the group structure, operation flow and related party transactions during the expansion process? How to optimize the financing model of outbound investment in order to maximize the investment return? How to obtain the best international trading solutions? How to obtain the best merger and acquisitions tax solutions? 20

21 Our contacts Cathy Jiang, Partner Tax & China Business Advisory Services Hong Kong Tel: , Nicola Tang, Senior Manager Tax & China Business Advisory Services Hong Kong Tel: , 21

22 Thank You The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice. Limited ("PwC") has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based on the specific facts involved. No reader should act or refrain from acting on the basis of any material contained in this presentation without obtaining advice specific to their circumstances from their usual PwC client service team or their other advisers. The materials contained in this presentation were assembled on 30 November 2009 and were based on the law enforceable and information available at that time All rights reserved. "" refers to the Hong Kong firm of or, as the context requires, the network of member firms of International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of LLP (US). P w C