Country update: China

Transcription

1 Country update: China Ray Zhu Partner, China

2 Speaker Ray Zhu Partner China Tax and Business Advisory Services Background Ray has over 17 years of experience in providing China tax and business advisory services, where he has accumulated extensive experience in advising both MNCs and domestic companies. He specialises in business model analysis, tax planning, tax audit defense and foreign exchange advisory. Office +86 (21) Fax +86 (21) Mobile Relevant experience Ray is very experienced in serving MNCs and his client portfolio includes many US Fortune 500 companies as well as many well known EU and Korean enterprises. Qualifications Ray is a member of the China Institute of Certified Public Accountants and is a Certified Public Accountant in China. 2

3 Agenda 1. China business and tax environment 2. Corporate restructuring and equity investment related regulations 3. Tax investigation on intra-group outbound payments 4. Recent update of B2V Reform 5. Q&A 3

4 China business and tax environment 4

5 So what is China s new normal How is China going to organise its economy Production capacity and industry structure Market competition and overseas growth Focus on social unrest environment, corruption, etc. The constraints and risks built in the economy Resources and environmental constraints Cumulated financial risks Limitation of fiscal and stimulus tools Real GDP Growth (%) Private Consumption Percent Change (%) China s GDP growth in 2014 was 7.4%, the country s slowest rate of growth since 1990 and in March 2015 slowed to 7% 5

6 Trend China tax revenue China s total tax revenue ( ) (billion RMB) Average growth rate 15.07% China s tax revenue from the non-tre enterprises ( ) (billion RMB) Average growth rate 24.34% Tax revenue growth rate of Q was 1.2% and tax revenue in some provinces in Northeast China decreases. International Collaboration Tightened administration on cross-border transactions Anti-Avoidance Non-TRE administration Source: Website of Ministry of Finance 6

7 Trend key focus in 2015/2016 Relaxed tax treatment for corporate restructuring More investigations on intra-group outbound remittance B2V Reform finalisation Simplified administration control from government 7

8 Corporate restructuring and equity investment related regulations 8

9 Milestones Dec 2014 Caishui [2014] No. 109 / No. 116 Relaxation of (Special Tax Treatment )STT criteria / deferral tax treatment for equity investment with non-monetary assets Dec 2009 Guoshuihan [2009] No.698 Indirect Transfer 26 July 2010 State Administration of Taxation (SAT) Notice [2010] No.4 supplementary regulation on Circular 59 3 Feb 2015 SAT Notice [2015] No. 7 supplementary rules for indirect transfer April 2009 Caishui [2009] No.59 STT vs. General Tax Treatment (GTT) 9

10 Background, objective and approach of Public Notice 7 Background Uncertain issues in the implementation of Circular 698 Assessment of reasonable commercial purpose Tax treatments Lack of feedback Echo base erosion and profit shifting project Balance the protection of China s tax base and FDI attraction Approach Objective Balance administrative resource and tax revenue collection 1. Self-assessment 2. Voluntary payment 3. Voluntary reporting 4. Investigation by the tax authorities 10

11 Seven general factors for assessing the reasonable commercial purpose Holistic approach Substance over form 1. China content of the equity value of the overseas company being transferred 3. Functions performed and risks undertaken 4. The existence duration of the shareholders, business model of the structure 2. China content of the asset value and income of the overseas company being transferred 5. Whether the indirect investment and transfer of the taxable properties in China can be substituted by a direct investment and direct transfer 6. Overseas income tax payment for the indirect equity transfer 7. The applicability of any treaty protection 11

12 Safe harbour rule the green zone (1/5) 1 The overseas transferor buys and sells the shares of the same listed overseas company through public stock exchanges. 2 If the overseas transferor directly holds and transfers the Taxable Property, the income from the direct transfer would otherwise be exempted from CIT under the applicable tax treaty or tax arrangement. Direct transfer:enjoy the treaty benefit Indirect transfer:apply the safe harbour rule Company A (Hong Kong) Company B Company A (Hong Kong) 100% Company B Overseas 24% China Company C Overseas China Intermediate Holding Co. 24% Company C 12

13 Safe harbour rule the green zone (2/5) 3 Qualified transaction which fulfils ALL of the following criteria: 1) the shareholding relationship 80% (100% for indirect transfer of propertyrich shares in China) 2) 100% equity payment (not including shares in a listed company) 3) not result in the reduction in the CIT burden on the subsequent potential indirect transfer new criteria to enjoy the safe harbour rule 13

14 Safe harbour rule the green zone (3/5) 3 Illustration of criteria 1) and 2) Payment with transferee's own equity Change in shareholding structure Scenario 1 Transferor 80% payment in equity Scenario 2 80% Group HQ 80% Holding Company Transferee Transferor payment in equity Transferee Chinese Company overseas China Holding Company Chinese Company overseas China 14

15 Safe harbour rule the green zone (4/5) 3 Illustration of criteria 1) and 2) Payment with the equity interest in transferee's subsidiary Group HQ Group HQ 80% Transferor Payment in subsidiary s equity 80% Transferee After transfer 80% Transferor 80% Transferee Holding company Subsidiary Overseas Subsidiary Holding company Overseas Chinese Company China Chinese Company China 15

16 Safe harbour rule the green zone (5/5) 3 Illustration of criteria 3) Not result in the reduction in the CIT burden on the subsequent potential indirect transfer Case1 Case 2 Group HQ Group HQ 100% 100% 100% 100% Transferor (Hong Kong) Transferee (Singapore) Transferor (Cayman) Transferee (Singapore) 100% 100% Holding Company Overseas Holding Company Overseas 24% Chinese Company China 24% Chinese Company 为什么不含上市企业股权? China 16

17 Unfavourable conditions the red zone 75% or more of the value of the overseas company being transferred is derived directly or indirectly from Taxable Properties in China. 90% or more of the total assets of the overseas company (not including cash) / its income is directly or indirectly derived from Taxable Properties in China. 1 ALL conditions met 2 directly considered as having no reasonable 3 commercial purpose 4 During anytime within one year before the indirect transfer In one year before the indirect transfer The overseas enterprise and its subsidiaries perform limited functions and undertake limited risks which are not enough to substantiate economic substance. The overseas income tax payable for the indirect transfer is less than the possible tax burden in China on the direct transfer of such properties in China. Do not fall in the red zone = absolutely safe? 17

18 Administrative procedures For transferor For transferee May consider reporting the May consider reporting the transaction to the in-charge tax transaction to the in-charge tax authority authority May need to pay CIT Shall withhold CIT May be subject to interest levy if do not pay CIT voluntarily May be subject to penalty if do not withhold CIT and the transferor does not pay the CIT either No report no risk The in-charge tax authority can conduct GAAR investigation and make adjustment if necessary. Report certain The in-charge tax authority may still not grant feedback to the reporting. 18

19 Other recent update of CIT treatments for restructuring transactions In March 2014, the State Council issued a circular, Guofa [2014] No.14 (Circular 14), urging various government bodies to improve their policies so as to encourage mergers and acquisitions (M&A) in China. In response to Circular 14, Caishui [2014] No. 109 and Caishui [2014] No. 116 are issued to substantially improve the CIT restructuring rules. Caishui [2014] No. 109 (Circular 109) Caishui [2014] No. 116 (Circular 116) Guofa [2015] No. 27 (Circular 27) Notice Jointly Issued by the MOF and SAT Regarding CIT Treatments to Support Corporate Restructuring ( 财政部 国家税务总局关于促进企业重组有关企业所得税处理问题的通知 ) Issued on 25 December 2014 and takes effect on 1 January Notice Jointly Issued by the MOF and SAT Regarding CIT Treatments for Equity Investment with Non-monetary Assets ( 财政部 国家税务总局关于非货币性资产投资企业所得税政策问题的通知 ) Issued on 31 December 2014 and takes effect on 1 January Decision of the State Council Regarding Cancellation of Items for Non-administrative Approval ( 国务院关于取消非行政许可审批事项的决定 ) Issued on 10 May

20 Highlights of major developments Reduction of the minimum threshold (the 2nd STT criterion) 75% 50% for both equity and assets deal Deferral tax treatment for equity investment with nonmonetary assets Simplified administration procedures for STT and treaty benefit claim Gains derived by a TRE from the asset appreciation arising from the use of nonmonetary assets to invest in equity of another TRE may be amortised over a period of up to five years. Consequently the relevant CIT paid in instalments. Cancel the pre-approval on STT and treaty benefit claim Assessment and documentation in place Prepare for inquiries from tax authorities 20

21 Suggested actions Good timing to revisit China investment structure to achieve business and tax efficiency 1. Conduct the cross-border restructuring optimise group structure moving holding company location to secure treaty benefit on dividend repatriation out of Chinese entities 2. Conduct restructuring within China, including merger, share swap, etc. so as to: reduce the number of Chinese entities fully utilise the domestic CHC structure to achieve tax-free cash movement within China 3. The enterprises shall: perform self-assessment in advance keep well documentation to defend the government s further inspection 21

22 Tax investigation on intra-group outbound payment 22

23 Common types of intra-group cross-border charges Procurement Marketing Technology licensing Sales Others: shareholder activities R&D Logistics Advertising Trademark licensing IT HR Legal 23

24 Recent regulations Notice Issued by the General Office of the SAT Regarding Anti-avoidance Investigations on Significant Outbound Payments (Circular 146) Notice Issued by the SAT Regarding Certain Corporate Income Tax Matters on Outbound Payments to Overseas Related Parties (Public Notice 16) 24

25 Highlights of Circular 146 Data collection Cover outbound remittance during the period from 2004 to 2013 Intra-group service fee and royalty fee Special Tax Adjustment Where suspicious, Special Tax Adjustments investigation to be initiated Consistent with SAT s report to UN 25

26 Local implementation for Circular 146 (cont d) Beijing Tianjin One of the district tax bureaus came up with a list of significant payments and requested the local service recipient to provide a detailed explanation on each payment. Two of the district tax bureaus released notices that, the scope of the payments under the examination covered not only the typical service fee and royalty, but also dividend, interest, rental, capital gain, etc. 26

27 Local implementation for Circular 146 (cont d) Shanghai Guangzhou One of the district tax bureaus set out a threshold for the examination to target companies with annual intra-group outbound service fee and royalty payments exceeding RMB30 million or 5% of the domestic payer s annual turnover any one year from 2008 to The Guangzhou municipal tax bureau required comprehensive information on royalty payment, including the royalty payment description, detailed calculation method, function taken by the Chinese subsidiary and the foreign service provider respectively, valid period for the use of intangible asset and whether there is depreciation in the value of the intangibles. A district tax bureau in Guangzhou even identified a number of jurisdictions that they considered as low tax rate jurisdictions. 27

28 Highlights of Public Notice 16 While Circular 146 illustrates SAT s nation-wide tax examination on significant outbound payments to overseas related parties in a BEPS context, it is considered that Public Notice 16 depicts the SAT s further guidelines on the local-level tax authorities administration on the various types of outbound payments to overseas related parties. Reconfirmed the 10 year statute of limitations for special tax adjustments which include TP maters Arm s length principle Intra-group outbound payments Authenticity test 28

29 Highlights of Public Notice 16 (cont d) Four types of payments which are not deductible for CIT purpose 1 Unqualified overseas related parties 2 Unqualified service fee 3 Royalties paid to an overseas related party which only owns the legal rights of the intangible asset but having no contribution to its value, creation, not in compliance with the arm's length principle 4 Royalties paid to an overseas related party in compensation for incidental benefits arising from the financing or listing activities 29

30 Possible solution centralised charge PRC Co 1 PRC Co 1 Previous arrangement XYZ Co (Singapore ) PRC Co 2 Overseas PRC Co n PRC Proposed arrangement XYZ Co (Singapore) ABC Co PRC Co 2 PRC Co n Service flow Cash flow Overseas PRC Potential issues and concerns 1 Business scope of ABC Co. sufficient for relevant services? 2 Payments qualify for B2V treatment? 3 How to persuade relevant tax authorities to accept agreements between XYZ Co. & ABC Co., ABC Co. & PRC Cos 4 How to address challenges from in-charge tax authority regarding ABC Co s reimbursement responsibility instead of providing actual service to each PRC Cos? 5 What is the appropriate mark-up rate for intercompany charge from XYZ Co. to ABC Co. and ABC Co. to PRC Cos? 30

31 Suggested actions A comprehensive tax health check and ongoing internal tax risk control Proper tax and transfer pricing documentation Proper communication with local-level tax bureaus Update/improve the intra-group outbound service charges mechanism (e.g. centralise the charge) 31

32 Recent update of B2V reform 32

33 Progress of the B2V transformation Shanghai Pilot industries Transportation services and certain modern services 1 January 2012 (Regulation released on 16 November Lead time 1.5 months. Expanded Pilot industries Transportation services and certain modern services Sep - Dec 2012 (Regulation released on 31 July Lead time 1 to 4 months. Nationwide Pilot industries Broadcasting movie and television services 1 August 2013 (Regulation released on 24 May Lead time 2+ months. Nationwide Pilot industries Railway transportation and postal services 1 January 2014 (Regulation released on 12 December Lead time 0.5 month. Nationwide Nationwide Pilot industries Remaining industries Telecommunication Financial services, real services estate, construction, culture and sports, consumer services. 1 June 2014 By the end of 2015 (Regulation released on 29 (Regulation to be April released on? Lead time 1 month. Lead time? Shanghai Tianjin Anhui Nationwide Nationwide Nationwide Future Jiangsu Beijing Hubei Xiamen Guangdong Zhejiang Fujian Shenzhen Currently, the Ministry of Finance is working on the B2V rules for the consumer service, financial services and real estate industries. 33

34 Overview of China B2V tax rates B2V Taxable items Transportation services 11% 3% Postal services 11% 3% Basic telecommunication services 11% 3% Value-added telecommunication services 6% 3% R&D, and technological services; information technology services; cultural innovation services, logistics support services; attestation and consulting services; broadcasting movie and television services VAT rate (before B2V reform) BT rate (before B2V reform) 6% 3%/5% Leasing services for tangible movable property 17% 5% 34

35 Trend B2V transformation in 2015 New policy may take effect at the earliest on 1 Oct 2015 New policy may take effect at the latest on 1 Jan 2016 May 2015 Jun Jul Aug Sep Oct Nov Dec Jan 2016 Feb Mar New policy may release 11% 6% 6% vs. 11% Real estate and construction Financial services Life services 35

36 Q&A 36

37 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 the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Ltd. (""). has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual client service team or your other advisers. The materials contained in this presentation were assembled in May 2015 and were based on the law enforceable and information available at that time All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.