As highlighted in KPMG China Tax Weekly Update (Issue 10, March 2017), Premier Li Keqiang delivered the 2017 Report on the Work of the Government on 5 March 2017. In this he noted that in 2017: (i). China will simplify the VAT rate structure; (ii). Expand the number of small enterprises who can benefit from preferential Corporate Income Tax (CIT) treatment; (iii). Increase the research and development (R&D) expense super deduction for science and technology-related small and medium enterprises (SME).
The timing of these policy measures, and the rollout of further tax reduction measures specified in the Report on the Work of the Government, were outlined by Premier Li at an 19 April executive meeting of the State Council.
It was also decided during the meeting that a three-year extension would be applied to a package of current tax incentive policies that were due to expire by the end of 2016. These include, inter alia:
(i). 50% reduction of urban and township land use tax (UTLUT) levied on land used for construction of bulk commodity warehousing facilities owned by logistics enterprises;
(ii). a VAT exemption for interest income arising from small loans made to small farmer households by financial institutions. All finance companies (including smaller lenders) engaged in providing small loans to farmers are now in scope of this incentive, provided that their activities are in compliance with laws and regulations;
(iii). Reduction of VAT, urban maintenance & construction tax (UMCT), education surtax and IIT/CIT for new businesses or new employments (as relevant) set up or entered into by college graduates, the long term unemployed, or ex-servicemen. Specific procedures and qualifying criteria apply.
These policies outlined by Premier Li will be followed up in due course with detailed implementation guidance from the SAT and other bodies and we will report on this guidance as and when it is released.
The Organisation for Economic Cooperation and Development (OECD) on 6 April 2017 released additional guidance for the preparation and filing of country-by-country (CBC) reports, pursuant to the base erosion and profit shifting (BEPS) Action 13 report recommendations. This is the third set of CBC guidance provided by the OECD; in the previous two rounds the OECD explained: (i) how to conduct of voluntary filings in parent-surrogate situations; (ii) the impact of currency fluctuations on the EUR750m CBC reporting threshold; (iii) coverage of investment fund groups by CBC reporting; (iv) treatment of partnerships as stateless entities; (v) how to deal with local notifications of CBC reports filed elsewhere (see KPMG China Tax Weekly Update (Issue 48, December 2016) and (Issue 41, November 2016) for more details).
This third round of CBC guidance addresses five specific issues:
* State Administration of Taxation (SAT) Announcement  No. 42 provides China’s CBC administrative guidance, together with a supplementary SAT announcement on 27 March 2017. You may refer to below our KPMG publications for more details:
To further support the consistent implementation of the Common Reporting Standard (CRS), the OECD on 6 April 2017 released:
* With regard to the detailed analysis of the FAQs, please refer to KPMG’s publication dated 11 April 2017 below:
** In September 2014, China committed to implement the OECD CRS for Automatic Exchange of Financial Account Information in Tax Matters, which was developed at the OECD under a mandate from the G20. The SAT in Oct 2016 published a discussion draft on “Due Diligence Administrative Measures on Non-residents’ Financial Account Information in Tax Matters”, which provided the principles and procedures for Chinese financial institutions to use in identifying the accounts of non-residents and guidance on collecting the relevant information, and called for public comments. According to the timeline, financial institutions in China shall conduct due diligence procedures beginning from 1 January 2017, identify the financial accounts of non-resident individuals and enterprises, collect and report the relevant information to SAT. Such information will be exchanged with the competent tax authorities of other jurisdictions by the SAT on a regular basis and China is expected to engage in the first information exchange in September 2018.
With regard to the impact of the Discussion Draft on China tax management, you may click the following links to access the relevant analysis by KPMG:
On 4 April 2017, the Ministry of Commerce (MOFCOM) issued new administrative measures for automobile sales (“new measures”). The new measures will take effect from 1 July 2017, replacing the existing implementation measures for automobile brand sales (“2005 measures”) issued in 2005, which was annulled at the same time.
Under the 2005 measures, auto dealers must obtain sales authorisation from auto suppliers (i.e. brand owners) in advance of commencing sales activity and are subject to recordal filing with the administration for industry and commerce. Auto dealers are only permitted to sell one brand of cars – the ‘single auto sales model’. The 2005 measures have helped the orderly development of China's auto sales and services market, but have also given rise to several problems. These include monopolistic behaviour by some vendors, imperfect competition, service quality issues, as well as overpriced cars and auto parts.
In a effort to move away from China’s ‘single auto sales model’ the new measures set out the following reforms:
In addition, a MOFCOM spokesperson indicated at the press conference launching the new measures that, with the development of internet technology, some enterprises are attempting to sell cars through the internet, which is still at a developmental stage. Supplementary measures would be introduced in due course to address the issues arising from this emerging auto sale model. In the interim, cars that are being sold through the internet, shall be subject to existing laws and regulations.
Per a news item posted on the OECD website on 13 April 2017, the fourth meeting of the OECD Global Forum on VAT was hosted in Paris on 12-14 April 2017. Approximately 300 participants, representing over 100 delegations from countries, jurisdictions and international organisations, were in attendance, as well as representatives from the business community and academia.
The keynote address at this meeting was delivered by Mr. Wang Jun, Minister of Taxation of the People's Republic of China, where he highlighted the comprehensive "Business Tax to VAT Reform" implemented in China since 2012 and which concluded in May 2016. The reform, one of the world's most wide-ranging and complex tax reforms in recent years, aims at supporting growth and boosting China's international competitiveness.
As mentioned in a previous news item posted by the OECD, this meeting of the OECD Global Forum on VAT had a particular focus on digital globalisation and on the rollout of the related International VAT/GST Guidelines. The participants focused on collection of VAT/GST on online sales by offshore vendors; the role of digital platforms in the collection of VAT/GST, and optimal use of technology. Other key focus areas were VAT/GST fraud detection and effective countermeasures, VAT/GST refunds policy and management, digitalisation of tax administration, and fostering of VAT/GST compliance through incentives, all areas in which China is at the forefront of global policy innovation.
On 17 April 2017 a tax appeal case decision by the Beijing-based Chinese Supreme People’s Court (SPC) was published on the official China Judgments Online website. The case was brought as an appeal by Guangzhou Defa Housing Construction Co., Ltd. (a Chinese tax resident company, hereinafter referred to as “Defa Co., Ltd.”, or “Defa”) against an imposition of tax and penalties by the Guangzhou Local Tax Bureau (Guangzhou LTB), specifically the Guangzhou 1st Tax Audit Bureau within the LTB. The Defa case is the first tax appeal case heard by the SPC, to-date.
In the past two years, tax cases have begun to be heard much more frequently at provincial court level. For example, a case concerning the UK-based The Children’s Investment fund (TCI) , heard by the Zhejiang Province People’s High Court in December 2015, was the first case on the application of the general anti-avoidance rule to an indirect offshore transfer of a China investment. A further case, decided by the Shandong Province Zhifu District People’s Court in December 2015, dealt with the Italian Illva Saronno Holding SPA’s use of the CIT reorganisation relief provisions. A further decision, made by the Guangdong Province People’s Intermediate Court in November 2015, was the first to deal with the individual income tax (IIT) treatment of dual employment arrangements, specifically under the China-US DTA. Building on these earlier cases, the Defa case takes China court engagement in tax cases to the next level, by involving the SPC. It might be noted that all three of the above cases were decided in favour of the tax authorities.
The Defa case, prior to its elevation to the SPC, initially underwent administrative review with Guangzhou LTB. It was subsequently brought before Guangzhou Tianhe People’s Court and finally the Guangzhou Intermediate People's Court. This succession of appeals follows Article 19 (1)(2) of the Tax Administrative Review Rules (TARR) and Article 88 (2) of the Tax Collection and Administration (TCA) Law.
The SPC decided partly for Defa and partly for the tax authorities. The SPC affirmed the tax authorities’ upward adjustment to Defa’s business tax and flood defense fee obligations in respect of a real estate transfer. However, at the same time, the SPC decided in favour of Defa that late payment surcharges (LPS) were not justified and should be refunded by the tax authorities.
The approach adopted by the SPC in the Defa case is broadly in line with the approaches applied by lower tier courts in previous tax cases. The courts recognize the tax authorities as having competence to interpret the tax law – the courts will not seek to overturn adjustments to tax assessments, made by the authorities on the basis of their interpretation, so long as these are not obviously unreasonable or an abuse of power. This follows Article 70 (1) of the Administrative Procedure Law. However, with regards to administrative formalities and penalties, such as application of LPS, the SPC, as with earlier court decisions, has shown itself prepared to decide against the tax authorities.
The background facts to the case are as follows:
The dispute between Defa and the tax authorities before the courts centred on several issues, the most important being the following:
(i) Whether there was a basis in law for the Guangzhou tax authority to make tax adjustments on an assertion that the taxable value is unduly low and this is without a justifiable reason (i.e. whether Article 35 (1)(6) TCA Law was in point);
(ii) Whether the Guangzhou tax authority’s imposition of LPS has a basis in law.
The SPC opined that:
A number of matters were left somewhat ambiguous in the SPC’s judgment:
The specifics of the decision aside, the fact that tax cases are now starting to go all the way to SPC level in China is an important development. It opens the way for an increasing body of court case guidance to emerge in the China tax space, looking ahead, and makes court appeal of tax cases an increasingly relevant option for taxpayer disputes.