The following matters are covered in this issue:
- China announces measures to boost foreign investment
- Implementation plan on central SOE reform(Guo Ban Fa  No. 69)
- SAT clarifies filing requirements for TP reporting(SAT Announcement  No. 26)
- Protocol to China-Pakistan DTA comes into force(SAT Announcement  No. 25)
- New regulations for Public-Private Partnership projects
China announces measures to boost foreign investment
On 28 July 2017, an executive meeting of the State Council outlined a series of measures to further boost foreign investment in China. The most notable are:
- The foreign investment “Negative List” approach will continue to be rolled out and foreign investment laws improved [See KPMG China Tax Weekly Update (Issue 25, June 2017) and (Issue 4, January 2017) for details].
- Reinvestment of distributed profits of foreign invested enterprises will be permitted without imposition of dividend withholding tax, and pilot city Corporate Income Tax (CIT) incentives for advanced technology services enterprises (ATSEs) will be expanded nationwide [See KPMG China Tax Weekly Update (Issue 47, December 2016) for details].
- Relaxation/elimination of requirements for foreign investors to have Chinese co-investors for their China investment in manufacturing and services sectors. Local governments are encouraged to promote the establishment of multinational enterprise ASPAC regional headquarters in China with local tax incentives, and efforts will be made to enhance the protection of foreign enterprise intellectual property rights [See KPMG China Tax Alert (Issue 23, August 2017) and China Tax Alert(Issue 9, March 2017) for details].
- Further development of national (high tech) development zones with facilitation of land grants to foreign invested projects, and provision of financial support to technology and green projects in western and northeast China [See KPMG China Tax Weekly Update (Issue 8, March 2017) for details.]
- Streamline the working permit/visa process for foreigner workers [See KPMG China Tax Alert(Issue 12, May 2017) for details].
During the State Council meeting, the other measures were also set out for stimulating private investment. These include, inter alia:
- Private enterprises will be encouraged to participate in key projects, such as “Made in China 2025”, and to participate in infrastructure and public utilities construction projects, for example, through public-private partnerships (“PPP”) (See linked KPMG publication on tax policies for PPP projects).
- Improve credit grading system for private enterprises for bank lending purposes. China recently reached an agreement with the US to facilitate the operation of foreign credit rating agencies in China. This was reflected in the new 2017 Catalogue Guiding Foreign Investment [See KPMG China Tax Alert (Issue 21, June 2017) for detail on the new Catalogue].
- Continue to increase financial support to small and medium enterprises, and technological innovation-based enterprises. This will build on recent policy innovations, such as the new tax incentives for venture capital enterprises investing in science and technology enterprises at seed capital or start-up stage [See KPMG China Tax Alert (Issue 15, May 2017) for details].
Implementation plan on central SOE reform
On 18 July 2017, the State Council issued the GuoBan Fa  No. 69. This sets out the Implementation Plan on Corporate Governance Reform of Central State-Owned Enterprises (“the Plan”).
The Plan aims to more clearly separate the operational management of state-owned enterprises (SOEs), some of which are currently registered under the ‘Laws on Industrial Enterprises Owned by the Whole People’, from government administration, by restructuring them into limited companies, and thereby increase business efficiency.
Since 1992, more than 90% of the SOEs, administered by different levels of government throughout the country, have been converted into corporations. Some economically significant SOEs, in particular those under the direct administration of the State-Owned Asset Supervision and Administration Commission of the State Council (“SASAC”), and referred to as the “central SOEs”, have not yet undergone this corporate governance reform process. The Plan clarifies that, the reform shall be completed before the end of 2017, and all the central SOEs (excluding financial and cultural sector (e.g. state media) enterprises) are required to be restructured into limited companies or corporations. Per officials of SASAC, 69 of 101 central SOEs are needed to be restructured.
The Plan also clarifies policies for the following matters:
- Disposal of lands that were allocated to the central SOEs before restructuring;
- Tax incentives will be granted to central SOEs in restructuring. These will provide tax relief for, inter alia, taxable gains arising on asset restructuring, including land transfers (Details of the tax incentives are to follow);
- Corporate conversion registration procedures;
- Retention of existing SOE business licenses and qualifications post-restructuring.
According to a posting on the government website, the reform aims to facilitate the introduction of further private or foreign investment into the shareholdings of the reformed SOEs. Oil and gas companies will be at the forefront of this initiative.
SAT clarifies filing requirements for TP reporting
On 7 July 2017, the State Administration of Taxation (SAT) issued Announcement  No. 26 (“Announcement 26”). This clarifies the requirements for filling in the related-party transaction (RPT) reporting forms and country-by-country (CBC) report set out in SAT Announcement  No. 42 (“Announcement 42”).
SAT issued Announcement 42 in June 2016, which replaced the earlier GuoShuiFa  No. 2 and GuoShuiFa  No. 114. It rolls out to China the BEPS Action 13 transfer pricing (TP) documentation structure, consisting of the Local File and the Master File, and incorporates the BEPS CBC report as an element of the annual RPTreporting. This means that, in China ,the CBC report will be filed as part of the 22 RPT report forms.Announcement 42 requirements apply to the 2016 fiscal year and subsequent [See KPMG China Tax Alert: SAT Issued Announcement on the Enhancement of the Reporting of Related Party Transactions and Administration of Contemporaneous Documentation( Issue 23, July 2016) for more details].
Announcement 26 seeks to align Chinese practice with OECD CBC reporting requirements, which have been clarified in four separate OECD guidance documents since the conclusion of the initial BEPS work in October 2015. In April 2017, the OECD released additional guidance [See KPMG China Tax Weekly Update (Issue 16, April 2017) for details],clarifying how to determine the ‘related party revenues’ of a multinational enterprise (MNE), for a particular country, for presentation on the face of the CBC report. The OECD clarified that related party revenues, for the purpose of the CBC report, will be those revenues arising from the entities described as ‘constituent entities’ of the MNE in Table 2 of the CBC report. An MNE’s ‘constituent entities’ will be determined with reference to accounting standards in the MNE’s home country. This may differ from the determination of ‘related parties’ under the TP rules of a country, so this is an important distinction.
Announcement 26 confirms that China will follow the OECD approach on this matter. It also clarifies that resident enterprises may amend their filed RPT reporting forms for year 2016 before 31 December 2017.
Protocol to China-Pakistan DTA comes into force
On 7 July 2017, SAT issued Announcement  No. 25 (“Announcement 25”) to clarify the Third Protocol to the Agreement between the Government of the People's Republic of China and the Government of the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (China-Pakistan DTA). The Third Protocol to the China-Pakistan DTA was signed on 8 December 2016 and formally entered into force on 24 April 2017 (See KPMG China Tax Weekly Update Issue 48, December 2016). Announcement 25 mentions that all required approval procedures from the China and Pakistan sides have been fulfilled.
According to the Third Protocol, interest, arising from loans provided by the Industrial and Commercial Bank of China (ICBC) and by the Silk Road Fund, to projects which are set out in the China-Pakistan Economic Corridor (CPEC) Energy Cooperation Agreement, shall be exempted from income tax in Pakistan.
China’s tax treaty network, encompassing 106 jurisdictions (including Hong, Macau and Taiwan), already covers almost all the Belt and Road Initiative (BRI) countries. It can be foreseen that, with the deepening cooperation between China and the BRI countries, China intends to negotiate and sign tax treaties with more countries along the BRI. As a result, “going out” Chinese enterprises may further reduce their tax burdens.
In May this year, Mr. Wang Jun, Director of the SAT, made a speech at the “Belt and Road” Forum held in Beijingat which he set out details of planned China BRI tax initiatives, as well as aspirations for tax measures to be taken by fellow BRI countries, both unilaterally and through agreements with China and other BRIcountries. Prior to this, SAT had issued ShuiZongFa  No. 42 setting out tax administration initiatives to better serve the BRI (See KPMG China Tax Weekly Update Issue 20, May 2017 and Issue 18, May 2017 for details).
New regulations for Public-Private Partnership projects
On 21 July 2017, the State Council issued the draft Regulations for Public-Private Partnerships (PPP) for Infrastructure and Public Services ("the Draft”) to solicit public comments. Comments may be made up to 22 August 2017.
In China, the concept of PPP is not new, having been introduced into China already in the mid-1990s. More recently, the State Council has repeatedly sought to push the use of PPP, with GuoBan Fa  No. 42 providing guidance on public service PPPs, and the March 2017 State Council legislative work identifying PPP as a priority item for 2017.
The Draft provides detailed rules for PPP initiation, implementation, supervision, dispute resolution, and legal liabilities, including:
- The Draft gives a formal definition to PPP. It clarifies that PPP can be used by government bodies if infrastructure and public services projects are of a long-term nature and are suitable for private sector involvement.
- The relevant government departments for given industries/projects are required to develop catalogues which detail the type of projects eligible for PPP.
- As many government agencies, such as the National Development and Reform Commission (NDRC), the Ministry of Finance (MOF) as well as industrial regulatory authorities, will be involved in each individual PPP project, a coordination mechanism will be set up by the State Council, to reconcile any disputes arising.
- Rules for implementation of PPP projects include:
- A contract for a PPP project may not require the government to:
- (i) Repurchase the investment made by private sector investor;
- (ii) Bear losses arising from the private sector investment;
- (iii) Set a minimum yield for the private sector investment;
- (iv) Provide a government guarantee for the financing of the PPP project.
- Companies set up by government and private sector investors for PPP projects (PPP project company) are not allowed to carry out other businesses that are unrelated to the PPP projects.
- In the course of building PPP projects, equity interests in PPP project companies held by private sector investors are not allowed to be transferred. However, in the course of operating the PPP projects (i.e. post-construction), such equities can be transferred, subject to approval from the government authorities.
- A contract for a PPP project may not require the government to:
- The Draft also sets out measures to limit the possibility of government actions potentially detrimental to the private sector investment in the PPP projects.
It is understood that, legislative work in relation to PPP is currently underway. Prior to its release, KPMG has launched a publication which focuses on the impact of tax policies on PPP projects.