The following matters are covered in this issue:
New guidance for outbound investment
On 3 November 2017, the National Development and Reform Commission (NDRC) issued Administrative Measures for Outbound Investment by Enterprises (Exposure Draft) (the “2017 Draft OI Measures”) for public comment. The 2017 Draft OI Measures builds on the 2014-issued Administrative Measures on Approval and Filing for Outbound Investment Projects (NDRC order No. 9), aiming to overhaul China’s management system for outbound investments. Specifically, the 2017 Draft OI Measures:
- Clarifies the definition of “outbound investment" activities. These include but not limited to:
- Acquiring ownership of and the right to use foreign land;
- Acquiring exploration and exploitation rights in overseas natural resources;
- Acquiring ownership and operation rights for overseas infrastructure;
- Acquiring ownership and operation rights for overseas enterprises/assets;
- Making investments to form new fixed assets overseas or renovation/expansion of existing overseas fixed assets;
- Set up new overseas enterprises or ramp up investment in existing overseas enterprises;
- Set up or participate in new overseas equity investment funds;
- Get control of overseas enterprises/assets through contractual arrangements, trusts, etc.
- Adjust the scope of sensitive jurisdictions or industries that are subject to NDRC’s approval when outbound investments are made. The sensitive industries now cover cross-border water resource exploration and exploitation, news media, manufacturing/research/development/repair of weapons and restricted industries detailed under China’s macroeconomic control policy, e.g. real estate, hotels, cinemas, entertainment, sport clubs at set out in Guo Ban Fa  No. 74, see KPMG China Tax Weekly Update (Issue 33, August 2017) for details.
- Extend the scope of regulatory scrutiny to indirect outbound investments. The 2017 Draft OI Measures require that outbound investments made by domestic enterprises and individuals through their controlled overseas enterprises, shall be subject to the 2017 Draft OI Measures. However, this does not imply that such investments must either be subject to approval or filing procedures. In relation to indirect outbound investments made by domestic enterprises through their controlled overseas enterprises, the 2017 Draft OI Measures set out the following requirements:
- Any indirect outbound investments made in sensitive jurisdictions or industries, shall be subject to NDRC’s approval. Sensitive jurisdictions refer to those jurisdictions that (i) have no diplomatic relationships with China; (ii) are at war (with China or a third country) or at civil war; and (iii). have agreed the restrictions in their bilateral/multilateral treaties or agreements concluded with China
- For indirect outbound investments that are not made in sensitive jurisdictions or industries, but exceed USD300 million, the Chinese company is required to notify NDRC with relevant information. It should be noted that the 2017 Draft OI Measures do not apply to direct outbound investments made by domestic individuals, only those by enterprises.
- Abolish the reporting requirement set forth in NDRC order No. 9, which regulated that “where an outbound acquisition or bidding project is made with Chinese investments of USD300 million or above, the enterprise is required to report the project information to NDRC, before substantive work is carried out”.
- Simplify the approval and filing procedures. Under NDRC order No. 9, for outbound investments that are subject to approval or filing with national NDRC, local enterprises shall submit the relevant materials to provincial NDRC for initial approval. However, the 2017 Draft OI Measures stipulates that a pre-approval will no longer be required by the provincial NDRC and the local enterprises may submit the materials directly to national NDRC for approval or filing.
- Loosen the timeframe for obtaining approval or completing the filing. Under NDRC order No. 9, where an enterprise intends to make an outbound investment which is subject to approval or filing with NDRC, the enterprise must obtain an approval from or complete the filing with NDRC prior to entering into any binding documents. This requirement has been abolished in the 2017 Draft OI Measures which stipulates that such outbound investment must be approved by or filed with NDRC before its implementation. This means that binding documents could be entered into prior to approval/filing, but there should be no substantive implementation of the project pending such approval/filing.
The 2017 Draft OI Measures set out more specific rules for approval and filing procedures, and on the timing and extension of validity periods for approved and filed documents. It also introduces new reporting mechanisms for outbound investments such as reporting on project completion status, and reporting on materially adverse situations encountered with investments.
Tax guidance for outbound investment
On 30 October 2017, the State Administration of Taxation (SAT) released Tax Guidance for Outbound Investment (“the OI Guidance”). This aims to better serve the national external economic strategy, and lower “going out” taxpayers’ tax risks.
The OI Guidance summarizes 83 items for “going out” enterprises in four categories: tax policies, tax treaties, administrative rules and tax service measures. Each item consists of four sections, specifying applicable taxpayers, applied tax policies/treaties, application condition and legal basis. The 83 items include:
- 29 items in relation to preferential tax policies. These include tax refund (exemption) policies for exported goods and services, zero rated /tax exemption policies for cross-border taxable services, tax policies for resident enterprises’ income derived from overseas, and corporate income tax (CIT) preferential policies.
- 19 items in relation to tax treaties. Income types derived from overseas, organised by their classification (such as permanent establishment, business profit, dividend tax exemption, technical service fee), are further elaborated in this section.
- 21 items in relation to administrative provisions. These include provisions for tax registration for overseas branches, automatic exchange of financial account information, foreign tax credits, transfer pricing, general anti-tax avoidance rules, and country-by-country reporting.
- 14 items in relation to tax service measures. These include issuance of Chinese tax resident certificate for “going out” enterprises, advance pricing arrangements, mutual agreement procedures (MAP) on special tax adjustment, investment tax guidance for investee countries.
This is just a summary of existing policies and does not involve introducing any new policies.
Draft Vessel and Tonnage Tax Law in development
The Standing Committee of the National People’s Congress (NPC) on 31 October 2017 reviewed the Draft Vessel Tonnage Tax Law (the “Draft Tonnage Bill”) and released the Draft Tonnage Bill to solicit public comments by 6 December 2017. Placing existing Chinese taxes on a statutory basis is part of the Chinese government’s effort to reinforce the ‘rule of law’. Taxes such as tobacco tax and VAT are also undergoing a similar transition (see KPMG China Tax Weekly Update (Issue 35, September 2017) for the latest development of tobacco tax).
Vessel tonnage tax (VTT) is currently based on 2011 State Council-issued rules and these will be replaced by statutory law issued by the NPC. Under the current rules, where vessels enter into a port within the territory of China from a port outside China, VTT shall be levied based on net tonnage and term of tonnage tax licenses issued by Chinese Customs. According to Mr. Xiao Jie, Minister of Finance, the framework of the existing VTT, and its tax burden, will remain unchanged.