The following matters are covered in this issue:
- Enhanced supervision rules for outbound investment (Shang He Fa  No. 24)
- Pilot VAT general tax payer status in special customs supervision zones expanded (SAT Announcement  No. 5)
- Enhanced information sharing between SAIC and SAT (Gong Shang Qi Zhu Zi  No. 11)
Enhanced supervision rules for outbound investment
In recent years, there has been a significant increase in overseas mergers and acquisitions (“M&A”) transactions conducted by Chinese domestic enterprises. This has prompted the Chinese regulatory authorities to implement a string of new regulations.
This includes simplifying the administration processes to support outbound investments (e.g. replacing pre-approval applications for most outbound investments with a simplified recordal filing). At the same time, other regulations have enhanced supervision of outbound investments. Part of the reason for this is to limit the extent to which outbound investment transactions may be used as a cover for moving funds out of China, circumventing capital controls.
In the latest development, on 25 January 2018, seven government authorities jointly issued Interim Measures for Recordal / Pre-approval of Outbound Investment (Shang He Fa  No. 24, (“Circular 24”)). The relevant authorities were the Ministry of Commerce (MOFCOM), People’s Bank of China (PBOC), State-owned Assets Supervision and Administration of the State Council (SASAC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC), and State Administration of Foreign Exchange (SAFE).
Outbound investment management protocols
Circular 24 also clarifies that the “encouraged industries + negative list” approach will be adopted for outbound investment recordals and pre-approvals. For outbound investments on the ‘encouraged industries’ list, or those not on the ‘negative list’, a recordal filing may be made (i.e. no pre-approval needed).
Interim/follow-up inspections will be carried out by relevant regulatory authorities for the following investments:
- Outbound investment projects, for which the cumulative investment by Chinese investors (which may be unrelated parties), amounts to USD300 million and above;
- Outbound investments made in sensitive countries (regions) or industries (such as investments made in cross-border water resource exploration and exploitation, news media, manufacturing/research/development/repair of weapons);
- Outbound investments which have incurred substantial losses;
- Outbound investments in respect of which a significant safety incident has occurred
- Outbound investment projects which have involved serious violations of laws and regulations; and
- Other major outbound investments.
Circular 24 sets out the framework system for the oversight of outbound investment activity, and will be referred by all relevant regulatory authorities in formulating their respective outbound investment measures.
Other recent regulatory circulars for outbound investment:
- In December 2017, the National Development and Reform Commission (NDRC) issued NDRC order No. 11 to promulgate the finalized Administrative Measures for Outbound Investment by Enterprise (“the 2017 OI Measures”).
The 2017 OI Measures will, from 1 March 2018, supersede the 2014-issued Administrative Measures on Approval and Filing for Outbound Investment Projects (these were issued under NDRC order No. 9) (see KPMG China Tax Weekly Update (Issue 1, January 2018) for details).
- The State Council on 18 August 2017 issued Guidance on Regulating Outbound Investment (Guo Ban Fa  No. 74) to further regulate outbound investments. The guidance sets out outbound investments which are encouraged, restricted and prohibited (See KPMG China Tax Weekly Update (Issue 33, August 2017) for details).
- On 12 June 2017, the MOF issued Financial Administrative Measures for State-owned Enterprises Making Outbound Investment (Cai Zi  No. 24), which seeks to upgrade the rigour with which Chinese state-owned enterprises (SOEs) evaluate their outbound investments (See KPMG China Tax Weekly Update (Issue 31, August 2017) for details).
- On 6 December 2017, NDRC issued Fa Gai Wai Zi  No. 2050, along with five other authorities including MOFCOM and PBOC. This sets out the guidance to regulate outbound investment activities made by private-owned enterprises (POEs) (See KPMG China Tax Weekly Update (Issue 50, December 2017) for details).
- In 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 which has been divided into 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 (see KPMG China Tax Weekly Update (Issue 43, November 2017) for details).
In relation to key corporate tax issues that “going out” enterprises may face, and how the SAT is supporting Chinese companies navigate through these overseas tax challenges, see an article entitle A thousand miles begin with a single step: tax challenges under the BRI in the following publication which was produced by KPMG China in association with the International Tax Review (ITR):
Pilot VAT general tax payer status in special customs supervision zones expanded
A large number of special customs supervision zones (SCSZs) have been established, around China, to facilitate trading and production activity. Enterprises located in SCSZs are (for most regulatory and administrative purposes) deemed to be established outside China. Consequently, they have, in the past, been excluded from the VAT system administrative chain for output tax collection and input tax credit, as it relates to domestic sales and purchases. Instead, where goods are sold from an SCSZ into the domestic market, Customs duty, VAT and consumption tax (CT), arises at the time the goods enter “China proper” (buyer in the domestic market then pays the taxes as ‘importer of record’). In order to facilitate the domestic sale of finished products from overseas, and the supply of materials to the domestic market, SCSZ based enterprises are now permitted to obtain VAT general taxpayer qualifications (allowing them to claim the input VAT credits).
On 14 October 2016, the SAT, MOF and the General Administration of Customs (GAC) jointly issued Announcement  No. 65 (‘Announcement 65”). Effective from 1 November 2016, a pilot program granted VAT general taxpayer status to particular enterprises located in certain SCSZs. The pilot SCSZs include comprehensive bonded zones of Kunshan, Suzhou Industrial Part, Chongqing Xiyong, Shenzhen Yantian and Zhengzhou Xinzheng as well as export processing zones of Shanghai Songjiang and Henan Zhengzhou (see KPMG China Tax Weekly Update (Issue 40, October 2016) for details).
Further, on 12 January 2018, the SAT, MOF and the General Administration of Customs (GAC) jointly issued SAT Announcement  No. 5 (“Announcement 5”). This further expands the pilot program to cover an additional 17 SCSZs (bringing the total pilot zones to 24), effective from 1 February 2018.
According to Announcement 65, tax policies which applied in the pilot areas are as follows:
- Bonded policies shall continue to apply to pilot enterprises when they import goods from overseas. That is, no import taxes (including Customs Duty, import VAT and CT) will be levied at the time when goods enter into the SCSZs from overseas.
- Where a pilot enterprise sells goods into the domestic market (i.e. into the China market outside the SCSZ), import taxes must be declared and paid at that time. This covers both bonded goods purchased for resale, and unprocessed bonded goods sold for further processing outside the zones. The import taxes (including any interest on deferred taxes) will be calculated based on the condition of bonded goods based at their time of entering the zone.
- For pilot enterprises importing equipment (including machinery equipment, capital construction materials and office supplies) for their own use, a temporary exemption applies to import taxes.
- Pilot enterprises exporting goods may apply for a tax refund when the goods exit China.
- These taxing arrangements for import/export of goods and equipment, were already in place prior to Announcement 65, and have not been changed.
- The VAT invoicing arrangements for the pilot enterprises map to these arrangements. In case of domestic sale of finished goods (including goods sold to other pilot enterprises in the zones), the pilot enterprises may issue VAT special invoices and declare and pay the relevant VAT and Consumption Tax (CT). For purchases of finished goods from areas within China but outside the SCSZs, the pilot enterprises may request for VAT special invoices for claiming the input VAT credit or tax refund for export.
Announcement 5 builds on Announcement 65 and clarifies the following:
- Expand the pilot special customs zones: An additional 17 special customs zones are added to the existing 7 pilot zones, including: comprehensive bonded zones in Chengdu Gaoxin, Alataw Pass, Beijing Tianzhu, Chenzhou, Wuhan Donghu, Wuxi Gaoxin district, Suzhou National New & Hi-Tech Industrial Development Zone, Zhenjiang, Huai’an and Wujiang, export processing zones in Zhejiang Ningbo, Guangxi Beihai, Shanghai Minhang, Liaoning Dalian and Fuzhou as well as bonded port zones in Fuzhou and Qingdao Qianwan.
- Exiting the pilot grogram: Enterprises that have already been enrolled in the pilot program for 36 months, may apply to exit. Once the enterprises exit the pilot program, they should be subject to the existing tax policies set for non-pilot enterprises in the special customs zones, and may not enroll again in the pilot program for a further 36 months.
Where an enterprise intends to exit the pilot program, it is required to make an application in advance with its in-charge tax authority and in-charge customs office. The exit can be carried out subject to the approval by the tax authority and customs office. Taxes (including tax payable, export tax refunds) should all be settled before exiting.
Where an enterprise has exited the pilot program, for its unused excess input VAT credits, further credit or refund is not allowed. These can be treated as costs (to be offset against income for CIT purposes). The enterprise is also not allowed to obtain or issue any special VAT invoice, unless for the purpose of the sale of services, intangible assets or immovable properties.
With regard to the detailed analysis on the VAT general taxpayer rule in SCSZs, please read the following KPMG publication:
Enhanced information sharing between SAIC and SAT
On 15 January 2018, the State Administration for Industry and Commerce (SAIC) and SAT jointly issued Notice on Intensifying Information Sharing and Joint Supervision (Gong Shang Qi Zhu Zi  No. 11, “Circular 11”). This aims to (i) enhance SAIC-SAT information sharing and joint supervision activities and (ii) to roll out simplified enterprise de-registration procedures. Circular 11, in particular, clarifies the following:
- More information required for business registration: Details on the enterprise “accounting method” and the “number of employees” will be required in the SAIC’s revised business registration form. Registration information will be shared with tax authorities and, therefore, such information will not be requested by the tax authorities again.
- Simplified enterprise de-registration: In December 2016, SAIC issued Gong Shang Qi Zhu Zi  No. 253, which simplified enterprise de-registration procedures on a nationwide basis from 1 March 2017. The simplified procedure is open to enterprises that, while registered, have not yet started business operations, and those without heavy debt (see KPMG China Tax Weekly Update (Issue 1, January 2017) for details).
Circular 11 now clarifies that where an enterprise intends to conduct the simplified de-registration procedure, it must announce this via the national credit record information sharing platform for the 45 days prior to de-registration. SAIC and its subordinate AICs must “push” such information to the tax authority, via the provincial-level information sharing platform, within one working day of the announcement being made. The tax authority will not raise any objection to de-registration (i.e. automatic clearance) if the enterprise situation is as follows:
- Taxpayers who have never had any dealings with the tax authorities (e.g. recognition of VAT general taxpayer status, issuance of tax certificates);
- Taxpayers who have had limited dealings with the tax authorities, but have never obtained tax invoices from the authorities, and have no tax arrears or outstanding tax issues;
- Taxpayers who have completed all tax liquidation formalities (such as cancelling tax invoices, settling all tax payables) before its de-registration announcement is due to expire (i.e. by the expiry of the 45 day period).
For a taxpayer who still has outstanding tax matters, the tax authority is required to raise an objection to the SAIC and subordinate local AICs.
Circular 11 also clarifies that SAIC and SAT will establish a collaborative mechanism to oversee the obtaining of VAT invoices, and will carry out joint supervision on ‘blacklisted’ enterprises as a result of breaching tax laws and regulations.
* Inter-agency collaborative agreements are an increasingly prominent feature of the Chinese regulatory landscape. On 21 April 2017, GAC, SAT and SAFE had jointly signed a Cooperative Framework Agreement on Information Sharing and Joint Supervision. This framework, and parallel agreements, underpin the development of mechanisms for information sharing, mutual recognition of supervision activity, and mutual enforcement assistance, among the authorities (See KPMG China Tax Weekly Update (Issue 17, May 2017) for details).
In October 2016, 40 Chinese regulatory authorities, including NDRC, PBOC and GAC, etc., jointly signed a Cooperation Memorandum to Grant Joint Incentives for Customs’ Advanced Certified Enterprises. Prior to that, in July 2016, 29 Chinese regulatory authorities, including NDRC, SAT, PBOC etc., also jointly signed a cooperation memorandum to grant 41 incentives to taxpayers with class-A tax credit rating. You may click KPMG China Tax Weekly Update (Issue 42, November 2016) and (Issue 27, July 2016) for details.