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China: Administrative guidance on income tax treaty benefits

China: Administrative guidance on income tax treaty

China’s state tax administration on 22 October 2019 released administrative guidance (Announcement 35) with regard to the application of China’s network of income tax treaties. Announcement 35 will be effective January 2020 and will replace the existing guidance (from 2015).


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KPMG observation

The new guidance generally is in line with a broader government program to reduce regulatory burdens and red tape for businesses, and is intended to move China further in the direction of a full self-assessment based tax system. The potential tax exposure for withholding tax agents is reduced, and may allow for more income tax treaty-relief to be granted upfront. However, significant ambiguities remain.

Changes under Announcement 35

China’s tax administration in 2015 set out highly detailed tax treaty-relief guidance in Announcement 60. This transitioned China tax treaty-relief from the pre-approvals system under Circular 124 of 2009, to a notification system. While at that time, there was hope that Announcement 60 would facilitate greater access to tax treaty benefits, in practice there were a number of deficiencies. These are now partly addressed by Announcement 35.

Announcement 60 required tax treaty-relief claimants or withholding tax agents, when notifying the tax authorities of a relief claim, to submit upfront extensive supporting documents. This was found by some to be highly burdensome. Announcement 35 now simply requires that supporting documents are kept by the relief claimants in their files for review, and a short notification form is to be sent to the authorities, either directly from the relief claimant or via the withholding tax agent.

A further change alters withholding tax agent tax exposures. The process under Announcement 60 required the withholding tax agent to determine that the materials (relief form and supporting documents) are complete. The withholding tax agent also had to determine that the assertions made by the relief claimant in the form (as supported by the documents) corresponded to the qualifying conditions for income tax treaty-relief. This could lead to liabilities for withholding tax agents for underpaid tax or penalties, when it was later determined by the authorities that relief was not merited. This naturally made many withholding tax agents quite cautious when it came to applying reduced tax treaty-related withholding tax rates upfront, and pushed relief claimants into making cumbersome refund applications instead.  Announcement 35 makes clear that the withholding tax agent’s responsibility is just to verify that the claimant has fully filled out the form, and is expected to facilitate upfront grant of relief.

Most other provisions are unchanged from Announcement 60—such as those concerning the use of contracts, board resolutions, and tax residence certificates as supporting documents, requirements on the relief claimant and withholding tax agent to assist the authorities with follow up review, refund procedures, etc. The multiple complex relief forms (that differ for companies and individuals and differ for income types) are now replaced with a single simple form.

KPMG observations

The efforts to limit administrative burdens and reduce withholding tax agent exposures are welcomed by tax professionals, but a number of issues remain.

  • A longstanding issue has been that certain local tax authorities have spun out the withholding tax refund process by making repeated requests for further supporting documentation and explanations, thereby frustrating tax treaty-relief claims. While a 30-day refund time limit starts from the date of filing a relief application, the guidance treats no filing as having been made as long as tax authority information requests are still outstanding. While some had hoped the new guidance would bring in a firm “stop the clock” provision, this has not happened.
  • While further clarity has been given on the extent of the relief form review required from the withholding tax agent, it is still not clear what lengths the withholding tax agent must go to in obtaining documents from the relief claimant to fulfil its obligations to assist the authorities with follow up review. Also lacking is any explicit provision requiring the withholding tax agent to help relief claimants with refunds. In practice, some local tax authorities will only accept refund applications from withholding tax agents, and these can sometimes refuse to assist. It remains to be seen whether further guidance will be set out on these matters in the forthcoming new legislation on tax collection and administration.
  • Relief claimants continue to face a lack of clarity on the precise documentation needed to support their tax treaty positions. For example, what evidence would be deemed sufficient to support a position that equity in a disposed of entity is not “land rich” or that a foreign company does not have a fixed place “at their disposal” in China that could constitute a permanent establishment (PE)? A lack of clear tax treaty-interpretative guidance is compounded by varying local tax authority practices and views.  The continued absence of a tax rulings system in China means that relief claimants will have to bear risks of withholding tax-relief claw back or PE impositions.

It remains to be seen in 2020 how effective the new treaty administrative guidance will be in practice, but it is being seen as an encouraging development. Tax professionals will be focused on further clarity in the future tax collection and administration law (expected by the end of 2019).

Obtaining income tax relief remains a complex area in China tax practice—both the administrative aspects as well as interpretative issues.  It is frequently necessary to confer with the in-charge local authorities as well as, in certain cases, the state tax administration. 

For more information contact a KPMG tax professional:

Shirley Shen | +1 408 367 6088 |

David Ling | +1 609 874 4381 | 

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