China’s State Administration of Taxation (SAT) has established rules for implementing its General Anti-Avoidance Rule (GAAR), effective 1 February 2015. A PwC summary and details of the rule, as translated into English, are attached for reference:
Note, as in most GAAR provisions, the definition is subjective in nature. Additionally, these rules would be applied after the Specific Anti-Avoidance Rules (SAAR) are applied, resulting in a tiering of potential disallowance avenues. However, the MAP rules could be employed to minimize double taxation consequences.
As the GAAR provisions are being enacted into domestic law, as well as treaties, in addition to existing rules for SAAR, these rules are critical for new arrangements / transactions, as well as preparing relevant documentation for future reference and defense.
China’s State Administration of Taxation (SAT) issued an internal circular, instructing tax bureaus to review, and report, companies that have made large service fee or royalty payments between 2004 and 2013. Tax bureaus will submit their findings to the SAT by September 15, 2014, followed by special investigations and potential tax adjustments. The transfer pricing audit period is 10 years, thus the look-back period is within the statute of limitations. The KPMG Tax Alert is provided for reference:
- SAT’s commentary to the UN in April 2014 sets forth stricter guidelines for payment and deductibility than the OECD guidelines suggest (i.e., if the beneficiary is not in need of such services or the provider also benefits, then benefit by the service recipient alone is not justification).
- Additionally, the SAT argues that the definition of shareholder services in the OECD Guidelines is too narrow.
- Payments made to “tax haven” jurisdictions will receive special attention.
- Economic substance in overseas entities will be reviewed.
Service fee and royalty payments are receiving global attention by tax authorities, although this retroactive review and narrow interpretation of deductible payments by the SAT will lead to additional assessments and the risk of double taxation going forward. Multinationals should review transfer pricing documentation with respect to China, including the identification of any duplicative services as well as the benefits received from such services by major jurisdictions.
THe 2012 Annual Report outlines China’s Advance Pricing Agreement (APA) process, in addition to statistics for 2005 – 2012. The agenda of the report includes:
- APA Program definition and advantages
- Legislation and Development of APA program
- APA Procedures
- Taxpayers’ Rights
- Statistics and Contacts
- Appendices, including formal meetings and applications
A Best Practices methodology addressing APA’s should be outlined in the global Tax Risk Framework for every multinational corporation. This methodology will summarize some of the following points:
- A description of the decision matrix for an APA and its implementation
- Preference for unilateral or bilateral APAs
- Implementation of global/regional/country proactive and/or reactive risk management tools
- Outline of significant jurisdictions, timelines, work plan, and accountability for implementation
- Integral coordination with tax counsel, and other functional business units
- Review plan for an APA methodology in today’s rapidly changing tax environment (evidenced recently by the change in administrative leadership for the India APA program)
- Review of applicable gaps that may exist to retrieve information readily for proactive, or reactive, APAs
Tax jurisdictions, and MNEs, are increasing their focus on APAs amidst a trend of growing uncertainty and complexity in international transfer pricing principles. The China APA Report provides good preparation for a better understanding of the complex, and lengthy, preparation needed by all parties to obtain an APA.