China’s State Administration of Taxation (SAT) has issued its 2016 Advance Pricing Agreement (APA) update, noting that 14 APA’s were entered into for 2016.
Value chain quality and location specific advantages are positive factors leading to an efficient APA process.
It is noteworthy that China has increased scrutiny re: intercompany service agreements, and formal documentation thereto, thus an APA may prove to be advantageous provided that the relevant documentation can be timely provided.
The report, which is referenced herein as well as EY’s analysis, commences with the following summary: “This is the eighth APA annual report released by the State Administration of Taxation (“SAT”) to describe the latest mechanisms, procedures, and implementation of the APA program in China. This report is intended to provide guidance to enterprises interested in entering into APAs with the Chinese tax authority, and to serve as a reference for competent authorities of other countries (regions) and the general public to better understand China’s APA program. It does not have legal validity, and therefore should not be regarded as a legal basis for enterprises or the Chinese tax authority to negotiate or conclude an APA.”
With the ongoing BEPS complexity, and country dissimilarities / double taxation issues being compounded, the attached documents are a valuable reference in deciding on an APA decision (unilateral or bilateral) with China.
China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015. The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.
- The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
- A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
- “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
- Advance Pricing Agreement (APA) procedures are clarified.
- The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test. The use of secret comparables, one comparable, one or multiple year results are allowed.
- Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
- Profitability monitoring will be used to establish a tax risk hierarchy system.
Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation. Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.
All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.
The State Administration of Taxation (SAT) has focused its risk determinations for outbound payments. Supplementing this focus, the State Tax Bureau of Zhejiang Province (Zhejiang STB) recently issued its Guideline for Administration of Tax Risks on Outbound Payments to Overseas Related Parties.
PwC’s Business Advisory provides details of this new focus on tax risk:
- Incentivized by BEPS Acton Plans, and local tax practices
- Six tests for profit shifting/base erosion:
- Value creation
- Required relevant information during record-filing for outbound payments
The timeliness of providing contemporaneous transfer pricing documentation, subjective tests for assessment of benefit / value for intercompany services, varying interpretations of internal guidance and lengthy appeal processes are becoming more common, evidenced by this recent focus by China and followed in many other jurisdictions.
The additional focus has introduced additional uncertainty, as well as less consistency, in jurisdictions around the world. However, the concept of simultaneous corresponding adjustments are generally not addressed in such initiatives, thereby increasing the level of double taxation for MNE’s.
A Best Practice approach will require additional resources focused upon such efforts, as the probability of double taxation increases exponentially.
The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2. The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules. The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:
Observations of “clarifications” to the law:
- Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
- Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
- It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
- There is not a GAAR review committee.
- Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
- Documentation may also be requested directly from the tax advisors to the taxpayer.
- GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.
This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques. There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation. Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.
It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer. This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.
GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.