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New implementation guideline on indirect transfers of China assets has just been issued Issue No.CTIN2015006 05 Jun 2015 Background In 2009, the State Administration of Taxation (SAT) promulgated Guoshuihan [2009] No. 698 (Circular 698) that addressed tax treatments on China equities transferred by non-residents. With the promulgation of Circular 698, China tax authorities have been empowered to disregard interposed entities if they are considered as lacking reasonable commercial purpose and the whole indirect share transaction will be treated as a direct share transfer with PRC capital gain tax liabilities arising. Circular 698 only laid down general guiding principles, leaving room for local authorities' interpretations. SAT Announcement [2011] No. 24 (Circular 24, subsequently released in 2011) provided certain clarifications following to Circular 698. About two months ago, the SAT Notice [2015] No. 7 (Announcement 7) preceded by Circular 698 was released. Instead of taking it as a supplement to Circular 698, Announcement 7 is actually an advanced version of Circular 698 - it broadened the scope cover “China taxable assets” (instead of shares only), provided safe harbor rules, abolished some articles in Circular 698 and Circular 24 by replacing them with other new requirements. However, uncertainties still remain in some areas, e.g., tax basis, reviewing time line, written confirmation, etc. An internal implementation guideline, Shuizongfa [2015] No. 68 (Circular 68), has just been issued by the SAT to clarify the respective responsibilities of tax authorities at different levels and detailed administrative procedures on the implementation of Announcement 7. This issue of China Tax and Investment News is to discuss this circular in detail. China Tax & Investment News
Transcript of China Tax & Investment News - Ernst & YoungFile/ey... · China Tax & Investment News 2 New internal...
China Tax & Investment News 1
New implementation guideline on indirecttransfers of China assets has just beenissued
Issue No.CTIN201500605 Jun 2015
Background
In 2009, the State Administration of Taxation (SAT) promulgated Guoshuihan[2009] No. 698 (Circular 698) that addressed tax treatments on China equitiestransferred by non-residents. With the promulgation of Circular 698, China taxauthorities have been empowered to disregard interposed entities if they areconsidered as lacking reasonable commercial purpose and the whole indirect sharetransaction will be treated as a direct share transfer with PRC capital gain taxliabilities arising. Circular 698 only laid down general guiding principles, leavingroom for local authorities' interpretations. SAT Announcement [2011] No. 24(Circular 24, subsequently released in 2011) provided certain clarificationsfollowing to Circular 698.
About two months ago, the SAT Notice [2015] No. 7 (Announcement 7) precededby Circular 698 was released. Instead of taking it as a supplement to Circular 698,Announcement 7 is actually an advanced version of Circular 698 - it broadened thescope cover “China taxable assets” (instead of shares only), provided safe harborrules, abolished some articles in Circular 698 and Circular 24 by replacing themwith other new requirements. However, uncertainties still remain in some areas,e.g., tax basis, reviewing time line, written confirmation, etc.
An internal implementation guideline, Shuizongfa [2015] No. 68 (Circular 68), hasjust been issued by the SAT to clarify the respective responsibilities of taxauthorities at different levels and detailed administrative procedures on theimplementation of Announcement 7. This issue of China Tax and Investment Newsis to discuss this circular in detail.
China Tax &Investment News
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New internal implementation guidelines
Circular 68 has delivered four key messages and each of them carries certain merits but may not be able toresolve all issues involve in the reporting of indirect transfers.
1. Encourage concerned parties to do voluntary reporting
Whether China tax authorities really have the right to require nonresident sellers of offshore transfers tofollow a PRC tax reporting requirement and related tax administration procedures before they areconcluded as having any China tax obligations – the answer is likely “no” and thus, China SAT does notovertly say it has such authority. Follow the same logic, Announcement 7 stipulates a voluntary reportingscheme and a compulsory filing requirement, respectively. The relevant parties, including sellers, buyers,and the related China targets (Chinese resident enterprises whose equities were indirectly transferred) inan indirect transfer MAY choose to report to the in-charge tax authority with the relevant documentssubmitted.
► What does Circular 68 say?
In Circular 68, the SAT further emphasizes that Chinese tax authorities should provide guidance andencourage all concerned parties in a transaction, including sellers, buyers, and the Chinese targets to dovoluntary reporting.
In general, voluntary reporting could apply to the two scenarios:�► a qualifying safe harbor transaction; or
► a transaction with concerned parties who would like to voluntarily disclose the related information toChina tax authorities in order to gain certainty on PRC-tax position.
► Take away – voluntarily report or not?
Safe harbor provisions have been provided in Announcement 7, which states that qualifying grouprestructurings would not be re-characterized under the “looking-through” approach but will be regardedas having reasonable commercial purpose. Announcement 7 does not state a compulsory requirementfor a qualifying group structuring to report. However, if no reporting is done, who has the say if atransaction is safe or not? If the answer is only the China tax authorities in charge, it would not beunreasonable to infer that related documentation should still be submitted by relevant parties forauthorities’ formal endorsement, so as to make it totally safe. In this regard, voluntary reporting alongwith proactive communication with in-charge tax authorities may be a wise approach for a safe harbortransaction.
The Announcement stipulates that if a non-resident seller provides the required documentation within30 days from the date on which a contract is signed, the additional 5% penalty interest may be waived.The sellers of indirect transactions (include those transactions that may be directly deemed as withoutcommercial purpose) may then wish to voluntarily report and conclude their case sooner in order tomitigate any late payment interest. In addition, Announcement 7 imposes withholding obligation onbuyers and states that a penalty may be waived if buyers report to tax authorities within 30 days fromsigning – for this reason, buyers may have greater motivations to perform voluntary reporting or toforce the sellers to file earlier than later.
Nevertheless, from foreign tax credit claim perspective, some investors may have a concern aboutwhether voluntary reporting would be construed as a voluntary tax payment that makes the taxpayment not eligible for foreign tax credit claim. While this risk is real, the definition of “voluntary tax”may vary in different countries. Detailed analysis by respective local country tax experts or internationaltax professional should be sought before any action.
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2. Written documentation from tax authorities
Previously, all related rules were silent about written acknowledgement from tax authorities upon voluntaryreporting; this has created difficulty for sellers to prove themselves on compliance unless they have filedthe tax return or paid the tax.
► What does Circular 68 say?
In Circular 68, the SAT specifically requires its subordinates to issue written acknowledgement to thereporting parties upon receipt of the reporting package.
► Take away – good news or not?�With no doubt this is a good move for the business community as once you report at least you would getpaper evidence to support that you have done it. However, the written acknowledgement is only for thereporting activity itself NOT for the result.
Based on Announcement 7, a nonresident’s indirect transfer of China taxable assets will receive aformal notice regarding the related tax treatments (with China tax liabilities or not) only if a formalGAAR investigation is launched. Announcement 7 does not mention if a qualifying safe-harbortransaction could obtain a formal written confirmation, or if a transaction which is pre-assessed ashaving commercial purpose by local in-charge tax authorities would get any clearance letter. Circular 68does not address these either. From a technical perspective, for a transaction that qualifies for the safeharbor provision or is pre-assessed as having commercial purpose, the tax authority does not have alegal obligation to issue a written confirmation to such a reporting party, this is on the basis that suchtaxpayer would be seen as a non-PRC-taxpayer, somebody outside of Chinese tax jurisdiction, thus, arenot qualified for receiving Chinese tax authorities’ formal administrative notice for tax treatments.
Unless further notice is issued, the related applicants should always negotiate with in-charge taxauthorities for an official feedback.
3. Re-introduce centralized reporting option for transfers involving multiple PRC targets
For a deal that indirectly transfers multiple PRC target companies, the seller was allowed to choose to filewith the tax authority in charge of one selected PRC target company according to Circular 24. In otherwords, multiple documentation filings would not be needed under this offer.
However, Announcement 7 abolished this protocol and requires a seller to file with tax authorities inmultiple locations. It is not unreasonable to anticipate that differences in technical positions of the differenttax authorities in charge on the same transaction may arise; especially on the price and cost allocation thatwill directly affect the tax revenue of the respective tax authorities.
► What does Circular 68 say?
Circular 68 brings along the good news that the centralized reporting system is being reintroduced.Pursuant to Circular 68, for a deal that involves multiple PRC target companies, the sellers, the buyers,or the underlying Chinese targets may choose to report to the tax authority in charge of a selected PRCtarget company.
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Circular 68 also clarifies the general process for tax authorities at different levels to deal with anindirect transfer involving multiple PRC targets. The procedures are illustrated below for your easyreference.
► Take away – certainly a good move�
The centralized reporting is a well-received administrative rule which could significantly reducetaxpayers’ compliance costs and avoid controversy that may arise from the different views of differenttax authorities. Relevant reporting parties with Chinese targets all over the place should thereforeproactively communicate with a user-friendly tax authority for the discussions on the option ofcentralized reporting.
It is worth noting that the provision of multiple tax filings stipulated in Announcement 7 is still valid, i.e.upon basis of tax filing is agreed with that single tax authority, tax returns should still be submitted andtax payments should still be made to the respective tax authority in charge of each PRC target.
Further, previous Circular 24 also offered centralized reporting and filing options for indirect sharetransfer involving multiple offshore sellers. That is to say, one offshore representative party wasallowed to complete information filing for all sellers for an indirect transfer. This article has also beenabolished by Announcement 7 but Circular 68 did not bring it back, which means all nonresidentinvestors should now conduct their own reporting and filing even if they are doing one single transactiontogether.
4. Reiterate case-conclusion timing to be in line with GAAR procedures
Announcement 7 prescribes that relevant GAAR provisions shall be applied if in-charge tax authoritiesdecide to launch a tax investigation on an indirect transfer of a China taxable asset. Set-up and conclusionof a GAAR case are both subject to the SAT’s final approval.
► What does Circular 68 say?
Circular 68 demands local tax authorities to identify indirect transfer cases from their daily work likecorporate income tax clearance, tax assessments, contemporaneous documentation reviews, taxclearance for outbound payments and from other news reports. Where a local tax authority suspects atax avoidance case, it shall report all the way up to the provincial-level tax authorities for their reviewand approval; these authorities would then submit the same to the SAT for approval before initiating acase for GAAR examination. From the date of a GAAR case initiation being approved, local taxauthorities shall reach a conclusion and escalate to the provincial tax authority for approval within 9months. The case conclusion should finally be endorsed by the SAT.
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► Take away – how long it would really take?�
By reading the description for the “9 months” counting, the in-charge tax authority’s decision to launcha tax investigation is a prerequisite. The tricky thing is, no rule has mentioned within how long a localtax authority should make such a decision. The 9-month timeline neither includes the above “thinking”time, nor the provincial tax authorities and the SAT’s review time either. Thus, the final conclusion mayindeed take much longer than this 9-month timing due to complications of each case.
The below diagram illustrates the procedures with and without specified time line in the wholeinvestigation and assessment procedure for an indirect transfer case.
As an internal protocol, Circular 68 aims to provide procedural and administrative guidance for the local taxauthorities to implement Announcement 7 consistently. It does not have any technical answers like cost basisfor tax calculation. It may also lead to different interpretations among different locations, especially for thecentralized reporting possibility. Apart from reviewing current structure to assessing tax exposure arisingfrom transaction plans, multinational companies are highly recommended to stay close with their taxconsultants and proactively communicate with tax authorities to understand their local practice; and theirviews and positions. We shall keep you posted if there is any further development.
9 monthsTimingnotspecified
Final approvedby the SAT
Timingnotspecified
Timingnotspecified
Timingnotspecified
SAT approvalon initiating a
GAAR case
In-charge taxauthorityreaching aconclusion
Documentsreceived by in-
charge taxauthority
Approval oninitiating a GAARcase by provincial
tax authority
Approved byprovincial tax
authority
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Contact usFor more information, please contact your usual Ernst & Young contact or one of the following of Ernst & Young’s China taxleaders.
► Walter Tong+86 21 2228 [email protected]
► Henry Chan (Beijing)+86 10 5815 [email protected]
► Alan Lan (Tianjin)+86 10 5815 [email protected]
Office Tax Leaders
► Samuel Yan (Dalian)+86 10 5815 [email protected]
Service Line Tax Leaders
► Andrew Choy (International Tax andTransfer Pricing)+86 10 5815 [email protected]
► Becky Lai (Tax policy)+852 2629 [email protected]
► David Chan (Transaction Tax)+852 2629 [email protected]
► Paul Wen (Human Capital)+852 2629 [email protected]
► Jane Hui+852 2629 [email protected]
Author – China Tax Center
Greater China Tax Leader
► Andy Chen (Qingdao)+86 10 5815 [email protected]
► Vickie Tan (Shanghai / Wuhan)+86 21 2228 [email protected]
► Audrie Xia (Suzhou)+86 21 2228 [email protected]
► Patricia Xia (Hangzhou)+86 21 2228 [email protected]
► Chuan Shi (Chengdu)+86 21 2228 [email protected]
► Rio Chan (Guangzhou / Xiamen)+86 20 2881 [email protected]
► Lawrence Cheung (Shenzhen)+86 755 2502 [email protected]
► Clement Yuen (China South)+86 755 2502 [email protected]
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► Robert Smith (Indirect Tax)+86 21 2228 [email protected]
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