Chinese Tax Authority issues Compliance Plan on International Tax Administration

​Published on January 1, 2017

China has been proactively participating in the OECD/BEPS Project. With the issuance of the final BEPS reports by OECD in 2015, China has also promulgated some domestic laws/regulations to respond to the action plans promoted by OECD. The Jiangsu tax authority has again issued 2016-2018 Compliance Plan on International Tax Administration, commenting its views on the latest changes of international taxation and new requirements of the SAT. The key points are summarized as follows:

Views on Transfer Pricing Policy Considerations:

• Consider the Location Special Advantages (”LSA”) of China (e.g. well-established infrastructure, market premium/demand, location saving for high value-added functions) in price setting/profit allocation;
• Examining subsidiaries in China dynamically for the changes of business activities, and considering compensation when adjusting functions and risks;
• Business restructuring should be based on business purpose, be supported by internal decision-making procedures and have substantive transfer of functions, risks or assets;
• Localized R&D activities or even contract R&D service provisions do play significant roles for the establishment of the intangible assets in view of the detailed project management, risk assumption, assets and important personnel resource devotion, and therefore should also participate in the profit sharing instead of merely remunerated by cost plus a routine mark-up as other routine service provision;
• Consider the price setting based on the overall value chain analysis, allocating the overall profit by also referring to the key indexes contributing to the value creation, such as assets deployed, sales revenues, costs incurred, staff employed, etc.

Risk Warning:

• Avoid aggressive tax planning, such as setting up a shell company in a low tax area, setting up a multi-layer overseas shareholding structure or evading permanent establishment via contract split. 
• Avoid mismatches with high tax risk:
  
  - Mismatch between the profit trend of the group and its members in China;
  - Mismatch between the group’s social image and its tax contribution;
  - Mismatch between value contribution (key production/R&D centers or key market) and profit allocation;
  - Mismatch between the status of high-tech enterprise and its performance/significant license fee payment;
  - Mismatch between the expansion of business scale and the unfavorable business performance;
  - Mismatch between the input and the output such as continuous significant license fee payment with poor business performance.

Compliance Guidance:

• Include both the timely completion of the various legal reporting/filing obligation (e.g. TP reporting, overseas payment contract filing and business restructuring reporting) as well as the quality of the transfer pricing documentation into the tax risk rating of the taxpayers;
• Fully utilize the information exchange via Mutual Administrative Assistance in Tax Matters, CRS and FATCA so as to standardize the regulation on offshore transactions;
• Establish the comprehensive data analysis mechanism with the combination of the tax filing information, information exchanged from bank, AIC, customs authority as well as commercial information extracted from third party resources so as to better monitor the tax risks of the taxpayers.

Our Observations

Following its announcement of Compliance Plan 2014-2015, Jiangsu SAT once again issued the Plan for years 2016-2018. Compared with the last version, this announcement reflects the  latest changes of international taxation incurred in recent years as promoted by OECD’s BEPS Plan. This has shown the Chinese tax authority’s attitudes to be well prepared for the post-BEPS era and the actions they are going to take. With more and more international information exchange as well as the current ”big data” analysis advocated by the tax authority in tax risk monitoring mechanism, tax compliance will become more important in the future and aggressive tax planning is of more risks. We recommend that the enterprises pay attention to the suggestions in the announcement for an internal tax risk check so as to avoid and mitigate the potential tax risks within the post-BEPS era.