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Sep 2015, Issue 38

Localisation of BEPS Actions in China - discussion draft of "Implementation Measures of Special Tax Adjustment" released for public consultation


China's State Administration of Taxation (SAT) released a discussion draft of "Implementation Measures of Special Tax Adjustment" (the Discussion Draft) for public consultation. The Discussion Draft revamps the existing Guoshuifa [2009] No.2 (Circular 2), by making reference to the various recommendations proposed in the Base Erosion and Profit Shifting (BEPS) Action Plans, adding in many China-specific elements, and incorporating the principles of special tax adjustments spread out in other existing circulars. We have already shared with you on what to expect in the revision of Circular 2 in our recent News Flash - Issue 31 and are pleased to find that the content of the Discussion Draft is basically in line with our forecast.

Please find the full text of the Discussion Draft (in Chinese) via these links below: Compared with the existing Circular 2, the Discussion Draft has the following significant changes:
  • Clearer definition of related parties: The Discussion Draft supplements how to recognise related parties for transfer pricing (TP) purpose, such as introducing a formula to assess whether there is a loan relationship between the two transaction parties, refining the scope of senior executives and relatives, defining the concept of ‘effective control’, etc. In particular, for the 'related parties relationships' recognised due to the control with respect to finance, business operations, and purchases and sales, the Discussion Draft provides that both parties should have shareholding relationship (either one party directly or indirectly owns the share of the other party, or a common third party directly or indirectly owns the shares of both parties) if they are regarded as related parties.
  • Contemporaneous documentation and related party transactions (RPT) reporting – the three-tier documentation plus RPT reporting structure: With the aim to collect more tax information on MNCs’ businesses operation, the Discussion Draft follows the approach set out in BEPS Action Plan 13 and introduces the three-tier documentation requirement (i.e. master file, local file, and special issue documentation) plus RPT reporting where Country-by-Country Reporting may be required. In addition, the Discussion Draft also requires that special issue documentation should be prepared in relation to intra-group services, Cost Sharing Agreements (CSA) and thin capitalisation respectively. More details about the potential change on documentation and reporting structure will be shared in our separate news alert.
  • More flexibility in TP methods selection: Apart from the five traditional TP methods referred to in the existing Circular 2, the Discussion Draft introduces a new 'value creation attribution method', as well as new methods for asset valuation.
  • Standardise special tax adjustment investigation procedures: The Discussion Draft provides further details on the TP investigation procedures (including investigation on companies' electronic information system) stipulated in the existing Circular 2 and expands the applicable scope of these procedures to cover other special tax adjustments.
  • New chapters on intangibles and intra-group services: The Discussion Draft introduces these two new chapters to enhance the administration on intangibles and intra-group services.
  • Advance Pricing Agreements (APA): The Discussion Draft refines APA procedures and clarifies the conditions where the Chinese tax authorities can prioritise and decline the APA requests.
  • CSA: The Discussion Draft enhances the procedures and administration on CSA.
  • Other special tax adjustment areas: The Discussion Draft provides further guidance on the Controlled Foreign Corporation rule, thin capitalisation rule and General Anti-avoidance Rule.
  • Profit level monitoring: The Discussion Draft requires local-level tax authorities to establish a risk ranking mechanism to administer related party transactions, closely monitor taxpayers’ real-time profit level, conduct special tax investigation on those taxpayers with a low compliance level but a high tax risk ranking, and keep track of taxpayers which have already been subject to special tax adjustments.
We would issue a News Flash to share our insights on the Discussion Draft soon.  Relevant stakeholders are welcome to submit their comments on the Discussion Draft to the SAT by 16 October 2015. Alternatively, you can touch base with your PwC contact to share your comments and suggestions so that we can incorporate your valuable comments into our PwC’s submission.

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