2019 has been a striking period of evolution, both for China's domestic economy and for its trade and investment relationship with the wider world. This year has been marked by continued efforts on tax and red tape reduction, an accelerated liberalization of restrictions on inbound investment, successive batches of additional tariffs on imports against the backdrop of continued China-US trade frictions, and the emerging new international tax framework. These are all impacting business planning for foreign investors in China, as well as for Chinese multinational enterprises (MNEs) investing overseas.
Keeping up with all of the latest developments is challenging, and the KPMG China Annual Tax Update Conference offers a unique opportunity to better understand the evolving China tax landscape and get insights on anticipated developments in 2020.
Landmark tax developments in 2019
Transfer pricing, trade and customs
Managing tax in complex global supply chains requires a focus on trade, customs, and transfer pricing.
China transfer pricing administration is evolving for more effective data-based supervision of China inbound and outbound business activity in 2019. This is at the same time as greater support is being provided through improved mutual agreement procedure (MAP) and advance pricing arrangement (APA) programs. These measures are key to achieving tax certainty for Belt and Road Initiative (BRI) activities.
In 2019, China has sought to manage adverse effects from trade frictions with the US. The year has seen reforms to customs supervision, an expanded role for bonded zones, and a refresh of key trade agreements.
M&A tax – Inbound and outbound investment challenges
China inbound and outbound investment were relatively robust in 2019, in the face of increasing global challenges.
In the inbound investment space, novel tax due diligence issues are coming to the fore for hot sectors such as life sciences and logistics. Tax administration practice for the Announcement 7 indirect disposal rules is becoming more mature. At the same time the STA have shown a willingness to engage with taxpayers on the many complex remaining issues, such as cost base determinations.
In the outbound investment space, BRI investment continues to grow, even as investment in other countries has moderated. Managing tax risks for these investments, and dealing with structuring issues arising from new economic substance requirements in offshore jurisdictions, raise many challenges.
International tax and digitalisation
The interaction of China's tax system with other countries is evolving, and set for much greater change in future.
In 2018/19 China signed a batch of new tax treaties, and amended existing treaties. These make important changes in relation to permanent establishment (PE), tax transparency rules, and anti-avoidance. The PE changes in particular mean new BEPS risks for both inbound and outbound activities. Further changes lie ahead once the multilateral instrument (MLI) is ratified.
At the same time, the BEPS 2.0 program is on the cusp of making major revisions to the international tax architecture. This work started with a focus on digitalization, but has now gone much wider, with potential impact on all large MNEs with operations into and out of China.
Individual Income Tax
The major 2018 Individual Income Tax (IIT) reform is continuing to bed down, with the operation of anti-avoidance rules remaining to be clarified. Chinese tax residents, as well as foreigners with exposure to China IIT, are having to come up to speed with these changes, along with an increasingly tight global enforcement on personal income taxes, such as through CRS.
New preferential tax incentives and opportunities for GBA (for Southern and Hong Kong sessions only)
The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) is a national strategic development initiated by the central government. The GBA Outline Development Plan was introduced early this year followed by a number of preferential policies. In our Southern and Hong Kong sessions, we will cover the latest tax incentives and opportunities in the GBA and explore how companies could take advantage of the policies and manage their cross-border tax issues amongst three different regions including China mainland, Hong Kong SAR and Macao SAR.
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