In late January 2014, Mr. Wang Jun, the Administrator of the SAT, attended the FTA Steering Committee Meeting held by OECD. This is the first time that the SAT Administrator, as a member of the FTA Steering Committee, participated in an international summit meeting on tax administration.
In the meeting, Mr. Wang Jun emphasized that the international community faces significant challenges of base erosion and profit shifting (“BEPS”) and brought up a series of suggestions on international tax cooperation, including to tackle the challenges in international tax cooperation proactively, to decide the subjects of international tax cooperation in a scientific manner, and to enhance the status and influence of international tax cooperation, etc.
As pushed by the G20 Summit, BEPS has become one of the hottest international tax topics. The main reason for the creation and development of BEPS is the variances among the tax system of each country and their interactive impacts. Multinational companies take advantage of the tax rules as adopted in different countries in terms of tax jurisdiction, transfer pricing and anti-avoidance rules, and so on, and abusively use the treaty benefits under different double taxation treaties, with the objective to reduce the overall tax burden. As such, in order to produce a more effective mechanism among tax sources states to deal with BEPS, OECD issued a BEPS report in February 2013 and an Action Plan in July 2013.
China has been strengthening the tax anti-avoidance administration in recent years, such rules as transfer pricing (Guoshuifa  No.2), indirect offshore share transfer (Guoshuihan  No. 698) and beneficial owner test (Guoshuihan  No. 601) have made significant impact on the cross-border investment and transaction structures. The recent speech of Mr. Wang Jun on BEPS during the OECD meeting indicates that China will more actively participate in the international anti-avoidance and intensify the combat against tax avoidance arrangement, so as to protect its tax base from being eroded.
Based on China’s close attention to the BEPS plan as well as the transfer pricing tax adjustment cases occurred in the last two years, we are of the view that the key areas of transfer pricing investigations in the following years would include:
- Cross-border service fee payments, e.g. profit repatriation by means of service fees from China subsidiaries to offshore headquarters;
- Cross-border financing arrangements, e.g. related-party loans with interest expense beyond reasonable scope;
- Intangibles transactions, e.g. profit shifting by means of trademarks and/or patents licensing among members of multi-national companies;
- Abuse of tax treaties and tax havens, e.g. profit shifting by taking advantage of shell companies established in “tax havens”.
Under these circumstances, with respect to the above key areas of anti-avoidance, such as cross-border investments, financing arrangements and intangibles transactions,, multi-national enterprises with investments in China as well as Chinese enterprises with outbound investments should adopt a more prudent approach when considering and assessing the commercial reasonableness in tax planning, so as to reduce the potential tax exposure. Emerging business activities such as cross-border transactions for digital products and e-commerce should watch out for global and especially China’s anti-avoidance rules and practice, review their cross-border tax arrangements and make adjustments accordingly.