On 17 September, China’s State Administration of Taxation (SAT) responded to the first batch of deliverables in connection with base erosion and profit shifting (BEPS) hours after its release by the Organization for Economic Cooperation and Development (OECD).
The BEPS Action Plan endorsed by the G20 in July 2013identified 15 key areas to be addressed by 2015, with the following 7 delivered in September 2014, and endorsed by the Finance Ministers of G20 countries at their meeting in Cairns, Australia on 20 and 21 September. The SAT provided a full Chinese translation of the reports of the 7 deliverables and its commentary thereon is as follows:
Action 1: digital economy
The SAT noted that the report recognized that because the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes. The report’s conclusion is that it will be hard to formulate stand-alone, specific policies tackling tax risks posed by the digital economy, which will be addressed by the work on the other Actions in the BEPS Action Plan.
The SAT expressed disappointment over the lack of solutions in the report, and commented that the failure to achieve consensus was also due to the vastly different interests pursued by participating states.
Action 2: hybrid mismatch arrangements
Hybrid mismatch arrangements exploit differences in the tax treatment of instruments, entities or transfers between two or more countries, and often lead to “double non-taxation” or long-term tax deferrals. The report suggested changes to both domestic laws and the OECD Model Tax Convention.
The SAT expressed no view on this report.
Action 5: harmful tax practices
Countries engaged in harmful tax practices to get a leg up in the “race to the bottom” by reducing tax burdens in order to attract or retain highly mobile economic activity in their jurisdictions. Harmful tax practices are harmful in that they erode the tax bases of other jurisdictions, distort the flows of capitals, and result in tax burdens shifted to lowly mobile tax bases such as labour forces, fixed assets and consumers.
The SAT noted that, as a Key Partner of the OECD, China’s own tax incentive regime will be reviewed and discussed at the meeting of the OECD's Forum on Harmful Tax Practices (FHTP) in November 2014.
Action 6: treaty abuse
Tax treaties are abused by artificial arrangements to gain tax benefits, e.g. double non-taxation, unintended by the treaties. This report includes proposed changes to the OECD Model Tax Convention and domestic laws to prevent treaty abuse. The report also clarifies that tax treaties are not intended to be used to generate double non-taxation and identifies the tax policy considerations that countries should consider before deciding to enter into a tax treaty with another country.
The SAT expressed no view on this report.
Action 8: transfer pricing issues in intangibles
This intermediate report contains revisions to the OECD Transfer Pricing Guidelines to align transfer pricing outcomes with value creation in the area of intangibles.The report is based on the principle that profits arising from intangible assets should be ascribed to different entities from the perspectives of global supply chain and value creation.
The SAT noted that the report has considered and incorporated important points proposed by China, paving the way and providing the international legal authorities for China’s future anti-avoidance practices.
Action 13: transfer pricing documentation and country-by-country reporting
The OECD endorsed the three-tier approach for transfer pricing documentation which comprises a master file, a local file and a separate country-by-country report ofrevenues, profit before income tax, income tax paid, current year income tax accrual and stated capital, accumulated earnings, number of employees, and tangible assets.
The SAT expressed no view on this report. But it is noted that the SAT is currently revising the implementation rules of “special tax adjustments”, which is expected to provide guidance for China’s domestic transfer pricing documentation.
Action 15: multilateral instrument
The report identified the issues arising from the development of a multilateral instrument, a mechanism to swiftly implement changes to model tax conventions to the content of actual tax treaties.
The SAT noted that this was an intermediary report emphasizing the necessity of such a mechanism, and would closely watch its latest development at a meeting in 2015.
The SAT concluded its response by observing that this new round of international tax reform gave fairness a chance, that is, tax liability should be aligned with tax substance of economic activities and value creation. The SAT also vowed to seize the rare historical opportunity as an emerging economy to participate in the formulation of international tax rule, which had hitherto been dominated by developed countries for almost a century.
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