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China – Perspective On Base Erosion And Profit Shifting.

17 November, 2014


Legal News & Analysis – Asia Pacific – China – Tax


On September 16, 2014, the Organization for Economic Cooperation and Development (“OECD”) released its first set of reports and recommendations (“2014 Deliverables”)for changing international tax rules and domestic tax rules to combat base erosion and profit shifting (“BEPS”) by multinational enterprises (“MNEs”). The 2014 Deliverables address 7 of the 15 actions listed in the BEPS Action Plan2 published  in July 2013 by the OECD. The 15 actions in the BEPS Action Plan will be finalized in three phases: September 2014, September 2015 and December 2015. 

On September 17, 2014, China’s State Administration of Taxation (“SAT”) released its views on BEPS and provided the Chinese translation of the 2014 Deliverables on its official website3.


Background of the BEPS Project4

On February 12, 2013, the OECD released a detailed report titled “Addressing Base Erosion and Profit Shifting” (“BEPS Report”)in response to the growing concerns expressed at the 2012 G20 meeting over MNEs artificially shifting profits to low tax jurisdictions. Five months later in July 2013, the OECD launched the BEPS Action Plan, which was fully endorsed by the G20 and identified 15 specific actions to address the BEPS challenge. The principal object of the BEPS Action Plan is to ensure “profits should be taxed in the jurisdiction where economic activities occur and value is created”. The 2014 Deliverables recommend modifying domestic laws and tax treaties to:


  • Address the tax challenges of the digital economy (Action 1);
  • Neutralize the effect of hybrid mismatch arrangements (Action 2);
  • Counter harmful tax practices (Action 5);
  • Prevent the abuse of tax treaties (Action 6);
  • Address transfer pricing issues in the key area of intangibles (Action 8);
  • Improve transparency for tax administration through improved transfer pricing documentation and a template for country-by-country reporting (Action 13); and
  • Develop a multilateral instrument to amend bilateral tax treaties (Action 15).

SAT’s Position On BEPS

Overall, the SAT has shown strong support for the BEPS project. The SAT has established a BEPS task force to systematically study, develop and implement the BEPS initiatives and turn them into anti-avoidance legislation and practice in China. Moreover, all local tax authorities have been instructed by the SAT to study the BEPS initiatives and actively counter tax avoidance.

SAT’s Response To BEPS

As part of the SAT’s response to BEPS, on July 29, 2014, the SAT issued Notice 146 to require PRC tax authorities at all levels to participate in a nationwide search for and investigation of all large payments of service fees or royalties from Chinese resident enterprises to their offshore related parties. In the SAT’s April 2014 letter6 to the United Nations working group on transfer pricing issues, the SAT also took a firm stance on intragroup service payments, calling for scrutiny of their benefits to the Chinese recipients. In a meeting held by the SAT on October 10, 2014 in Beijing, the SAT emphasized that it will take this opportunity to improve China’s domestic rules and international tax administration capabilities by:


  • Revising the Implementing Measures for Special Tax Adjustments (Circular 2), which comprise the majority of Chinese transfer pricing rules, by the end of 2015;
  • Releasing administrative guidelines on general anti-avoidance rules by the end of 2014;
  • Releasing new regulations on indirect share transfers by the end of 2014;
  • Revising the Tax Administrative and Collection Law to permit PRC tax authorities to collect more information from taxpayers so that they can effectively counter aggressive tax planning;
  • Establishing automatic information exchanges with more than 45 countries by the end of 2018.

In the meeting, the SAT also mentioned 15 unacceptable practices by MNEs. These unacceptable practicesinclude claiming losses incurred by single-function entities of foreign companies, abuse of tax treaties, unreasonably high pricing of intangibles, disregarding the particularity of the Chinese market, engaging in aggressive tax planning, establishing structures without substantive economic activities, etc. 


In the context of BEPS, it is no surprise that MNEs have been challenged more often by Chinese tax authorities in recent years. Examples of these challenges include: taxation of indirect transfers of Chinese-resident enterprises; denial of tax treaty benefits for dividends, interest, royalties and capital gains; denial of tax deductions claimed for intragroup payments such as royalties and service fees; and transfer pricing methodologies that favour higher levels of source-country taxation. According to the People’s Daily8, Chinese tax authorities collected RMB 46.9bn in enterprise income tax (“EIT”) for tax anti-avoidance in 2013. The individual liabilities that make up this total have also been quite high. Ten foreign-invested enterprises (“FIEs”) each paid more than RMB 100m in EIT in 2013.

Now that the SAT has officially endorsed the BEPS project, we can anticipate that Chinese tax authorities will become more willing to counter aggressive tax planning. MNEs should prepare documentation to support their positions and examine their current tax planning structure in the context of BEPS. In addition, MNEs should also be aware of their home country’s tax rules and adopt strategies to avoid double taxation. In case of disputes, MNEs must prepare defense strategies, stand firm during negotiations with tax bureaus, and be prepared to enter formal proceedings such as administrative review and litigation.


End Notes:


1 http://www.oecd.org/ctp/beps-2014-deliverables.htm.
2 http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/action-plan-on-base-erosion-and-profit-shifting_9789264202719-en. 

3 http://www.chinatax.gov.cn/n2735/n2834/n2835/c784400/content.html.

4 http://www.oecd.org/ctp/beps.htm.
5 http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en#page1.
6 http://www.un.org/esa/ffd/tax/TransferPricing/CommentsPRC.


Baker McKenzie


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Jinghua Liu, Partner, Baker & McKenzie

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