Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

China (People’s Republic of)

The People’s Republic of China (“China”) has met all aspects of the terms of reference (ToR) for the calendar year 2017 (year in review), except for the timely provision of information on rulings to the Competent Authority for exchange of information (ToR II.5.5). China is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority. In the prior year’s peer review report, China received two recommendations regarding the identification of future rulings (ToR I.4.1.2) and timely exchange of information on future rulings (ToR II.5.6). China has addressed the issues and these recommendations are removed.

China can legally issue one type of rulings within the scope of the transparency framework.

In practice, China issued 11 past rulings; for the period 1 April 2016 - 31 December 2016, China issued six future rulings; and for the year in review, China issued three future rulings within the scope of the transparency framework.

Peer input was received from one jurisdiction in respect of the exchanges of information on rulings received from China. It was positive, noting that the information was complete, in the correct format and received in a timely manner.

Introduction

226.  This peer review covers China’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

227.  China can legally issue one type of rulings within the scope of the transparency framework: cross-border unilateral advance pricing agreements (APAs) covering transfer pricing or the application of transfer pricing principles. The local in-charge tax administration offices are responsible for issuing rulings, with relevant consultation with the Chinese Tax Administration (SAT). Where an APA involves two or more local offices or both the state tax and local tax bureau, the APA process is organised and co-ordinated by the SAT.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

228.  There is a legal barrier to the exchange of information on rulings on China, which does not allow the exchange of past rulings. The legal framework in China has now been amended to allow exchanges on future rulings. As such, the balance of this report relates only to future rulings.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

229.  For China, future rulings are any tax rulings within scope that are issued on or after 1 April 2016. In the prior year peer review report, China had not completed the process to collect information on all future APAs and all potential exchange jurisdictions, and therefore received a recommendation to complete the identification of all future rulings as soon as possible (ToR I.4.1.2). China has now addressed this recommendation, and completed the identification and exchange of future rulings for the calendar year 2016 and the year in review.

230.  For the year in review, local tax authorities identify APAs for exchange at the point of issuance. The information on APAs is collected by the SAT from the local tax administration offices which have issued the ruling. In order to identify all potential relevant jurisdictions with which the information on rulings should be exchanged, this information is taken from the APA request. During the process of submitting an APA application, taxpayers are requested to provide detailed information about related parties. Specifically, applicants are required to provide a list to the local tax administration, consisting of the jurisdictions of its ultimate parent company, immediate parent company, and related parties with whom it enters into a transaction covered by the APA.

Review and supervision mechanism (ToR I.4.3)

231.  In the prior year peer review report, it was determined that the Chinese Tax Administration’s review and supervision mechanism was sufficient to meet the minimum standard. The Chinese Tax Administration’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Conclusion on section A

232.  For the year in review, China has met all of the ToR for the information gathering process and no recommendations are made.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

233.  China has implemented the necessary domestic legal basis to exchange information spontaneously in place. The legal framework in place does not allow the exchange of past rulings but does allow the exchange of information on future rulings, as from 1 April 2016.1

234.  China is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”), and (ii) double tax agreements in force with 102 jurisdictions.2

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

235.  For the year in review, the SAT completed the templates in the form of Annex C of the 2015 Action 5 Report (OECD, 2015). The SAT has issued internal instructions to streamline the process for completing the information required in the Annex C template. The summary section of the template is completed with reference to the aspects of the internal FHTP suggested guidance which relate to unilateral APAs, including providing a summary of the transaction or activity covered by the unilateral APA, and identification of which transfer pricing methodology has been applied. The template is completed by local tax administration officers, and reviewed for approval at the local tax administration level. The template is then transmitted to the Competent Authority in SAT for final review and approval before the template is exchanged.

236.  For the year in review, China collected all relevant templates from the local in-charge authorities in January 2018 and such information was exchanged with the relevant jurisdictions in February 2018. However, in March 2018, China finalised testing to incorporate the issuance of unilateral APAs into their holistic information system for all anti-avoidance measures. The new system allows the SAT to identify and process information relating to unilateral APAs, and receive unilateral APAs via the system within 10 days after an APA is issued rather than receiving future rulings from the local in-charge tax administration offices once a year.

237.  In the prior year peer review report, China had not completed the timely exchange of information on future rulings (ToR II.5.6). For future rulings issued in 2016, China collected all relevant templates from the local in-charge tax authorities in September 2017 and such information was then exchanged with relevant jurisdictions in October 2017. China has now completed the exchange of information on future rulings and this recommendation is removed.

238.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	N/A	N/A	N/A
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	11	0	N/A	These 11 exchanges are a result of the delayed exchanges from the prior year. No exchanges were undertaken in 2017 for rulings issued in 2017, as templates were not provided to the Competent Authority until January 2018.
Total	11	0

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	0

Conclusion on section B

239.  China has in place the necessary legal basis for exchanging information on future rulings. China has met all the ToR for the exchange of information process except for the timely provision of information on rulings to the Competent Authority for exchange of information (ToR II.5.5). China is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority.

C. Statistics (ToR IV)

240.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	N/A	N/A
Cross-border unilateral advance pricing arrangements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	11	Hong Kong (China), Macao (China), Germany, Indonesia, the Netherlands, United States
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	N/A	N/A
Permanent establishment rulings	N/A	N/A
Related party conduit rulings	N/A	N/A
De minimis rule	N/A	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	N/A	N/A
Total	11

D. Matters related to intellectual property regimes (ToR I.4.1.3)

241.  In the prior year’s peer review report, it was determined that the transparency requirements were not relevant for China’s intellectual property regime (Reduced rate for high & new tech enterprises).

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
During the year in review, China’s Competent Authority collected information on future rulings on an annual basis, which is longer than necessary.	China is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority.

Jurisdiction’s response and recent development

242.  In March 2018, China finalised testing to incorporate the issuance of unilateral APAs into their holistic information system for all anti-avoidance measures. The new system allows the SAT to identify and process information relating to unilateral APAs, and receive unilateral APAs via the system within 10 days after an APA is issued.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  Public Notice on Matters Regarding Enhancing the Administration of Advance Pricing Arrangements (SAT Public Notice [2016] No. 64).

← 2.  China has Double Tax Agreements with Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bahrein, Bangladesh, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Cambodia, Canada, Chile, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Ethiopia, Finland, Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Lao People’s Democratic Republic, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Seychelles, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, Viet Nam, Zambia and Zimbabwe.

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