News Flash. China Tax and Business Advisory

Transcription

1 News Flash China Tax and Business Advisory April 2012 Issue 9 Our Tax Controversy Services Team Contacts Northern China Xiaoying Chen Tel: +86 (10) xiaoying.chen@cn.pwc.com Central China Jane Wang Tel: +86 (21) jane.y.wang@cn.pwc.com Southern China Janet Xu Tel: + 86 (20) janet.xu@cn.pwc.com PwC China's Tax Controversy Services (TCS) practice helps companies face and respond to increased pressure and attention from tax authorities in China by preventing, managing, and resolving tax disputes. Our success is based on a powerful combination of deep technical expertise, tax appeals and alternative dispute resolution experience, and our local knowledge and global perspective.our team includes former government officials who can capitalise on their first-hand understanding of process and procedures and long standing relationships as well as specialists with technical expertise in all areas of China tax. More clarity for taxpayers to manage compliance risks: Launch of the <Working Guidelines on Replies to Specific Tax Matters> On 10 February 2012, the State Administration of Taxation (SAT) published a notice launching the <Working Guidelines on Replying to Specific Tax Matters (Trial)> (Guoshuifa [2012] No. 14) (hereinafter referred to as the Guidelines ). The Guidelines introduce for the first time a set of detailed working guidelines and internal procedures prescribing how the Chinese tax authorities should provide replies on specific tax matters ( Replies ). With the aim of improving the science, democracy and transparency of tax administration, the SAT released the Guidelines to strengthen internal control and to standardize the formulation of Replies. The Guidelines take effect from 1 March The Guidelines clarify procedures which were previously ambiguous, set out the roles and responsibilities of the authorized tax authorities and specify documentation requirements, timeframe, etc. It is a breakthrough for tax administration counterparts 1 to give them more certainty in how the tax authorities will apply tax laws and regulations on specific tax matters from a procedural perspective. With the increased standardisation and transparency of Replies, we hope that tax administration counterparts, 1 According to Article 2 of <Administrative Measures for Formulation of Tax Circulars> (the SAT Order [2010] No. 20), tax administration counterparts shall include taxpayers, withholding agents and other counterparts involved in tax administration.

2 especially taxpayers, will be able to effectively reduce the tax exposures of critical transactions/arrangements so that tax disputes arising from the application of tax laws and regulations can be effectively minimized or even mitigated in the future. In this issue of News Flash, we would like to summarize the salient points of the Guidelines, illustrate the scope of Replies and procedures and share our insights and observations in this regard. Salient points of the Guidelines Scope of Replies covered by the Guidelines The Guidelines set out the definition and scope of Replies as follows: Definition of Replies Authorized tax authorities Tax matters not covered by the Guidelines Limits of authority A reply on a specific tax matter refers to a reply made by the tax authorities as to how to apply tax laws, regulations, rules or circulars on a specific tax matter undertaken by a specific tax administration counterpart. Replies must be made in the name of the tax authority (rather than any internal division within a tax authority). 1) Tax matters requiring permission and approval as stipulated in the tax laws and regulations are not covered by the Guidelines. 2) In the event that the tax matter resolved in the Reply is applicable generally to other tax administration counterparts, the matter should be published in the form of a tax circular in accordance with the <Administrative Measures for Formulation of Tax Circulars> (the SAT Order [2010] No.20). Replies shall not be made in the event of any of the following circumstances: 1) Where it exceeds the statutory authority of the tax authority concerned 2) Where it conflicts with any superior laws, or 3) Where it is obviously unfair to other tax administration counterparts under similar circumstances. Detailed rules and procedures with respect to issuing Replies The Guidelines set out a set of procedures and timeframe for a tax authority to issue a Reply. The flow chart below illustrates the general procedures for a taxpayer to apply to the tax authority for the issuance of a Reply. News Flash China Tax and Business Advisory 2

3 Note: For timeframes that have not been prescribed in the chart above, the following rules shall apply: 1> Circulation of materials amongst tax authorities shall be completed within five working days. 2> Countersign and review by relevant divisions shall be completed within ten working days. 3> Investigation and verification conducted by the in-charge tax authority shall be completed within thirty days. PwC Observations In the light of the increasing complexity of the economic environment and the rapid development of the taxation system in China, it is vital that a platform shall be made available to taxpayers to better interact with the Chinese tax authorities so that they have certainty on tax matters and are thus able to minimize or mitigate tax disputes and controversies. As a starting point and a breakthrough in this regard, the Guidelines introduce standardized detailed procedures for the tax authorities to issue replies on specific tax matters. Taxpayers alike may avail themselves of this new opportunity to effectively control and manage their potential tax exposures arising from significant transactions or arrangements. Impact of the Guidelines on taxpayers Who can make a request for Replies? According to the Guidelines, the in-charge tax authority will generally be the party making a request for a Reply to its superior tax bureau after receiving a submission from the tax administration counterpart. In addition, the Guidelines also set out some other circumstances where the request for Replies can be put forward (including the scenario where the taxpayer directly submits the application) together with their corresponding treatment by the tax authority. What kind of tax matters can be covered by the Replies? Replies shall address the application of existing policies on specific tax matters rather than formulate new tax policies that have not been stipulated in the current tax laws and regulations. Moreover, the Guidelines clarify that tax matters requiring permission and approval do not fall within the scope of Replies. Therefore, tax matters such as the application of tax clearance certificate for outbound remittance purpose, application of tax incentives, etc. which require permission and approval should not fall within the scope of reply on a specific tax matter. Whether specific tax matters include rulings on contemplated transactions with certain assumptions ( advance ruling ) is another issue which deserves attention. The literal reading of the Guidelines (i.e. that the tax authorities are required to investigate on tax matters) appears to suggest that the specific tax matters may only aim to address those matters that have already taken place. It is yet to be seen if in practice advance rulings would fall within the ambit of the Replies. Acceptance of the request for Replies. A request for the Reply shall be registered by the general office of the authorized tax authority before being dispatched to the in-charge division. It seems that as long as the general office accepts the request and then proceeds with the registration, the consequential procedures as illustrated in the flow chart above shall be followed. Binding force of the Replies. The Guidelines stipulate that if the tax matter resolved in the Reply is applicable generally to other tax administration counterparts, the matter should be published in the form of a tax circular. In other words, a Reply shall only apply to the specific tax matter addressed in the Reply with respect to that specific tax administration counterpart, and shall not have binding force on other similar tax matters or other tax administration counterparts. The fact that a Reply does not have general binding force may help to confine the scope of investigation and compliance review by the tax authorities to the specific tax matters of that particular taxpayer, without having to consider other kinds of circumstances and different possible scenarios thereby reducing the time and complexity of the process involved. This would be welcome by taxpayers. In addition, the Guidelines may be a double-edged sword as to how a Reply that has been made on the specific tax matter of taxpayer A would affect another taxpayer B who encounters similar situation. On one hand, where the resolution provides taxpayer A with a favourable tax treatment, the resolution may not be automatically available to taxpayer B as the Reply does not have a general binding force. On the other hand, if the resolution does not grant favourable treatment or even brings about negative outcome to taxpayer A, the in-charge tax authority of taxpayer B cannot rush to the same negative conclusion simply based on the Reply to A without fully investigating B s case. Instead, it must spend the time and News Flash China Tax and Business Advisory 3

4 effort to treat B s case as a separate one for assessment and determine the tax treatment accordingly. However, there is a limitation in the Guidelines which states that a Reply shall not be obviously unfair to any other taxpayers under similar circumstances. Therefore, it appears that the Reply to taxpayer A may also be applicable to taxpayer B in similar circumstances; it may just a matter of procedure and timing. Sustainability. Although the Guidelines introduce a set of complicated internal procedures by requiring various divisions of different levels of tax authorities to carry out investigation and review before making a Reply, it is fair to say that such complicated procedures will improve the sustainability of the resolution. This will help taxpayers by enhancing the transparency of tax treatments and improving tax certainty. Transparency vs. Confidentiality. The tax authority that makes a Reply shall publicize the same in the government bulletin, newspaper or official website within thirty days upon the issuance of the Reply; or publicize in the bulletin boards or equivalent within five days. This disclosure requirement will make the Replies more transparent to the public which shall, to some extent, be welcomed by the taxpayers. However, at the same time, it may also give rise to commercial confidentiality concerns as the Guidelines only exclude national secrets from this disclosure requirement. Impact of the Guidelines on tax authorities Who is authorised to make a Reply? The Guidelines stipulate that the Reply must be in the name of the tax authorities (rather than any internal divisions thereof). However, it is not always clear in practice as to which level of the tax authorities is authorized to make the Reply. This may cause local-level tax authorities to hesitate in the acceptance and onward submission of a taxpayer s request for a Reply. Complicated procedures to make a Reply. As illustrated in the flow chart above, it is necessary for the tax authority to undertake a series of complicated procedures before a Reply can be issued. It may involve the co-ordination and co-operation among different levels of tax authorities and various divisions. The procedures can be so comprehensive that they include review before accepting a request, onward submission, investigation and even supplementary verification, countersign and compliance review before approval, as well as further review by the superior tax authority after the issuance, etc. It is yet to be seen what the impact of this extra administration, time and effort will be on the tax authorities. Escalated internal control. The Guidelines were not issued directly for taxpayers purposes. Instead, they set out a set of internal working guidance for the Chinese tax authorities in this area. Therefore, the Guidelines put more emphasis on standardising the internal procedures in order to establish an integrated and unified internal control mechanism. Breakthrough in procedures. Before the release of the Guidelines, the lack of guidance in relation to making a Reply might have prevented local tax authorities from providing written clarification to taxpayers in the course of enforcing tax policies and regulations. Procedurally wise, making a Reply is much more practical and workable. With the Guidelines covering the procedures of making a request, onward submission, investigation and other relevant steps, there is now a clear legal basis for local-level tax authorities to make such Replies. Conclusion Over the past years, tax authorities procedures for issuing a Reply on tax matters have been unclear, making it difficult for taxpayers to apply for a Reply. The release of the Guidelines is a breakthrough from a procedural perspective, despite the strict requirements in the Guidelines which would likely result in tedious documentation preparation and time-consuming application processes. Therefore, it is important for taxpayers to undertake detailed advance planning and be mindful of each and every step of the entire application process. We will keep monitoring the implementation of the Guidelines and the assessing practice of the local-level tax authorities. Our Tax Controversy Services team and PwC client service teams will be in close communication with local-level tax authorities via various channels to promote the establishment of a more transparent and open environment and providing more certainty with respect to the enforcement of tax laws and regulations in China. At the same time, we will assist enterprises to improve their management of tax compliance risks and continue to share our insights on the important developments in this area. News Flash China Tax and Business Advisory 4

5 In the context of this News Flash, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers client service team or your other tax advisers. The materials contained in this publication were assembled on 10 April 2012 and were based on the law enforceable and information available at that time. To make enquiries about our China tax and business advisory services, please feel free to contact the following lead specialist partners: Financial Services Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Transfer Pricing Spencer Chong Tel: +86 (21) spencer.chong@cn.pwc.com Indirect Tax Alan Wu Tel: +86 (10) alan.wu@cn.pwc.com Mergers & Acquisitions Nick Dignan Tel: nick.dignan@hk.pwc.com China Business & Investment Advisory Anthea Wong Tel: +86 (10) anthea.wong@cn.pwc.com International Tax Services Edwin Wong Tel: +86 (10) edwin.wong@cn.pwc.com Domestic Enterprises Tax Services Elton Huang Tel: +86 (21) elton.huang@cn.pwc.com Customs & International Trade Damon Paling Tel: +86 (21) damon.ross.paling@cn.pwc.com Registration & Corporate Compliance Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Tax Accounting Services Terry Tam Tel: +86 (21) terry.sy.tam@cn.pwc.com Value Chain Transformation Steven Tseng Tel: +86 (21) steven.tseng@cn.pwc.com Tax Controversy Services Xiaoying Chen Tel: +86 (10) xiaoying.chen@cn.pwc.com International Assignment Services / Human Resources Services Northern Region Edmund Yang Tel: +86 (10) edmund.yang@cn.pwc.com Central Region Stacy Kwok Tel: +86 (21) stacy.kwok@cn.pwc.com Southern Region Jacky Chu Tel: jacky.chu@hk.pwc.com Our regional contacts: Beijing Edward Shum Tel: +86 (10) edward.shum@cn.pwc.com Chongqing Robert Li Tel: +86 (23) robert.li@cn.pwc.com Dalian Rex Chan Tel: +86 (411) rex.c.chan@cn.pwc.com Guangzhou Daisy Kwun Tel: +86 (20) daisy.kwun@cn.pwc.com Hangzhou Jenny Chong Tel: +86 (21) j.chong@cn.pwc.com Hong Kong Charles Lee Tel: charles.lee@cn.pwc.com Macao Pat Wong Tel: pat.lk.wong@hk.pwc.com Nanjing Jane Wang Tel: +86 (25) jane.y.wang@cn.pwc.com Ningbo Ray Zhu Tel: +86 (21) ray.zhu@cn.pwc.com Qingdao Steven Wong Tel: +86 (532) steven.wong@cn.pwc.com Shanghai Peter Ng Tel: +86 (21) peter.ng@cn.pwc.com Shenzhen Charles Lee Tel: +86 (755) charles.lee@cn.pwc.com Singapore Lennon Lee Tel: lennon.kl.lee@sg.pwc.com Suzhou Linjun Shen Tel: +86 (512) linjun.shen@cn.pwc.com Taiwan Steven Go Tel: +886 (2) steven.go@tw.pwc.com Tianjin Kelvin Lee Tel: +86 (22) kelvin.lee@cn.pwc.com Xiamen Mike Chiang Tel: +86 (21) mike.chiang@cn.pwc.com Xian Elton Huang Tel: +86 (29) elton.huang@cn.pwc.com This China Tax and Business News Flash is issued by the PwC TAX Knowledge Management Centre in China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PricewaterhouseCoopers partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui Tel: +86 (10) matthew.mui@cn.pwc.com Please visit PricewaterhouseCoopers websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.