The China State Administration of Taxation releases working procedures for indirect transfer rules

Tax Update


In early February, the China State Administration of Taxation (SAT) issued Notice 71. This Notice superseded the provisions in relation to indirect share transfers under the well-known Circular 6982 and has become the key tax rule governing indirect transfer transactions, ie transfer of shares or other similar interests of an offshore entity that directly or indirectly holds 'China Taxable Properties'. The promulgation of Notice 7 represents a significant change in China's indirect transfer rules in both magnitude of influence and implementation guidelines. Notwithstanding, there remains some operational issues and uncertainties in respect of the implementation of Notice 7 at local levels.

Following on from this in mid-May the SAT released Notice 683 entitled Enterprise Income Tax Working Procedures for Non-tax-residents' Indirect Transfer of China Properties (Trial). A follow-up to Notice 7, Notice 68 sets out general working procedures for local tax authorities' in relation to the implementation of indirect transfer rules, as well as clarifying certain unanswered questions in Notice 7.

Highlights of Notice 68 and Notice 7

Tax payment upon voluntary reporting

Notice 68 confirms that if a non-tax-resident enterprise reports an indirect transfer and a corresponding China income tax payable according to Notice 7, the relevant local tax authority should accept such reporting and collect the tax payment (in a timely manner), so as to ensure the local tax authority's timely responses to the voluntary reporting. The local tax authority's acceptance of the indirect transfer filing and the associated tax payment does not necessarily mean its agreement to the non-tax resident enterprise's submitted information and/or the tax payable calculation. The local tax authority may continue to investigate or even carry out an audit on the indirect transfer transaction within the relevant statutory limit under the China Enterprise Income Tax Law.

Acknowledgement of receipt

Notice 68 requires local tax authorities to issue an acknowledgement of receipt to non-tax-resident enterprises that make voluntary filings according to Notice 7. Apparently, the SAT is aware of local tax authorities' current practice of not issuing confirmations upon receipt of the submission documents, and this new requirement if strictly enforced will be a welcome change to taxpayers.

Active collection of transaction information

While Notice 7 encourages voluntary reporting from non-tax-resident enterprises in relation to their indirect transfers of 'China Taxable Properties', Notice 68 urges local tax authorities to actively collect information on indirect transfer transactions from various sources such as transfer pricing documentation, reports of listed companies, outbound payment administration records and share transfer administration records, etc. In other words, local tax authorities are encouraged to pursue unreported indirect transfer transactions, as well as carry out verification procedures on those reports made by non-tax-residents on a voluntary basis.

Reporting of transaction involving multiple properties

Notice 68 clarifies that if an indirect transfer involves multiple 'China Taxable Properties' under different local tax authorities' jurisdictions, the non-tax-resident enterprise may choose to voluntarily report the indirect transfer transaction to one of the local tax authorities. The local tax authority accepting the submission should undertake a review of the transaction that involves multiple 'China Taxable Properties' and co-ordinate and work local tax authorities and the SAT for a final assessment. If payment is required, taxes should be paid to the tax bureau where the relevant 'China Taxable Properties' are located respectively.

Review and audit procedures

Notice 68 sets out procedures in relation to indirect transfer reviews and audits for local tax authorities to follow. Specifically, local tax authorities are given the power to assess the reasonable business purpose of the relevant indirect transfer transactions under Notice 7. If a local tax authority decides an indirect transfer is supported by a reasonable business purpose as stipulated under Notice 7 it may close the case without conducting further review. The relevant local tax authority is not obliged to notify the taxpayer(s) who made the indirect transfer filing on their final decision.

If a local tax authority decides an indirect transfer is not supported by a reasonable business purpose, it is required to report this to the SATs supervising authorities for purposes of setting up a formal audit. Generally, the relevant audit procedures are consistent with those for the general anti-avoidance and transfer pricing audits and are intended to be settled within nine months.

Last but not the least, it is worth mentioning that in Notice 68, the SAT introduces a 'joint-hearing mechanism' for material and significant cases. For such cases, five people (appointed by the SAT) will conduct a joint review of the case with the hope that such a review will avoid or minimize any bias or misinterpretation of individual reviewers on any of the indirect transfer tax rules.

Notice 68 takes effect from 13 May 2015. Cases which have not been handled and settled shall be processed according to the working procedures as set out in Notice 68.

1 Public Notice [2015] No. 7, The Public Notice on Certain Enterprise Income Tax Issues of Indirect Asset Transfer by Non-Tax-Resident Enterprises.
2 Guo Shui Han [2009] No. 698, Circular of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Income from Non-resident Enterprises' Equity Transfers.
3 Circular Shui Zong Fa [2015] No. 68, Trial Enterprise Income Tax Working Procedure for Non-tax-residents' Indirect Transfer of China Properties.