China Tax Newsletter - September / December 2016

Tax Newsletter

Welcome to the latest issue of our Tax Newsletter. In this issue we have covered a number of developments and cases in the PRC and Hong Kong from September to December 2016 which could have legal and tax implications to your business.

In the PRC, the State Administration of Taxation (SAT) is committed to improving the tax landscape in China. The SAT has implemented new rules to expedite the export tax refund process on exported good for Integrated Foreign Trade Service Enterprises (IFTSEs) and introduced a new process of application for Advance Pricing Arrangements (APA). Moreover, SAT has recently clarified matters on deduction of consumption tax payable in relation to high-end cosmetics. The SAT and the Ministry of Finance (MOF) have jointly laid down qualifying criteria for preferential individual income tax (IIT) treatment of certain stock incentive awards granted by domestic companies, and capital contributions to resident enterprises through technology investment.

Importantly, the regime for the administration of foreign invested enterprises (FIEs) in China has been relaxed through the introduction of a recordal system for the establishment and administration of corporate changes of FIEs on a nationwide basis. The new public access to the database of enterprise names is an important step forward in facilitating the registration of company names and improving registration efficiency. It is expected that these changes will boost economic development in the PRC and facilitate foreign investment.

Despite PRC's positive economic outlook, managing custom risks in China is a growing concern for taxpayers in view of the new customs audit rules issued by China's General Administration of Customs. Taxpayers should be mindful of the need for customs compliance and take appropriate actions.

In Hong Kong, the Inland Revenue Department (IRD) is on track in preparing the implementation of the Automatic Exchange Of Information (AEOI) regime. Hong Kong has also recently signed bilateral competent authority agreements (CAAs) with Japan and the United Kingdom. It is expected that in 2018 Hong Kong will begin to exchange financial account information in tax matters with Japan and the United Kingdom. It is welcoming to see IRD publishing more detailed AEoI Guidance materials including Guidance for Financial Institutions (FIs), Frequently Asked Questions, Self-Certification, Financial Account Information Return XML Schema and User Guide and Pamphlets.

Hong Kong is also devoted to extending its Comprehensive Double Taxation Agreement (CDTA) network. In this regard, CDTA with South Korea came into force on 27 September 2016 and applies to any year of assessment on or after 1 April 2017. CDTA with Romania came into force on 21 November 2016 and applies to any year of assessment on or after 1 January 2017.

In the meantime, IRD published its annual report for 2015-2016, showing a total revenue collection of $291.3 billion in 2015-2016. In addition, IRD clarified tax rulings regarding the qualification of corporate treasury centres. Two recent tax evasion cases were published with convicting taxpayers sent to jail for falsely claiming deductions of home loan interests, expenses of self-education and approved charitable donation. Furthermore, IRD has issued useful guideline on court-free company amalgamation to clarify the tax treatment in the case of any potential set off between amalgamating and amalgamated company.

To gauge public views on implementation of measures to counter base erosion and profit shifting (BEPS), a consultation exercise was conducted by the Government from 26 October 2016 to 31 December 2016 to gather views regarding various measures including Country-by-Country Reporting. We shall await the result of the consultation exercise in the New Year.

The Hong Kong Government has demonstrated its latest effort to suppress the overheated residential property market via the introduction of a 15% flat rate of ad valorem stamp duty. Meanwhile, the Government has rejected the attempt to impose a land and sea departure tax on Mainland visitors in the hopes of cracking down parallel trading behavior.

We welcome your feedback on this issue of the Tax Newsletter.

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