China Records Tremendous Progress in Tax Co-operation and Tax Transparency
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On May 16, 2016, the heads of 44 tax administrations met in Beijing for the 10th Meeting of the OECD Forum on Tax Administration (“FTA”).
The Meeting came at a critical time, when tax co-operation and tax transparency have been a high priority for the G20 agenda under the Chinese Presidency, and there are increased expectations of progress.
The Meeting focused on the following three interlocking themes:
China Signed CBC MCAA
- Effective implementation of the G20/OECD international tax agenda, requiring coordinated action from tax commissioners;
- Building modern tax administrations that effectively respond to the challenges and opportunities of an increasingly digital world, and integrating it into the way tax commissioners work; and
- Helping build capacity in tax administration so that all countries, and in particular developing countries, can benefit from the changes in the international tax landscape and better mobilize the resources they need.
During the FTA Meeting, China recorded tremendous progress in tax co-operation and tax transparency.
One of the key highlights is that on May 12, 2016, China signed the OECD’s Multilateral Competent Authority Agreement (“CbC MCAA”) for the Automatic Exchange of Country-by-Country (“CbC”) reports, joining a group of 38 other signatories.
China’s signing of the CbC MCAA presents a commitment to localize and implement Action 13 of the G20/OECD BEPS Project. China-based multinational companies (“MNCs”) with significant global revenues will be required to file CbC reports, in which high level information of the group and the affiliates should be disclosed on a tax jurisdiction-basis. In addition, China shall be granted the right to access and analyze CbC reports filed by foreign-based MNCs that have operations in China.
According to the discussion draft of “Implementation Measures of Special Tax Adjustment” (“Discussion Draft”) released on September 17, 2015, taxpayers that meet one of the following conditions shall prepare a CbC report form of the “Annual Reporting Forms for Related-Party Transactions”:
- The taxpayer is the ultimate holding entity in the group, and its group consolidated revenues for the previous fiscal year exceed RMB 5 billion;
- The ultimate holding entity of the taxpayer is outside China, but the taxpayer is assigned by the group as the reporting entity for the CbC report form.
Though the Discussion Draft is not yet finalized, it presents China’s tax authority’s positions on CbC reporting, which may give some preliminary guidance for MNCs to prepare in advance.
Signing of the CbC MCAA will expedite the release of China’s domestic regulations on CbC reporting.
A separate circular concerning related-party disclosures and transfer pricing contemporaneous documentation is expected to be issued by the end of May.
CBC Reporting Requirements
In CbC reports, MNCs are required to report the following information on a CbC basis, aggregating information from all group entities (including permanent establishments) in each tax jurisdiction:
- Revenues from unrelated parties;
- Revenues from related parties;
- Profit or loss before income tax;
- Income tax paid (on a cash basis);
- Income tax accrued (current year);
- Stated capital;
- Accumulated earnings;
- Number of employees; and
- Tangible assets (other than cash and equivalents).
In addition, MNCs will need to disclose the characterization of each entity in each jurisdiction and its business activities (e.g., manufacturing, sales, distribution, R&D, services, etc.).
Other Progress in International Tax Co-Operation
During the FTA Meeting, China had concluded a series of achievements in international tax co-operation:
- Signing the Memorandum of Bilateral Tax Co-operation with the Canada Revenue Agency;
- Signing the Memorandum of Bilateral Tax Co-operation with Internal Revenue Service of USA;
- Together with the Canada Revenue Agency, putting forward a number of initiatives for building capacity in tax administration;
- Communicating with BRICS countries on in-depth tax co-operation.
China-based and foreign MNCs are advised to pay close attention to upcoming updates on CbC reporting implementation in China.
Key considerations include:
- Higher requirements for tax compliance and risk control capacity on MNCs’ global business;
- Whether the current information systems of an affected taxpayer could support the compliance work;
- How to build an appropriate procedure to collect data and information;
- Assessments that should be made as to which accounting standards should be employed to report the required information, i.e., choosing among parent country GAAP, IFRS or local country GAAP; and
- How to fit CbC reporting within the group’s broader transfer pricing planning and compliance frameworks.
Should the above topics affect your current situation, or should you require further information, please do not hesitate to contact the following practice leaders:
BDO China SHU LUN PAN Certified Public Accountants LLP, a Chinese LLP company, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.