Developing you business in China, Chinese tax health

Developing Your Business in China: Master the Chinese Tax System Part of the TCS Hong Kong European Road show September 2013

Content

China

‒ An overview of Tax Structural Enhancements

‒ An overview of Tax Law Focus

‒ An overview of Tax Development Trends

Hong Kong

‒ Investment Holding Overview

‒ How to promote positive tax health: TCS Hong Kong Solutions

Key Points Contacts

Developing your business in China: Master the Chinese Tax System 2

Welcome to China


Mandarin 101


How are you?

nǐ hǎo ma

I am Good!

wǒ hěn hǎo

Welcome to China.

huān yíng nǐ lái dào zhōng guó

China‟s Geography


Key Facts and Figures (2012)

China is as large as the whole continent of Europe.

There are 22 provinces, 5 autonomous regions and 4 municipal cities.

The highest state body is the National People of Congress (NPC).

China has the worlds 3rd largest Gross Domestic Product (GDP): € 6,348 billion.

The worlds largest Population: 1.354 billion.

The worlds largest Foreign exchange reserves: € 2,478 billion.

A Tax revenue of: € 1,237 billion.

Source: Statistical Communiqué of the People's Republic of China on the 2012 National Economic and Social Development issued on February 22, 2013


Tax Structural Enhancements

Municipal

Country

Head of your Tax Bureau

There is national regulation but local enforcement. Meaning interpretation varies from location to location.

It is important to

understand which body to communicate with as well as their interpretations of regulation.

Be wary of the term „Guanxi‟ (relationships) as the structures within local practices can change.

Having the correct documentation and evidence to maximize compliance is key.


How Many Different local practice

Beijing (Governing body)

Provincial

Tax Structural Enhancements

China now has more participation in various multinational organizations for example:

‒ World trade organization

‒ The Group of 20 (G20)

‒ The United Nations

‒ Joint international Tax Shelter Information Centre

‒ Study Group of Tax shelter administration and research

‒ 101 double tax agreements and 9 Tax information exchange agreements


List of signed tax information exchange agreements

Country Date of Agreement

1 Bahamas 01/12/2009

2 Bristish Virgin Islands

07/12/2009

3 Isle of Man 26/10/2010

4 Jersey 29/10/2010

5 Guernsey 27/11/2010

6 Bermuda 03/12/2010

7 Argentina 13/12/2010

8 Cayman Islands

26/09/2011

9 San Marino 09/07/2012

Tax Law Focus

Scrutiny of Non residents

Expanded Jurisdiction

An era of Transformation

Tougher tax audit/ enforcement

• New anti avoidance rules.

• Equity transfer, tax free recognition.

• Transfer Pricing documentation.

• Tax residency.

• Beneficial owner (BO).

• Business purpose and commercial substance.

• Ongoing release of circulars.

• Transforming China into a service economy.

• Targeted location/industry incentive.

• Information exchange.

• Various transaction disclosure forms.

• Tax internal control.

• Tax administration of non resident with effective management in China.


More Sophisticated

Increased focus on…

Abnormal and frequent profit

fluctuations

Persistent losses or low

profits

Absence or incomplete TP

documents

Non arm’s length pricing

Transactions with related parties in tax

heavens

Expansion despite low

profit or losses

Lower profitability

than industry average

What Makes Me a Target for an Audit?


One or all of the following…

Tax Development Trends

B2V: Business Tax to Value Added Tax

Key Facts:

Nationwide application from 1 August 2013 for all transportation and modern services sectors.

Expand to other industries by 2015.

The 3Vs: VAT registration + VAT invoicing control + VAT compliance.

Annual turnover > RMB 5 million or small scale.

1+ 7 Model From the August 1 2013

Transport Industry

› Land transportation › Water transportation › Air transportation › Pipeline transportation

Certain Modern services industry

R&D and technology service

Culture and creative services

Logistics auxiliary services

Movable property leasing

Authentication & consulting services

Production, broadcasting and distribution of radio: television products




There is No “One China”

Strategy


Southern China

Development of three coastal areas in Guangdong province, subject to reduced CIT of 15% and rebate of individual income tax for qualified talents:

‒ Qianhai in Shenzhen

‒ Hengqin in Zhuhai

‒ Nansha in Guangzhou Subject

Eastern/Central China

Shifting to services, high-value outsourcing, new hi-tech, environmental protection.

Western China

A new wave of inbound investment by offering special fiscal incentives (e.g. reduced 15% tax rate).


Hong Kong: Investment Holding

Overview


Hong Kong Investment Holding

Hong Kong is NOT a tax heaven and there can be many benefits from managing Chinese's business from Hong

Kong such as:

Territorial tax system. No income tax on foreign dividends. No capital gains tax. No dividends/Interest withholding. No foreign exchange control. Advance Rulings available. Keep expanding treaty network. Proximity to China – One country Two Systems Easier to obtain BO status under HK/China DTA

under Circular 165.



Offshore trading in Hong Kong can be used to streamline processes and maximize on business tax savings because:

Offshore trading is non-taxable. Investment holding is non-taxable. Service can be both onshore or offshore Manufacturing via processing in China is 50% taxable

in Hong Kong.

Please see an example on the next slide…



European supplier

Asian Customer


European supplier

Hong Kong Offshore trading

Asian Customer

Example 1: Basic Model

Example 2: Offshore trading via Hong Kong

Profit €50

Profit €20 Profit €30

Profit €30 in Hong Kong, can be claimed offshore.

Structural Example

Summary of Key Points


Red Flags

What puts my company at risk? What are the warning signs of weak tax health in China?

China operations set up for years without regular review.

Many inter-company transactions without proper documentation.

Insufficient in-house resources to keep updated on the latest tax regulations and compliance requirements.

Full reliance on local team to ensure compliance.

Not sure/not updated of local compliance status.

Non resident deriving income from China.


TCS Hong Kong Corporate Solutions

Meeting Management: Fieldwork and meetings with local management/finance managers.

Documentation Review: review selected documentation and tax filing papers.

Risk Management:

‒ Identification of technical issues, quantify under-reporting exposures, suggest remedial action.

‒ Identification of major compliance issues and local irregularities tax reporting.

‒ Resolve time sensitive issues before being targeted by a government tax audit, minimize interest and penalty

Developing you r business in China: Master the Chinese Tax System 20

What we do…

TCS Hong Kong Corporate Solutions

Structuring: Identify tax planning and restructuring options to save tax costs while better managing tax compliance.

Circular 698 review

‒ Substance and BO status of HK/BVI holding structure.

‒ If vulnerable to challenges.

‒ Where 5% dividend withholding rate is NOT automatic anymore.

‒ Tax resident certificate: conditions required to be fulfilled.

Transfer pricing study and documentation management.

Devise efficient cross charging mechanism to avoid trapped cash.

Developing you r business in China: Master the Chinese Tax System 21

What we do…

TCS Hong Kong Individual Solutions

TEMP: Tax Efficient Mobility Program

Review existing staff secondment arrangement

Assess documentation and specific terms

Tax filing mechanism review: Tax under-reporting exposures or tax planning scheme e.g. time apportionment

Recommendations to TEMP including revise secondment contract, re-set staff reporting protocol, performance evaluation system, segregation of duties etc.


What we do…

Key Points

The China and Hong Kong Markets:

There has been a tightening of taxation of non-resident in China.

An increased focus on anti-avoidance including transfer pricing.

Obsolete structures in China e.g. Representative Office.

New regional opportunities across China.

Redefined supply chain model in Hong Kong and China.

China is moving from low-end manufacturing to high value added, environmental friendly manufacturing.

Hong Kong has a wider role in Chinese business development.

International mobilization can trigger corporate exposures, be proactive and transparent.


For more information contact

TCS in France

Web:www.tcs-soregor.com E-Mail: [email protected] Tel. +33 (0) 1 44 78 89 90

Lucien Raveux, Senior Manager of the International Tax and Consulting Department Silvia Létang, Client Relationship Manager - FCCA Audit Ruby Braithwaite, International Marketing Manager

TCS in Hong Kong

Web: www.tcscpa.com.hk E-Mail: [email protected]

Tel: +852 3422 3823

Kenneth Young, Managing Director Leo To, Director Eddy Yeung , Director and head of Tax for China and Hong Kong

Economy & Finance

Developing you business in China, Chinese tax health