The State Administration of Taxation will sign and update more tax treaties and step up the implementation of these agreements to help Chinese companies investing in countries that form part of the “Belt and Road Initiative”, an official from the agency told China Daily.
The SAT will also step up Mutual Agreement Procedures, a bilateral consulting mechanism, to help Chinese companies involved in international tax disputes, said Liao Tizhong, director-general of the international taxation department at the SAT.
Tax treaties reduce or avoid double taxation, which involves individuals or companies from one country paying tax in another country for the same income. Since 1983, China has signed 100 such pacts, the latest with Chile in May.
Chinese companies benefit from these treaties by enjoying generally lower withholding tax rates on interest, dividends and royalties, among other benefits stipulated. The treaties not only prevent double taxation, they also offer certainty to taxpayers.
In 2014, the SAT discussed more than 20 MAP cases with its foreign counterparts, and concluded five of them, the disputed tax of which was about 500 million yuan ($80 million).
When the Foreign Ministry conducted a survey of Chinese companies in Africa last year, it found that tax-related issues accounted for 60 percent of the problems these companies encountered. Most of these companies are small ones, without due awareness of seeking treaty protection or adequate knowledge of how a treaty works.
According to Liao, there are a few countries along the Silk Road Economic Belt and the 21st Century Maritime Silk Road with which China has not signed tax treaties. In Africa, where Chinese investors are plentiful, only about 10 treaties exist. The figure is less than 10 in Latin America.
Liao said many old treaties need overhaul to keep up with the evolving bilateral economic interactions, and also to accommodate with the fast-changing international tax rules.
For example, a major State-owned enterprise last year rented equipment to its subsidiary in an unidentified treaty country. The country levied tax on the rent the SOE received according to its domestic rates, instead of the withholding tax rate previously agreed by the two countries in the tax treaty.
The SOE filed a MAP request with the SAT, which then consulted with the tax authority in the country. The authorities agreed to apply the treaty rate, but with a condition: that the tax bill first be paid under the domestic rate, with the difference to be refunded.
The SAT insisted the treaty tax rate should apply from the start. The other country eventually agreed. The settlement saved the equivalent of $20 million for the SOE.
The savings from such agreements can be considerable in light of the cost of having capital tied up under a “pay and refund” system. Drawing on the experience from such cases, the SAT now tries to include clauses in new or updated treaties that clearly exclude the “pay and refund” model.
Tax treaties often include clauses specifying that when a treaty country levies tax on a Chinese company’s “permanent establishment” in that country, the scope should be limited to profits attributed to the establishment, instead of all profits.
To take one example, a Chinese company might sign an engineering procurement construction contract with a company in another country to build a power plant and then set up a “permanent establishment” in that country to facilitate the project.
But when tax authorities in the overseas jurisdiction calculate the taxes due, they might not only include the value attributable to the permanent establishment within their borders when it comes to onshore equipment but also offshore equipment that was exclusively finished within China.
“There are increasing tensions on the interpretation and application of tax treaties as well as corresponding MAP cases. The SAT’s strengthened role in this area is a positive for companies,” a report by Ernst & Young said.
“Compared with big companies, small companies are less familiar with foreign countries’ tax policies and the treaties we signed with those countries. At present, more than 90 percent of the companies who seek our assistance with MAPs are large companies,” Liao said.
“Our advice is, on the one hand companies should abide by foreign laws when operating abroad. On the other hand, they should familiarize themselves with bilateral tax treaties and use those as a powerful weapon to protect their interests,” he said.