As in other jurisdictions, the COVID-19 pandemic continued to cause disruption and challenges for individuals and businesses in China throughout 2021. The Chinese government has been taking measures to strike a balance between reviving the economy and addressing the pandemic.
For multinational companies (MNCs) operating in China, an important China tax development is the introduction of a new simplified process for the administration of unilateral advance pricing arrangements (UAPA). The new process features fewer steps, specified timelines and one-off submission of application documents. Previously, MNCs were discouraged by the potential cost, time commitment and uncertainty involved in the process of concluding advance pricing arrangements (APA) with the Chinese tax authorities. The new process demonstrates that the Chinese tax authorities are more willing to improve MNCs' experience when managing their transfer pricing matters in China. We believe the new process is a useful and practical tool for MNCs. MNCs that are interested in negotiating and concluding APAs with the Chinese tax authorities are recommended to discuss this with their tax advisers to evaluate whether they could take advantage of the new rules. The topic is discussed in section 2.
With respect to individual income tax (IIT), compliance is perhaps the theme of the year. By issuing Bulletin [2021] No. 69, the State Taxation Administration (STA) makes clear that it will be strengthening the administration of equity incentive plans in China and enforcing collection of IIT on income from participating in these plans. MNCs that have implemented equity incentive plans or are contemplating implementing any such plans should comply with the filing and reporting requirements under the new and existing rules. The topic is discussed in section 3.
Another trend we have observed over the recent years is the proliferation of regional free trade ports and modern service cooperation zones, and regional tax policies associated with the establishment of these special regions. At the top of the list are Hainan Free Trade Port, Qianhai Modern Service Zone (Shenzhen), Lin'gang New Area (Shanghai) and Henqing Guangdong-Macau Cooperation Zone. While these regions differ in how they position themselves strategically to attract domestic and foreign investment, they are similar in terms of formulating and providing tax incentive policies to attract investment. MNCs with a presence close to these regions may consider whether an investment in these regions makes sense from a strategic perspective. In the decision making process, considerations should be given to the geographic location, supply chain, cost of establishing operations in the regions, etc. in addition to the potential tax saving. Transfer pricing policies should be planned and implemented commensurate with the function and risk profile of the enterprises in the regions to justify the reasonableness of the overall transfer pricing arrangement. Further, MNCs should be aware that detailed implementation guidance has yet to be released for some regions, meaning the local governmental authorities may have some flexibility to adjust details of the tax incentive policies and make them more competitive compared to other regions. MNCs that are interested in investing in the regions are advised to obtain assistance from their tax advisers when communicating and negotiating with the local governmental authorities. Finally, MNCs that have already established operations in the regions should ensure they continue to be eligible for the tax incentive policies by satisfying the business substance requirements and complying with the compliance and documentation requirements. The topic is discussed in section 4.
With respect to enterprise income tax (EIT), the tax policies implemented in 2021 reflect the Chinese government's policy priorities that emerged in recent years, including: (1) tax and fee cuts to support the development of real economy and vital market players, in particular, SMEs and sole proprietors in response to the pandemic; and (2) tax incentives to encourage scientific and technological innovation and enterprises in the manufacturing industry in response to the rapidly changing international landscape. 2 In addition, Bulletin [2021] No. 34 extends the tax exemption policy on bond interest earned by foreign institutional investors. The policies are discussed in section 5.
In section 6, we will discuss Bulletin [2021] No. 21 and Bulletin [2021] No. 17, which extends the deed tax (DT) and land value appreciation tax (LVAT) exemption treatment for qualified enterprise restructuring. Enterprises that contemplate restructuring involving real properties should evaluate whether they are eligible for the exemption and retain relevant documents for inspection.
In section 7, we will discuss the Stamp Duty Law of China ("SD Law"). The SD Law simplifies the tax items that should be subject to SD and reduce tax rates for certain items. The passage of the SD Law is another step that the Chinese government has taken to implement the principle of statutory taxation in China.
Last but not least, in section 8, we will discuss the China-Spain Double Taxation Agreement (DTA) that went into effect on 2 May 2021 and replaced the 1990 tax treaty between the two countries. Further, a new treaty was signed with Rwanda, which has yet to be ratified.
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