In China, More Advance Rulings, More Cases Going to Court

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Mark Melnicoe

May 26 — Chinese authorities are making greater use of advance rulings, and courts increasingly are being used as a place to resolve legal disputes—signs China is bringing its tax system up to date, Deloitte China partners said.

“The written advance ruling is something most interesting to us in terms of giving another certainty prior to a transaction happening,” Vicky Wang, a Deloitte tax partner in Shanghai and moderator of the firm's May 26 webcast, said in response to a question from Bloomberg BNA. “That's a very welcome practice, and it remains to be seen if this becomes a recurring practice available to most taxpayers.”

China has no formal advance notice system in place, Wang said. During the webinar, she and others reviewed some of the top cases from 2015, as well as cases involving indirect transfers, beneficial owners and controlled foreign corporations. They also cited increasing use of information exchange systems with other countries to help catch companies and individuals seeking to avoid taxes.

Tax Authorities Willing to Help

Jie Liang, another Shanghai-based tax partner at Deloitte, pointed to a November 2015 case involving a German company that merged with its Hong Kong subsidiary, which in turn controlled a pair of companies in the Jiangsu Province city of Wuxi. The Wuxi companies applied for an advance ruling on special tax treatment, as the transaction fell under Bulletin 72 of the State Administration of Taxation, which concerns cross-border equity transfers. The tax bureau agreed and granted the desired tax treatment.

The decision wasn't the most important aspect of the case, the Deloitte partners said, instead citing the willingness of Chinese tax authorities to issue such help in advance. From this case, Liang said, it is evident that the SAT has been approving advance rulings—especially for large enterprises—on a trial basis since 2012. In addition, she said, various local tax authorities, such as those in Anhui and in Xiamen, have considered “a few other cases.”

Most Applicants Big Companies

Liang said the majority of companies applying for advance rulings “are still very big enterprises.”

She said the exposure draft of the revised tax administration law published at the beginning of 2015 “also mentioned advance ruling arrangement, which seems to be a positive signal that the government is considering this.”

However, Liang warned, progress could be undone by the SAT or by provincial authorities, as the idea is at the cutting edge of tax policy in China. From a legal and technical analysis standpoint, however, such rulings should survive, she said.

Much of the recent attention in China has focused on its response to the Organization for Economic Cooperation and Development's action plan to combat tax base erosion and profit shifting and how the country plans to tax companies with overseas operations.

Complex CFC Case

Shanice Siu, a Deloitte tax partner in Shenzhen, described a complex controlled foreign corporation case in which a large chemical company from Shandong Province set up a holding company in Hong Kong to use for outbound trading and investment. The holding company, in turn, created a third company, which controlled 90 percent of three more companies, all located back on the Chinese mainland. The third company was then sold to a Dutch company at a profit of 300 million yuan ($45.8 million), which wasn't a taxable event in Hong Kong.

But the transaction turned out to be taxable in China once authorities looked at the myriad details to determine that the company making the sale had no business substance.

“We notice the Chinese tax authorities are paying more attention to Chinese companies obtaining substantial profits overseas,” Siu said. “We expect there will be a greater enforcement of anti-avoidance and CFC rules, which will of course have a great impact on the Chinese companies going outbound.”

Changes to CFC Rules Likely

Current CFC rules in China are murky, making it hard to assess whether an offshore company is really engaged in active business and how to prove there is a commercial need to keep its profits overseas, Siu said. But changes are likely coming, she said.

“We are aware there might be changes in the CFC rules as a part of the revision of the anti-avoidance rule,” Siu said.

“Based on the latest and official draft, the CFC rule is being considered by the SAT,” she said. The administration will look at “whether the CFC's profits are derived from active business” by taking into account such factors as the business operations of the CFC, the scale of its employment in its offshore location, its functions, whether it pays overseas tax and other factors, she said.

To contact the reporter on this story: Mark Melnicoe in Shanghai at

To contact the editor on this story: Molly Moses at

For More Information

Deloitte's slides from the webinar detailing the cases are at

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