China after BEPS, for now…

In last year's sixth edition of China Looking Ahead, the chapter BEPS in China – multi-track developments looked at China's rollout of the BEPS 2015 deliverables. We highlighted China's enhanced big data-driven cross-border tax enforcement efforts. We also outlined the rapid development of China's external tax policy. In this year's edition, a new chapter, A thousand miles begins with a single step: tax challenges under the BRI, separately addresses the Belt and Road Initiative (BRI) tax issues. Consequently, this chapter hones in on the continued China BEPS rollout, tax enforcement intensification, and the gradual reorientation of China's international tax policy to reflect China's evolved role in the global economy.

Before diving into the details of China tax legal and enforcement developments during 2017, it is worth standing back to take in the broader picture. It is clear that the context in which China formulates its international tax policy has rapidly shifted since the commencement of the BEPS project in early 2013. By the end of 2012, on the cusp of the BEPS project launch, China had become the world's third largest outbound investor, after the US and Japan. China's outbound direct investment (ODI) had, starting from minimal levels in 2005, consistently grown at rates exceeding 30%, and was $88 billion for 2012. This still fell short of Chinese inward foreign direct investment (FDI), which stood at $112 billion in that year.

Zoom forward to 2017 and the scene is transformed. China ODI overtook FDI back in 2015. Consequently, China became a net capital exporter for the first time, simultaneously becoming the world's second biggest capital exporter after the US. By 2016, China ODI had surged well beyond inward FDI, with ODI at $183 billion and FDI at $131 billion. While government measures taken in 2017 to temper some of the perceived imprudent ODI activity had an impact on outflows, China appears likely to structurally remain a significant capital exporter for the foreseeable future. Equally notable is that the nature of China ODI has changed significantly over the years, with highly innovative Chinese digital economy companies now making a key contribution to outflows (see further detail in the chapter, One billion Chinese mobile phone users can't be wrong: tax and the digital economy.

While, as yet, there have been no major new tax rule changes reflecting this shift in the underlying tectonic plates of Chinese international tax policymaking, the signs of a shift are already becoming apparent. The steadily increasing numbers of tax disputes facing Chinese MNEs in overseas investee jurisdictions, especially in relation to permanent establishment (PE) challenges, have led to increased demands on the State Administration of Taxation (SAT) to offer assistance through mutual agreement procedures (MAP), as detailed further in the BRI chapter. This may have given Chinese tax policymakers pause for thought when considering where the global tax consensus, as mediated through the G20, OECD, UN and other bodies, should move next on novel digital economy source nexus concepts.

The desire to help Chinese MNEs with the continuous recycling and redeployment of their overseas capital and profits has spurred efforts to revise China's outbound investment tax rules. Enhancements to the foreign tax credit regime, or even a Chinese participation exemption, are now on the cards. This was a highlight of the State Council Circular No. 39, issued in August 2017, which sought to implement the directives of the State Council's January 2017 Circular 5 and President Xi Jinping's January 2017 World Economic Forum speech, which set out China's central role in sustaining globalisation.

On the whole, a shift in China's thinking from that of a 'source' country to that of a 'residence' country is in evidence, including the updated terms of tax treaties with BRI countries, which pushed for much lower withholding tax (WHT) rates (e.g. Russia, Romania, Malaysia double taxation agreement (DTA) updates). This being noted, it can hardly be said that China has let up in the enforcement of its source taxing rights, with better data collection and analysis driving ever more intensive efforts in this space. Furthermore, the relative stagnation of inward FDI in recent years is spurring China to develop new tax measures to encourage inward investment. This includes deferring WHT on outbound dividends where the dividends are used to finance reinvestment in China.

Viewing the entire Chinese international tax policy and administration 'waterfront' together, one may speak of a progressive structural shift in the China tax policy lens towards a 'residence' country perspective, while at the same time technological and organisational developments in the Chinese tax authorities drive ever more effective 'source' enforcement.

In the international tax chapter of China Looking Ahead in previous years we have given an annual round-up of China's stance and progress on each of the 15 items of the BEPS Action Plan. China's policy decisions on which BEPS changes to adopt are determined by the SAT and the Ministry of Finance (MOF) working together. Most rapid progress has been made in the transfer pricing (TP) space, with the BEPS work on revamping TP rules (Actions 8 to 10) 'localised' for China's economic context in SAT Announcement [2017] No. 6 and the BEPS TP documentation revamp (Action 13) given effect in China through SAT Announcement [2016] No. 42 (for details see the chapter, TP in China: all the data in the world). Outside of the TP space, China has made clear how it will update its treaties for the BEPS anti-treaty abuse work (Action 6). This is evident in the selections China has made for multilateral instrument (MLI) (Action 15) updates to China's tax treaty network (discussed below). Further SAT guidance on treaty abuse rules is understood to be forthcoming in the first half of 2018.

However, for other BEPS areas of concern, China's position is yet to be revealed:

• Senior SAT officials have noted in public pronouncements that work is continuing on revised PE recognition and profit attribution guidance – this is anticipated for release in the first half of 2018. China elected not to adopt the revised BEPS PE definition (Action 7) into its tax treaties through the MLI. Therefore, it remains to be seen how much the new guidance looks to 'push out' the boundaries of PE interpretation, operating within the existing PE language of China's DTAs.

• Work is understood to be continuing on anti-hybrid rules, which would be expected to draw on the BEPS Action 2 work. It is noted though that Chinese regulatory and forex rules, as well as aspects of the overall China tax system, make hybrid planning far less of an issue in China than in many developed countries.

• Work is understood also to be continuing on new controlled foreign company (CFC) rules guidance. It is not yet known how far this will depart from the earlier 2015 draft CFC guidance, which had drawn some concepts from the BEPS Action 3 work.

• As far as the BEPS Action 5 review of harmful preferential tax regimes is concerned, China's high and new technology enterprise (HNTE) incentive and the advanced technology service enterprise (ATSE) incentive were both, in 2017, determined by the OECD Forum on Harmful Tax Practices (FHTP) not to be harmful and do not require adjustment.

• It is understood that China's tax policymakers do not intend to roll out the BEPS Action 4 interest limitation rules.

It is anticipated that some of the draft guidance detailed above may be issued, at least in public consultation form, in the first half of 2018. Final details remain to be seen.

China signed the MLI on June 7 2017, committing to the update of virtually all of its tax treaties. Which Chinese treaties get updated through the MLI is a function of two factors. It depends on (i) whether China's nominated treaty counterparties also sign the MLI and (ii) whether they make selections for treaty update that are compatible with the selections made by China. Where both factors are fulfilled, treaty MLI updates may take effect. At the time of writing, 71 jurisdictions had committed to the MLI and these matched to China in 48 cases. This means that nearly half of China's 106 double tax agreements (including treaties with sovereign states and arrangements with non-sovereign jurisdictions) would see MLI updates. The MLI updates cover the treaties with China's major OECD trading partners (with the exception of the US) and partly cover treaties with China's BRICS trading partners (excluding Brazil and India).

The principal update, made to all of China's MLI-updated treaties, is the inclusion of a principal purposes test (PPT). The PPT asks whether 'one of the principal purposes' of a business or investment arrangement, designed and used by a taxpayer, is to gain access to benefits under a DTA (so-called 'treaty shopping'). DTA benefits may be denied where the tax authorities determine this to be the case. In the case of 12 of the MLI-updated treaties, the existing China treaty 'main purpose' anti-abuse rules (mainly included in dividends, interest, and royalty articles) will be replaced. In other cases the PPT article will be inserted in Chinese treaties that did not have existing anti-abuse rules. This will be accompanied by a new treaty preamble, inserted in all the MLI-updated treaties, clarifying that the object and purpose of tax treaties is not meant to facilitate treaty shopping.

Beyond this, other China-selected MLI updates affect a far smaller number of Chinese treaties. A clarified 12-month shareholding period to access dividend WHT reductions will be inserted in seven treaties, a new corporate residence tiebreaker rule (which does away with the place of effective management test) will be inserted in 18 treaties, and the older MAP and TP corresponding adjustment rules in China's nominated treaties will be replaced.

For the MLI updates to China's treaties to take effect it is required that both China and the treaty counterparty first complete their domestic procedures for ratifying the MLI. It is estimated that China's MLI updates will start to be effective from 2019/2020 onwards, with some treaties taking longer for the updates to take effect.

As more of China's treaty partners sign up to the MLI more Chinese treaties will be updated. China could also potentially modify some of its preferences in the MLI, resulting in further treaty updates where these selections match with those of other countries – though for the moment China appears to have no interest in the BEPS PE updates. More intriguingly, as the OECD develops further global tax treaty standards, through the BEPS Inclusive Framework, the MLI provides an existing platform to put these into global effect, including through China's treaties. As such, MLI developments need to be continually monitored by taxpayers and China's tax professionals.

As to the effect of the MLI, a key question is what impact the PPT updates will have on access to benefits under China's tax treaties. Use of DTA benefits in practice had already become highly challenging since the issuance of SAT Circular [2009] No. 601, with its substance-focused beneficial ownership definition. Treaty administrative procedure reform with SAT Announcement [2015] No. 60 has not made access to treaty relief, in practice, measurably easier. In fact, the inconsistent application of Announcement 60 by local tax authorities across China may have made matters more difficult in many cases. It is to be hoped that the forthcoming SAT guidance on treaty abuse (anticipated in the first half of 2018) will take the opportunity to clarify the respective roles of the PPT, beneficial ownership rule, and other anti-abuse provisions in regulating access to treaty relief, provide detailed rules on how they are to be applied, and streamline administration. The extent to which the SAT's PPT guidance draws on the OECD's PPT guidance, set out in the BEPS Action 6 report and supplementary OECD documents, remains to be seen.

As noted above, the renewed political commitments to globalisation, made by China's leadership in early 2017, have been followed by a string of tax proposals to enhance China's investment attractiveness.

State Council Circular 39 sets out a new policy under which foreign enterprises will be able to reinvest the distributed profits of FIEs in China without immediate imposition of the standard 10% dividend WHT. This could be of value as the existing measures to limit tax leakages in reinvestment cases, such as by setting up onshore holding companies in China, are hampered by regulatory limitations. The new incentive could be a great boon to the use of Singapore and Hong Kong offshore holding companies for Chinese operations. Details of the incentive are to be clarified by the end of 2017.

Circular 39 also highlights that enhancements are to be made to the existing regime for granting foreign tax relief for overseas dividends received by Chinese enterprises. This might be by way of improved tax credits or by introducing a participation exemption. The planned improvements are asserted to make it more attractive for MNEs to establish regional headquarter companies in China. Given other regulatory and commercial issues with using a China hub as an ASPAC headquarter (e.g. forex controls, air travel and visa considerations) the success of this incentive in spurring ASPAC headquarters to relocate to China remains to be seen. As noted above though, this will be very welcome for Chinese MNEs expanding overseas.

Very recently, efforts have also been made to clarify China's WHT administration rules, to reduce filing requirements and make the timing of payments more reasonable. To this end the SAT issued Announcement [2017] No. 37 in October 2017 to replace the WHT agent obligations set out in SAT Circular [2009] No. 3, as well as the capital gains calculation provisions of Circular [2009] No. 698.

Announcement 37 reduces the compliance burden on WHT agents somewhat by abolishing the Circular 3 cross-border contract registration requirements, and by extending the WHT payment deadline for arrangements with staggered payment terms. It also modifies the secondary liability obligations for non-resident payees, where a WHT agent fails to withhold, to shift obligations more towards the WHT agent, and in particular to the buyer in equity transfer transactions. At the same time, there are certain uncertainties on how the Announcement 37 rules interact with the Announcement 7 indirect disposal rules, as explored further in the chapter, Chasing deals: tax trying to keep pace with business in China. China's WHT administration is still in need of further improvements, in particular with regard to its interaction with DTA relief, as noted above.

As outlined above, China tax policy work continues on reshaping China's treaty network through the MLI, integrating the BEPS deliverables into Chinese law, and enhancing the tax policies for both ODI and FDI. At the same time, at the 'coal face' of tax administration, China's tax enforcement efforts on cross-border transactions have been getting ever more targeted and effective. A round up of notable enforcement cases reported in the last year is set out below. It should be noted though that, with relatively few cases going to court in China (though the number is increasing), the main sources of information on tax enforcement cases are business and tax-specialist media, as well as the SAT and local tax authorities themselves. The latter make particular use of their official WeChat social media feeds to highlight cases. The details available are generally limited, with relatively little technical discussion, though they do serve to highlight enforcement focus areas and key pitfalls for taxpayers.

As noted above, further SAT guidance is anticipated in the first half of 2018 to clarify the application of treaty anti-abuse rules and treaty relief administration. In the interim, local tax authorities have continued to put the guidance in SAT Circular [2009] No. 601, with its substance-focused beneficial ownership definition at the centre of their enforcement efforts:

• Dividend WHT reductions under China's DTAs continue to be frequently challenged on the basis of insufficient economic substance in the DTA relief claimant entity. Many of the reported cases relate to Hong Kong DTA relief claimants.

• In a case reported by China Taxation News (CTN) in February 2017, the Baotou (Inner Mongolia province) State Tax Bureau (STB) denied dividend WHT DTA relief to a Hong Kong company. This was on the grounds that, while the Hong Kong company's main source of income was from the financing of its subsidiaries, its functional oversight and risk management of the day-to-day operations of the Chinese distributing subsidiary was minimal. The zero Hong Kong taxation of its dividends was taken to strongly imply a tax motivation for the use of a Hong Kong company. While these conclusions do draw on the seven factors set out in Circular 601, the negative inference drawn from non-taxation of dividends in Hong Kong contradicts the guidance in SAT Circular [2013] No. 165, which sought to nuance China-Hong Kong DTA interpretation.

• Similarly, a September 2016 case reported by CTN involved a denial of dividend WHT DTA relief to a Hong Kong company. This was on the basis that, with minimal operations, the extent of the Hong Kong company's assets and staff did not adequately 'match' the dividend income drawn from the Chinese subsidiary. Again, while this draws on the Circular 601 factors, this does not appear to have regard for the Circular 165 guidance. This accepted that, for a holding company, a minimal, but competent, staff could be reconciled to the grant of DTA relief, so long as the holding company had rights of control and disposal over the equity investment and related income. A further factor in this case though was the inability of the Hong Kong company to provide a tax residence certificate – this is an increasing challenge in recent years as the Hong Kong tax authorities have become highly cautious in issuing Hong Kong tax residence certificates to holding companies in Hong Kong.

• Numerous cases of denied dividend WHT DTA relief for holding companies in other jurisdictions have also been reported. A case reported in July 2017 concerned a Barbados tax resident holding company (a subsidiary of a Canadian mining group). This sought dividend WHT DTA relief on dividends received from a Qinghai province-registered company under the China-Barbados DTA. As the Qinghai STB lacked sufficient experience they forwarded the case directly to the SAT for handling. The SAT concluded that the Barbados company lacked sufficient staff and capital to assume and manage the risks associated with its investment in the Chinese company. It also noted the lack of any tax paid in Barbados. The SAT concluded that DTA relief should not be allowed.

• Beyond dividend WHT DTA relief cases, there continues to be reports of capital gains WHT DTA relief being denied on the basis that the DTA relief claimant lacks 'beneficial ownership' of the disposed China equity. This is a long-contested matter in the China tax treaty interpretation space, going back to the 2010 Xuzhou (Jiangsu province) case. The beneficial ownership requirement, included in the dividends, interest and royalty articles of tax treaties, is not included in the capital gains article of treaties. Nonetheless, starting with the Xuzhou case, the Chinese local tax authorities have 'read this into' treaty capital gains articles. Senior SAT officials have at various points clarified that they considered this not appropriate and that abuse of capital gains WHT DTA relief would need to be challenged using a specific DTA anti-abuse rule or the domestic law general anti-avoidance rule (GAAR) – this has not stopped local tax authorities taking this line in practice. The latest example is a denial of relief to a Hong Kong company's disposal of China equity on this basis by the Huzhou (Zhejiang province) STB, reported by CTN in September 2016.

What is clear from the above cases is that there is a pressing need for the forthcoming SAT treaty abuse guidance to clarify the manner in which the various treaty anti-abuse rules apply and interact with each other. The rollout of the PPT throughout China's treaty network provides a good opportunity to draw a line between the beneficial ownership concept, as a measure of the degree of control that a treaty relief claimant has over an investment and the related income flows, and tax purpose-focused anti-treaty shopping rules. The latter analysis would ideally occur solely within the scope of the PPT/domestic GAAR. There is also a continuing need for clarification that capital gains WHT DTA relief will be challenged under the PPT/GAAR, rather than by reading the beneficial ownership requirement into capital gains articles.

As in many other countries around the world, PE exposures have been an area of increased concern for foreign investors in China in recent years. With senior SAT officials repeatedly marking out PE as a focus area for increased local tax enforcement efforts, many foreign investors have been re-examining their potential PE risks and adjusting their contractual arrangements and operating protocols accordingly. As noted above, China made a policy decision not to expand agency PE, with reference to the BEPS changes, through the MLI. In contrast to many other ASPAC countries (e.g. Indonesia, Thailand, and Australia), China has not yet sought to introduce any novel digital economy tax nexus concepts. Consequently, enhanced PE enforcement has continued, in the interim, to focus on traditional PE issues in China, notably service PE:

• Equipment installation and calibration services, provided by a foreign company in connection with supply of equipment, are a notable service PE focus area. Pingtan (Fujian province) STB was reported by CTN in January 2017 to have imposed service PE taxation on a Japanese company, which had supplied equipment and installation under a single contract, with no separate billing of services. Administratively-speaking, local tax authorities readily pick up on and scrutinise service payments, as where these exceed $50,000 they must be recorded with the tax authority. Bundling installation into the equipment supply contract avoids the recordal requirement as payments under goods supply contracts require no recordal. The Pingtan STB identified the supply from a general screening of online business news reports – a tax audit investigation showed the visiting Japanese installation staff to have been in China for a period exceeding the service PE treaty time threshold, and tax was imposed. Similarly, a July 2017 CTN report noted that the Jiyuan (Hainan province) STB had imposed service PE taxation on an Italian company that had dispatched staff to China to install and calibrate equipment sold by the Italian company to a Chinese buyer.

• It is notable that, going in the other direction, there have been numerous reported cases of Chinese equipment companies running into similar PE issues overseas. In India many of these have become high-profile court cases (e.g. Shanghai Electric Group Co. Ltd. v. DCIT [2017], ZTE Corporation v. ADIT [2016]). The SAT has frequently got involved in resolving such cases through the MAP, and has repeatedly flagged to Chinese MNEs its willingness to assist, including through highlighting individual resolved cases over WeChat and on their website. For example, the SAT website in October 2016 reported the case of Chongqing Wukuang Machinery Export Ltd., which had been subject to a PE challenge in Vietnam on a supply of equipment and installation services. The company was willing to concede PE tax on the service element but not on the equipment supply – through SAT MAP support the company succeeded in having the Vietnamese authorities stand down on this point.

It is striking that the increase in the number of PE disputes for Chinese companies overseas may be having an impact on overall China policy thinking on PE. Certainly, China is getting more effective at using data to track and challenge inbound PE cases, whether this is data pooled between Chinese regulatory bodies or the details are obtained from public sources, for which extensive use of 'web crawler' technology is notable. However, whereas at an earlier point in time China would have been considered a prime candidate for adoption of expanded PE and source nexus concepts, this can no longer be said with the same confidence. The upcoming new SAT PE guidance will be heavily anticipated to see whether China tax policymakers use a revised interpretation of existing treaty PE language to expand its scope, or whether limits will be set on how far China plans to push PE, with an eye to the position of China 'going out' enterprises.

China began to use its CFC rules in 2014, with the Shandong and Hainan cases, and followed this in 2015 with the Urumqi case. The trend for increased use of CFC rules has continued, and CTN reported in June 2017 of a CFC tax imposition by Suzhou Industrial Park (Jiangsu province) Local Tax Bureau (LTB) against a Hong Kong subsidiary of a Suzhou-registered company. Relative to the earlier CFC cases, the report on this case provides a much higher level of detail on the rationale used by the tax authorities in deciding to use the CFC rules.

The Hong Kong company had, in its registration with the Jiangsu foreign investment promotion agency, stated its main business to be management service provision. However, the Suzhou Industrial Park tax authorities observed, from the regular CFC reporting provided by the Chinese company, that the income of the Hong Kong company consisted mainly of investment returns, including equity disposal gains (accumulated in 2014 and 2015). As these were offshore sourced these fell outside the Hong Kong tax net and suffered no Hong Kong tax.

The Chinese CFC rules impute the income of a foreign controlled company to the controlling Chinese company where the effective tax rate in the overseas jurisdiction is significantly lower than the Chinese corporate income tax (CIT) rate (12.5% rate indicated by the guidance), and where non-distribution of income back to China is not justified by reasonable business needs of the CFC. There is a let out where the CFC's income is mainly from active business operations, which is left undefined by the law and guidance.

The tax authorities rejected the taxpayer's assertion that the low tax criterion was not met. While Hong Kong's statutory CIT rate is 16.5%, the effective rate in this case was 0%. The authorities also noted that Hong Kong does not appear on the China CFC white list.

Against the taxpayer's argument that the retention of income and gains offshore, and its non-distribution back to China, was for the reasonable purposes of long-term operational expansion, the authorities observed that the proceeds of the equity disposals had been simply left as accounts receivable, and had not been used for the expansion of the business or reinvested. As to the argument that the CFC income was mainly from active operations, the tax authorities observed that the international tax consensus was to regard dividends, interest and capital gains as passive in nature.

It is notable that, in defining reasonable business purposes, and in setting out the active income-passive income divide, the authorities appear to have drawn on the yet-to-be-finalised draft China CFC guidance issued in September 2015. The finalisation of this guidance (anticipated in the first half of 2018) and the continued reporting of CFC enforcement cases should progressively bring greater clarity to the bounds of China's CFC rules.

The SAT and provincial tax authorities have for many years now been flagging for taxpayers their enhanced tax audit capabilities deriving from greater sources of pooled data, both from domestic and overseas sources, and their big data analytical capabilities. Numerous cases where the Chinese authorities reached out to their overseas counterparts through EOI on request (under revamped treaty EOI provisions) are highlighted on tax authority official websites and WeChat feeds, as well as in the Chinese business and tax media:

• A December 2016 CTN report highlighted how in 2016 Shenzhen Guangming (Guangdong province) STB initiated an EOI request with a foreign jurisdiction. This followed the recordal of a CNY 200 million ($30 million) outbound related party service payment by a local textile industry FIE. The fluctuating cost base of the FIE and lack of contractual clarity on the FIEs risks and responsibilities spurred the EOI request. On clarification being obtained from overseas, the service fee tax deduction was adjusted downwards, raising an additional CNY 7 million in tax and penalties.

• A November 2017 CTN report highlighted how Guangzhou (Guangdong province) LTB used big data analysis and matching to detect tax evasion by the operator of a large-scale wholesale market. Guangzhou LTB, working together with the public security authority, obtained electronic data from the shareholder of the operating enterprise. The data revealed that personal bank accounts of the shareholder were used to handle off-account enterprise business income and expenditures over a 10-year period. CNY 690 million in tax and penalties was imposed.

• A September 2016 case reported in CTN noted how Yanqing (Beijing municipality) STB, following an information exchange with the local Commission of Commerce, detected an equity transfer meriting further tax audit. The transfer, of equity in a domestic enterprise from another local enterprise to a foreign transferee, was determined taxable and CNY 12 million in tax and penalties was imposed.

• A February 2016 CTN report noted efforts by Haian (Jiangsu province) STB to build up a mechanism for cross-border tax information with other government agencies, including local MOF, the Ministry of Commerce (MOFCOM), and the Industrial Development Bureau. Under this mechanism, a WeChat group for these authorities is used to share cross-border transactions and identify those with high-risk. In 2015 this collaborative initiative led to the collection of further tax of CNY 52 million.

Starting from September 2018, China will commence automatic EOI (AEOI) via the OECD common reporting standard (CRS) mechanisms, opening a new chapter in the targeted effectiveness of Chinese cross-border tax enforcement (see the chapter, A brave new world in tax transparency: CRS in China, Hong Kong and Taiwan).

As noted in the international tax chapter of last year's China Looking Ahead, taxpayers in China have been growing in confidence in bringing disagreements over tax assessments into the mechanisms for formal tax dispute resolution, and increasingly going to court. Last year, we noted cases rising to the provincial people's court level in relation to an indirect offshore disposal (The Children's Investment (TCI) fund), the application of the CIT reorganisation relief (Illva Saronno), and a China-US treaty case concerning dual employment arrangements into China.

In 2017 these developments carried even further, with the first ever case decision by the Beijing-based Chinese Supreme People's Court (SPC) released online in April 2017. This was an appeal by Guangzhou Defa Housing Construction Co., Ltd. (Defa) against an imposition of tax and penalties by the Guangzhou (Guangdong province) LTB, following an earlier administrative review and hearings at local and provincial court levels. Defa disputed an additional assessment of business tax and local charges, as well as late payment surcharges (LPS), on a sale of land through auction. The authorities asserted that the auction price was unduly low, providing a range of comparative price information from the sale of other parts of the same estate, comparable Guangzhou property, as well as valuer assessments. Ultimately the SPC decided for the tax authorities on the substantive matter, but decided for the taxpayer on the LPS, taking a favourable interpretation of the penalty provisions that the tax authorities would need to prove the taxpayer to be at fault to sustain the imposition.

More notable than the specifics of the decision, the fact that tax cases are now starting to go all the way to SPC level in China is an important development. It opens the way for an increasing body of court case guidance to emerge in the China tax space and makes court appeal of tax cases an increasingly relevant option for taxpayer disputes, including in the cross-border tax space. In fact, the TCI fund indirect offshore disposal case was also appealed to SPC level, though the court decided (September 2016) to reject the application of TCI for retrial, meaning the imposition of CIT by the Hangzhou (Zhejiang province) tax authority was affirmed.

In relation to obtaining greater certainty for taxpayers on cross-border transactions, another emerging trend is for tax authorities to grant private tax rulings on cross-border transactions. In early 2016, a municipal STB in Hubei province was reported to have issued a private tax ruling covering the application of DTA dividend WHT relief rules to distributions made by a domestic enterprise. This followed on from reports of private rulings granted in 2015 by a municipal tax bureau in Jiangsu province in relation to cross-border reorganisation relief.

The extension of private tax rulings to cross-border transactions (local tax authorities have, with SAT encouragement, been granting these to purely domestic transactions for several years) is important in the context of the 2015 abolition of tax authority pre-approvals for most transactions. A greater expansion of private tax rulings is envisaged from 2018 when the new Tax Collection and Administration (TCA) Law, which includes specific provisions on rulings, is expected to be finalised.

In 2018, with the upgrade of China's tax relief for the foreign income of Chinese enterprises, the finalisation of the CFC rule guidance, and the clarification of China's position on PE recognition, China's evolving thinking on the appropriate balance between residence and source taxation should become more evident. In parallel, further tax court cases and the finalisation of the TCA Law, with the institution of advance rulings, should further solidify tax certainty. This is at the same time as technology-driven enforcement and the tax data revolution heralded by CRS to drive a much more transparent and compliant China tax environment.

In the Chinese zodiac, 2018 is the Year of the Dog, and a time for action. This certainly looks to be the case in the international tax space.

Chris Xing

Partner, Tax KPMG China 8th Floor, KPMG Tower, Oriental Plaza 1 East Chang An Avenue Beijing 100738, China Tel: +86 (10) 8508 7072 christopher.xing@kpmg.com Chris Xing is the KPMG Asia Pacific regional leader for international tax. He has assisted numerous international and domestic Chinese private equity funds and corporations on tax due diligence, as well as a wide range of tax issues concerning cross-border transactions, corporate establishment, mergers and acquisitions (M&A) and other corporate transactions in China and Hong Kong. Chris has also assisted multinational enterprises with undertaking investments in China, restructuring their business operations and devising tax efficient strategies for implementing China business operations and profit repatriation strategies. Chris is a member of the mainland taxation sub-committee of the Hong Kong Institute of Certified Public Accountants and is an editor of the Asia-Pacific Journal of Taxation. He is also a regular speaker and writer on tax matters, and has published numerous articles on Chinese taxation in various journals. He has also been interviewed and quoted in the New York Times, Wall Street Journal and BBC World News.

Conrad Turley

Director, Tax KPMG China 8th Floor, Tower E2, Oriental Plaza 1 East Chang An Avenue Beijing 100738, China Tel: +86 10 8508 7513 Fax: +86 10 8518 5111 conrad.turley@kpmg.com Conrad Turley is a tax director with KPMG China and heads up the firm's national tax technical centre. Now based in Beijing, Conrad previously worked for the European Commission Tax Directorate in Brussels, as well as for KPMG in Ireland, the Netherlands and Hong Kong. Conrad has worked with a wide range of companies on the establishment of cross-border operating and investment structures, restructurings and M&A transactions, both into and out of China. He is a frequent contributor to international tax and finance journals including the International Tax Review, Tax Notes International, Bloomberg BNA and Thomson Reuters, and was principal author of the 2017 IBFD book, 'A new dawn for the international tax system: evolution from past to future and what role will China play?'. He is also a frequent public speaker on topical China and international tax matters. Conrad received a bachelor's degree in economics and a master's degree in accounting from Trinity College Dublin and University College Dublin, respectively. He is a qualified chartered accountant and a registered tax consultant with the Irish Taxation Institute.

Jennifer Weng

Partner, Tax KPMG China 26th Floor, Plaza 66 Tower II 1266 Nanjing West Road Shanghai 200040, China Tel: +86 21 2212 3431 jennifer.weng@kpmg.com Jennifer Wang is a partner based in Shanghai. She has more than 20 years' experience in advising multinational clients across a wide range of sectors such as the consumer, industrial and manufacturing, real estate, logistics and financial industries in relation to appropriate corporate holding and funding structures to conduct their proposed business activities in China. She has helped multinationals identify and address tax and foreign exchange controls issues arising from their operations, and provided advice on tax efficient expansion and restructuring planning and repatriation of funds from China. Jennifer is a member of the Chinese Institute of Certified Public Accountants (CICPA) and a Certified Tax Agent in China.

Karmen Yeung

Partner, Tax KPMG China 8th Floor, Prince's Building 10 Chater Road Central, Hong Kong Tel: +852 2143 8753 karmen.yeung@kpmg.com Karmen Yeung has extensive experience of providing various corporate and individual tax advisory services to foreign investment enterprises in China. She has advised Hong Kong companies and multinational enterprises on structuring their investments in China and establishing tax efficient supply chain models. In particular, she advises companies on the form of investment, corporate restructuring and design of tax efficient supply chain models from sourcing and manufacturing to distribution and retailing in China, from the corporate income tax, transfer pricing, value added tax and customs duty perspectives. Karmen is a fellow of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants. She is president of the Taxation Institute of Hong Kong, a co-opted member of the general committee of the Federation of Hong Kong Industries, council member of Asia-Oceania Tax Consultants' Association, honorary council member of the China Certified Tax Agents Association and a Certified Tax Adviser in Hong Kong.