China

  1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
  2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
  3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
  4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
  5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation 1 The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.  (your State? the other State concerned? both States?)
  6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
  7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
  8. Is tax collection suspended during the procedure?
  9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
  10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?

In China, the legal bases for eliminating double taxation are twofold:

  • Double tax treaty concluded between China and the other State. For example, the tax treaty between China and France for the avoidance of double taxation where article 26 provides for the mechanism of negotiation between tax authorities of France and China to resolve double taxation issues; and,
  • Domestic laws:
    1. transfer pricing rules, namely “Implementation Measures of Special Tax Adjustment Implementing Measures” issued by the State Administration of Taxation (also referred to as “TP Rules”), effective as of 8 January 2009. Chapter 11 of these Measures provides for the general provisions in this regard; and,
    2. the procedural law, “Implementation Measures for the Mutual Agreement Procedure of Tax Treaties” issued by the State Administration of Taxation ((also referred to as “Procedural Rules”), effective as of 1 November 2013.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?

To the best of our knowledge, no arbitration procedure is provided for by tax treaties in China.

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?

The time spent on domestic application by a taxpayer in People’s Republic of China (“PRC” hereafter) and subsequent review procedures is around 35 working days, according to the Procedural Rules.

Time for implementing the double taxation elimination should not be longer than three months after the PRC tax authorities and the other tax authorities reach an agreement on the case and related tax refund is initiated on PRC’s side.

However, there is no standard regulation regarding the time limit for the negotiation between tax authorities. Time spent on mutual negotiations between the PRC tax authorities and the other tax authorities depends on various factors such as the complexity of the case, responsiveness of the other tax authorities including their review procedures and formalities. A general assessment of the time needed for the mutual negotiation stage is difficult.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?

In China, the starting point is the receipt of the notification of reassessment. If the taxpayer fails to initiate such procedure within (in principle) three years from the starting point, tax authorities should no longer accept the request. For some countries having an “old” tax treaty with China, such period may be shorter than three years (such as in the tax treaty with Italy) or no time period can be provided by the tax treaty (such as in the tax treaty with the UK), but the Chinese domestic law provides for the three years period. In practice, we consider that this three years period will be applied by Chinese tax authorities.

In practice, we suggest to have a discussion with tax authorities before initiating the procedure.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation 1 The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.  (your State? the other State concerned? both States?)

In this case, the other State concerned should receive the application for the international procedure.

6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?

A procedure to eliminate double taxation can be initiated if all the following conditions are met:

  1. taxpayer considers that there is a double taxation in different jurisdictions further to the notification of a reassessment and consequently initiates the procedure within the three years from receipt of the notification of reassessment;
  2. the taxpayer is a Chinese tax resident or a Chinese citizen who can initiate the procedure according to Article 9 or 10 of the Procedural Rules;
  3. the application is submitted within the time limit set forth in the double tax treaty;
  4. the other country, party to the tax treaty has violated or may have violated the tax treaty; and,
  5. the taxpayer has evidences to prove that the othercountry has violated the tax treaty or the suspicion of such violation cannot be excluded.

In case only part of the above conditions are met, a procedure to eliminate double taxation can be initiated if tax authorities consider double taxation as serious or in case the decision of the other tax authorities may harm tax interests of China and a mutual agreement procedure is necessary.

Documents to be provided are as follows:

  • Standard application form to start mutual negotiation procedure;
  • Any other supporting documents.

The national tax authorities, at provincial level, in charge of corporate income tax (for corporate tax residents) are competent.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?

  1. Taxpayer has deliberately hidden important facts or has provided false documents;
  2. Taxpayer has refused to provide necessary documents required by tax authorities;
  3. Taxpayer or tax authorities has failed to obtain necessary information to move the mutual agreement procedure forward;
  4. The tax authorities of the other country has refused or stopped mutual negotiations;
  5. Any other reason which has made the proceeding impossible or which has led the procedure to fail the expected goal.

8. Is tax collection suspended during the procedure?

Tax collection will not be suspended unless tax authorities consider the suspension as necessary.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?

It depends on the negotiation with tax authorities. In principle, the correlative adjustments reassessed in the other State should be performed at once because, according to the Procedural Rules, the implementation time should not be longer than three months after the PRC tax authorities and the other tax authorities reached an agreement on the case and related tax refund is initiated on PRC’s side.

If the international procedure to eliminate double taxation results in a decrease of tax in PRC, it does not give rise to the payment of interest to the local taxpayer since no regulation provides for it.

In case Chinese tax authorities agree to decrease the royalties, interest or rentals flows with foreign affiliated companies, the related withholding tax paid to PRC will not be adjusted by Chinese tax authorities.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?

No. It is not possible in China

Authors

Nicolas Zhu
Nicolas Zhu
Head of Lifesciences and Healthcare Sector Group, CMS China