Developing your business in China: Master the Chinese tax system. Find out about: - The enhancements of Chinese tax structure - The new legal focus of the Chinese government - Tax Development Trends - How to promote positive corporate and individual tax health and TCS Hong Kong Solutions

1. Developing Your
Business in China:
Master the Chinese
Tax System
Part of the TCS Hong Kong European Road show
September 2013

2. Content
 China
‒ An overview of Tax Structural Enhancements
‒ An overview of Tax Law Focus
‒ An overview of Tax Development Trends
 Hong Kong
‒ Investment Holding Overview
‒ How to promote positive tax health: TCS
Hong Kong Solutions
 Key Points
 Contacts
Developing your business in China: Master the Chinese Tax System 2

3. Welcome to China
Developing your business in China: Master the Chinese Tax System 3

4. Mandarin 101
Developing your business in China: Master the Chinese Tax System 4
How are you?
nǐ hǎo ma
I am Good!
wǒ hěn hǎo
Welcome to
China.
huān yíng nǐ lái dào zhōng guó

5. China‟s Geography
Developing your business in China: Master the Chinese Tax System 5

6. Key Facts and Figures (2012)
 China is as large as the whole continent of Europe.
 There are 22 provinces, 5 autonomous regions and 4 municipal cities.
 The highest state body is the National People of Congress (NPC).
 China has the worlds 3rd largest Gross Domestic Product (GDP):
€ 6,348 billion.
 The worlds largest Population: 1.354 billion.
 The worlds largest Foreign exchange reserves: € 2,478 billion.
 A Tax revenue of: € 1,237 billion.
Source: Statistical Communiqué of the People's Republic of China on the 2012 National Economic and Social Development issued on
February 22, 2013
Developing your business in China: Master the Chinese Tax System 6

7. Tax Structural Enhancements
Municipal
Country
Head of your Tax
Bureau
 There is national regulation
but local enforcement.
Meaning interpretation varies
from location to location.
 It is important to
understand which body to
communicate with as well as
their interpretations of
regulation.
 Be wary of the term „Guanxi‟
(relationships) as the
structures within local practices
can change.
 Having the correct
documentation and
evidence to maximize
compliance is key.
Developing your business in China: Master the Chinese Tax System 7
How
Many
Different
local
practice
Beijing
(Governing body)
Provincial

8. Tax Structural Enhancements
China now has more participation in various multinational
organizations for example:
‒ World trade organization
‒ The Group of 20 (G20)
‒ The United Nations
‒ Joint international Tax Shelter Information Centre
‒ Study Group of Tax shelter administration and
research
‒ 101 double tax agreements and 9 Tax information
exchange agreements
Developing your business in China: Master the Chinese Tax System 8

9. Tax Law Focus
Scrutiny of Non
residents
Expanded
Jurisdiction
An era of
Transformation
Tougher tax
audit/
enforcement
• New anti avoidance rules.
• Equity transfer, tax free recognition.
• Transfer Pricing documentation.
• Tax residency.
• Beneficial owner (BO).
• Business purpose and commercial
substance.
• Ongoing release of circulars.
• Transforming China into a service
economy.
• Targeted location/industry incentive.
• Information exchange.
• Various transaction disclosure forms.
• Tax internal control.
• Tax administration of non resident with
effective management in China.
Developing your business in China: Master the Chinese Tax System 9
More
Sophisticated
Increased focus on…

10. Abnormal and
frequent profit
fluctuations
Persistent
losses or low
profits
Absence or
incomplete TP
documents
Non arm’s
length pricing
Transactions
with related
parties in tax
heavens
Expansion
despite low
profit or losses
Lower
profitability
than industry
average
What Makes Me a Target for an Audit?
Developing your business in China: Master the Chinese Tax System 10
One or all of the
following…

11. Tax Development Trends
B2V: Business Tax to Value
Added Tax
Key Facts:
 Nationwide application from 1
August 2013 for all
transportation and modern
services sectors.
 Expand to other industries by
2015.
 The 3Vs: VAT registration +
VAT invoicing control + VAT
compliance.
 Annual turnover > RMB 5 million
or small scale.
1+ 7 Model From the August 1 2013
Transport
Industry
› Land transportation
› Water transportation
› Air transportation
› Pipeline transportation
Certain
Modern
services
industry
R&D and technology service
Culture and creative services
Logistics auxiliary services
Movable property leasing
Authentication & consulting
services
Production, broadcasting and
distribution of radio:
television products
Developing your business in China: Master the Chinese Tax System 11

12. Tax Development Trends
Developing your business in China: Master the Chinese Tax System 12
There is No
“One China”
Strategy

13. Tax Development Trends
Southern China
 Development of three coastal
areas in Guangdong province,
subject to reduced CIT of
15% and rebate of individual
income tax for qualified
talents:
‒ Qianhai in Shenzhen
‒ Hengqin in Zhuhai
‒ Nansha in Guangzhou
Subject
Eastern/Central China
 Shifting to services, high-
value outsourcing, new hi-
tech, environmental
protection.
Western China
 A new wave of inbound
investment by offering special
fiscal incentives (e.g. reduced
15% tax rate).
Developing your business in China: Master the Chinese Tax System 13

14. Hong Kong:
Investment Holding
Overview
Developing your business in China: Master the Chinese Tax System 14

15. Hong Kong Investment Holding
Hong Kong is NOT a tax heaven and there can be many
benefits from managing Chinese's business from Hong
Kong such as:
 Territorial tax system.
 No income tax on foreign dividends.
 No capital gains tax.
 No dividends/Interest withholding.
 No foreign exchange control.
 Advance Rulings available.
 Keep expanding treaty network.
 Proximity to China – One country Two Systems
 Easier to obtain BO status under HK/China DTA
under Circular 165.
Developing your business in China: Master the Chinese Tax System 15

16. Hong Kong Investment Holding
Offshore trading in Hong Kong can be used to streamline
processes and maximize on business tax savings because:
 Offshore trading is non-taxable.
 Investment holding is non-taxable.
 Service can be both onshore or offshore
 Manufacturing via processing in China is 50% taxable
in Hong Kong.
Please see an example on the next slide…
Developing your business in China: Master the Chinese Tax System 16

17. Hong Kong Investment Holding
European
supplier
Asian
Customer
Developing your business in China: Master the Chinese Tax System 17
European
supplier
Hong Kong
Offshore trading
Asian Customer
Example 1: Basic Model
Example 2: Offshore trading via Hong Kong
Profit €50
Profit €20 Profit €30
Profit €30 in Hong Kong, can be claimed offshore.
Structural Example

18. Summary of Key
Points
Developing your business in China: Master the Chinese Tax System 18

19. Red Flags
What puts my company at risk?
What are the warning signs of weak tax health in China?
 China operations set up for years without regular review.
 Many inter-company transactions without proper
documentation.
 Insufficient in-house resources to keep updated on the latest
tax regulations and compliance requirements.
 Full reliance on local team to ensure compliance.
 Not sure/not updated of local compliance status.
 Non resident deriving income from China.
Developing your business in China: Master the Chinese Tax System 19

20. TCS Hong Kong Corporate Solutions
 Meeting Management: Fieldwork and meetings with local
management/finance managers.
 Documentation Review: review selected documentation and tax
filing papers.
 Risk Management:
‒ Identification of technical issues, quantify under-reporting
exposures, suggest remedial action.
‒ Identification of major compliance issues and local irregularities
tax reporting.
‒ Resolve time sensitive issues before being targeted by a
government tax audit, minimize interest and penalty
Developing you r business in China: Master the Chinese Tax System 20
What we do…

21. TCS Hong Kong Corporate Solutions
 Structuring: Identify tax planning and restructuring options to save
tax costs while better managing tax compliance.
 Circular 698 review
‒ Substance and BO status of HK/BVI holding structure.
‒ If vulnerable to challenges.
‒ Where 5% dividend withholding rate is NOT automatic anymore.
‒ Tax resident certificate: conditions required to be fulfilled.
 Transfer pricing study and documentation management.
 Devise efficient cross charging mechanism to avoid trapped
cash.
Developing you r business in China: Master the Chinese Tax System 21
What we do…

22. TCS Hong Kong Individual Solutions
 TEMP: Tax Efficient Mobility Program
 Review existing staff secondment arrangement
 Assess documentation and specific terms
 Tax filing mechanism review: Tax under-reporting
exposures or tax planning scheme e.g. time apportionment
 Recommendations to TEMP including revise secondment
contract, re-set staff reporting protocol, performance
evaluation system, segregation of duties etc.
Developing your business in China: Master the Chinese Tax System 22
What we do…

23. Key Points
The China and Hong Kong Markets:
 There has been a tightening of taxation of non-resident in
China.
 An increased focus on anti-avoidance including transfer
pricing.
 Obsolete structures in China e.g. Representative Office.
 New regional opportunities across China.
 Redefined supply chain model in Hong Kong and China.
 China is moving from low-end manufacturing to high value
added, environmental friendly manufacturing.
 Hong Kong has a wider role in Chinese business development.
 International mobilization can trigger corporate
exposures, be proactive and transparent.
Developing your business in China: Master the Chinese Tax System 23

24. For more information contact
TCS in France
Web:www.tcs-soregor.com
E-Mail: contact@tcs-soregor.fr
Tel. +33 (0) 1 44 78 89 90
Lucien Raveux, Senior Manager of
the International Tax and
Consulting Department
Silvia Létang, Client Relationship
Manager - FCCA Audit
Ruby Braithwaite, International
Marketing Manager
TCS in Hong Kong
Web: www.tcscpa.com.hk
E-Mail: info@tcscpa.com.hk
Tel: +852 3422 3823
Kenneth Young, Managing Director
Leo To, Director
Eddy Yeung , Director and head of
Tax for China and Hong Kong