Doing business with China: The evolving tax landscape
Doing business in a foreign country is never easy and dealing with international tax developments and the ever changing tax landscape has its challenges at the best of times. Combine these normal pressures with the on-going tax developments in China and the current global tax debate on base erosion and profit shifting (BEPS) and you really need to be ahead of the game.
In recent times there has been a simplification of the rules applying to wholly foreign owned enterprises (WFOE) in China. Organisations using representative offices are recommended to review and monitor the scope of their China activities to ensure that the representative office is operating within its allowed scope and to ensure that a separate taxable presence does not arise for the New Zealand group. The recent changes mean it is now much easier to use a WFOE and this may result in increased certainty and a reduced tax base in China as well.
China is currently transitioning from its business tax system to VAT (GST) and the new rules are being phased in across different industries at different times so it is important to monitor these developments. This obviously results in necessary systems changes and additional compliance costs especially given the China regime is quite different from the GST regimes that operate in New Zealand and Australia. Difficulties with the VAT exemption for services charges to non-residents can also result in VAT leakage. These implications need to be carefully managed.
Recent developments have simplified the processes for making payments out of China to related entities however there is still a significant level of complexity in navigating the withholding tax requirements and ensuring a tax deduction is available in China for the costs. Care needs to be taken in relation to related party cross border payments out of China.
Finally, China is entrenched in the current BEPS debate and a number of the OECD proposals will likely result in an increased tax burden for multi-national groups doing business in China. These changes include transfer pricing developments in relation to pricing methods and the treatment of intangibles, as well as other matters such as “country-by-country reporting” and the tightened rules for permanent establishments.
The Deloitte China Services Group in New Zealand and China assists a large number of New Zealand organisations with navigating these issues and is extremely well placed to assist you as required. Please contact Jenny Liu at firstname.lastname@example.org or your regular Deloitte advisor.