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16 February 2011

International Fiscal Association British Branch The UK and the BRICs: Key Treaty Issues and Recent Developments: China. 16 February 2011. Jon Eichelberger, Partner, Beijing. What will probably be the central tax treaty issues over the next two years (2011-2013) in China?.

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16 February 2011

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  1. International Fiscal AssociationBritish BranchThe UK and the BRICs: Key TreatyIssues and Recent Developments:China 16 February 2011 Jon Eichelberger, Partner, Beijing

  2. What will probably be the central tax treaty issuesover the next two years (2011-2013) in China? • Withholding tax rates on passive income • Beneficial ownership = economic substance • Application to capital gains? • Approval process for treaty benefits: Circular 124 • Permanent establishment – particularly for services provided to Chinese recipients • Tax clearance requirement for outward remittances • Presumption that services create permanent establishment • Difficulties of proof

  3. What will probably be the central tax treaty issuesover the next two years (2011-2013) in China? • Taxation of indirect share transfers (cf. Vodafone) • Reporting obligations • Key factors: lack of reasonable commercial purpose / economic substance • Is this a treaty issue? • MAP

  4. What is a representative leading case of tax treatyinterpretation in the passive and/or active incomearenas in China? • Korean vessel case • First example of litigation involving tax treaty • Characterization of income as leasing fees or international transportation fees • Other cases involve decisions of local tax bureaus, e.g., denial of residency, denial of capital gains exemption

  5. What are the roles of the OECD Transfer PricingGuidelines and similar OECD documents in the area of tax treaty interpretation in China? • Philosophical point: China views the OECD rules as written for the “rich” nations and in some respects contrary to China’s interests • China accepts the arm’s length standard but interprets differently from OECD nations, e.g.: • Rejects idea that intangibles are completely offshore • Rejects limited risk distributor approach to luxury goods • Cost-plus on services 15% to 50% • Insists that part of location savings belong to China • Follows UN model for permanent establishment

  6. What is the evolutionary path of transfer pricingdispute resolution since the arm’s length standardwas introduced into domestic law? • Little change in dispute resolution practices since 1990s • Administrative review and litigation rarely used because of government relations and cultural reasons • Audits and other disputes are resolved at the local tax bureau level • High degree of discretion results in lack of uniform application of rules • Non-technical factors such as “guanxi” are important • Are we on the verge of significant change because of the new aggressiveness of the tax authorities?

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