China Tax Treaty and Policy Development and Updates

Abstract

China has risen as a key global economic development engine and player over the past three decades. An outgrowth of its great economic advances is China’s gradually escalating move from being a passive norm taker to being a driver of the discourse in various international arenas, such as China’s continual efforts in reforming its international tax policies and outreaches. Since China concluded its first two tax treaties with Japan (1983) and the United States (1984), China’s tax treaty network has expanded to a system of 99 tax treaties (as of June 30, 2013), and two arrangements with its own special administrative regions, Hong Kong and Macau.First, Chinese tax treaties are characterized and inspired by the hybrid influence of the UN Model and Commentaries, OECD Model and Commentaries and China’s indigenous features in terms of economic and political orientations. On one hand, China concluded different specific tax treaty provisions with developed (typically OECD members) and developing countries (South American, African and Southeast Asian states). Second, there emerges a general re-evaluation of China’s treaty position given its emergence as a growing capital exporter rather than a mere capital receiver or importer. One driver for this change is China’s weighty foreign exchange reserves, which invites the use of conduits for Chinese capital to be reinvested in China via overseas investments. Another force is that enterprises controlled by Chinese capital go abroad to invest in a myriad of enticing acquisitions and profitable businesses, putting China at the front of international tax policy negotiations. Third, with China’s reconstruction of a tax legal system, especially after the re-entry to the WTO (2000) and the enactment of the Enterprise Income Tax Law (EIT Law) (2007), tax treaties concluded thereafter exhibit noteworthy differences from those contracted in the 1980s and 1990s. For example, GAAR, CFC rules, abolishment or removal of certain tax incentives, and tax holidays were all directly raised in recent tax treaty negotiations and implementations. Fourth but not least, the evolution of tax treaties between OECD Member countries and China witnesses a broader scope of source taxation, especially comparing with those non-OECD countries or countries with less sophisticated tax regimes. This claim can be substantiated by provisions relevant to BEPS, tightened compliance requirements, and adoption of anti-abuse rules. This trend is worthy of closer observation and factoring in.