New China law targets tax avoidance offshore
The mainland has stepped up its participation in the G20’s fight against international tax avoidance by passing a law cracking down on the indirect sale of assets outside the country to avoid paying taxes.
The law would affect investment companies, analysts said, adding it would also have a significant impact on Hong Kong, a major hub for cross-border deals involving the mainland.
To strengthen global cooperation against tax avoidance, a law on tax on gains from the indirect sale of assets by offshore companies took effect last Tuesday, the State Administration of Taxation said on Friday.
“This announcement is the latest policy of the taxation administration’s proactive participation in the G20 base erosion and profit shifting action plan [against tax avoidance],” it said.
Liu Jinghua, a Beijing-based tax partner at Baker & McKenzie, an international law firm, said the new rules “clearly indicate China will focus more on cross-border anti-avoidance enforcement”.
Christopher Xing, a KPMG China tax partner, described it as a major development.
“Even the IMF [International Monetary Fund] and OECD [Organisation for Economic Cooperation and Development] have recently recognised such rules as valid instruments to combat double non-taxation,” he said.
“It is against this backdrop that the State Administration of Taxation has issued the indirect offshore disposal rules, as the second significant new international anti-avoidance measure, following the introduction of the GAAR [general anti-avoidance rule] measures in December 2014.”
Patrick Yip, a national financial services tax leader at Deloitte Touche Tohmatsu, said the impact of the asset sales law would most likely fall on investment funds, including private equity funds and venture capital funds, which have investments on the mainland, as well as multinationals that restructured their mainland operations or sold mainland companies.
The new law addresses cases where an offshore company indirectly sells an asset on the mainland by selling its stake in a vehicle located outside the mainland which owns the asset. Investors can abuse this indirect method by using a shell company to sell the mainland asset, and avoid paying mainland taxes by claiming the transaction took place outside the mainland.
“Hong Kong is a common jurisdiction where the intermediate companies holding Chinese investments are established,” Liu said. “The new rules would require more substance to be built into Hong Kong holding companies.”
The tax administration said the new law was an extension of a law passed in December 2009 that addressed the indirect sale of equities by offshore firms. That law ensnared Carlyle Group, a leading international asset management firm, among others.
In January 2010, Carlyle indirectly sold a mainland joint venture, Yangzhou Chengde Steel Tube, to a Hong Kong subsidiary of a US company for US$350 million. Carlyle, after initial objections, paid the central government 173 million yuan (HK$218 million) in tax in May 2010.
“The new rules are seemingly more aggressive, and will significantly influence how cross-border mergers and acquisitions are conducted in China,” Liu said.
