News Flash
China Tax and Business Advisory
OECD takes action on BEPS; are
you ready?
July 2013
Issue 17
In brief
Base Erosion and Profit Shifting (BEPS) is one of the hottest current tax issues globally, attracting
growing attention worldwide. Under the request from G20, the Organisation for Economic Co
Co-operation
and Development (OECD)
(OECD published a report called Addressing BEPS in February 2013 and promised to
develop a comprehensive action plan by July 2013. On 19 July 2013, the OECD finally released the 40page BEPS Action Plan (AP),
(AP) which contains 15 items of actions or work streams to prevent and counter
BEPS.
There is no doubt that the BEPS Project will have significant impact on some of the fundamental rules
governing thee taxation of cross border transactions (e.g. tax treaties,, transfer pricing, and both domestic
and international anti-avoidance
anti
provisions). According to the AP,, most of the actions will take one to
two (or even more) years to complete. However, it may take
ta considerably longer to fully apply these
changes in practice.
There are indications that the BEPS Project and related developments are already leading to changes in
the behaviour of tax authorities.
authorities Governments, revenue authorities, and businesses will all have a
material role to play going forward as proposed
proposed changes are implemented.
We believe there are many interests for China, as a G20 state, to adopt the BEPS initiatives and take part
in developing the details of the AP to protect its tax base. Taxpayers
Taxpayers in China, both foreign MNC and
Chinese MNC, should follow closely these developments and take corresponding actions to get
themselves well prepared for the impact on their business operations not just only in China but also
worldwide.
In detail
Background
The BEPS Project is primarily
driven by the increasing
concern that corporations are
conducting various planning
aimed at eroding the taxable
base and/or shifting profits to
locations where they are subject
to a more favourable tax
treatment. In addition, in many
cases it is considered that the
principles governing the
sharing of taxing rights between
states have not kept pace with
the changing environment,
especially with the development
of e-commerce
commerce and the
increasing importance of
intellectual property. The BEPS
issue has received much
political attention1.

OECD BEPS report
The OECD BEPS report (the
Report) of 12 February 2013 is
the first report that
comprehensively described the
BEPS landscape. The Report
starts out by diagnosing the
current BEPS problem, and
then examines global business
models, competitiveness,
corporate governance and
typical tax planning structures
of multinational corporations
(MNCs).
Key pressure areas
In Chapter five of the Report,
‘key pressure areas’ identified
and considered to most readily
facilitate BEPS include:



international mismatches
in entity and instrument
characterisation including
hybrid mismatch
arrangements and
arbitrage;
application of treaty
concepts to profits derived
from the delivery of digital
goods and services;
the tax treatment of related
party debt-financing,
captive insurance and other
intra-group financial
transactions;
transfer pricing, in
particular in relation to the
shifting of risks and
intangibles, the artificial
splitting of ownership of
assets between legal
entities within a group and
transactions between such
entities that would rarely
take place between
independents;
www.pwccn.com
News Flash — China Tax and Business Advisory


the effectiveness of anti-avoidance
measures, in particular general
anti-avoidance rules, controlled
foreign company (CFC) regimes,
thin capitalisation rules and rules
to prevent tax treaty abuse; and
the availability of harmful tax
preferential regimes.
expected output (due September
2015) includes recommendations
regarding the design of CFC rules.

Global action plan to address BEPS
The Report strongly emphasised that
the OECD is ideally positioned to
advance a collaborative solution,
which is preferable to any unilateral
action by different nations. In relation
to specific steps identified, it reported
that a comprehensive action plan was
to be prepared within six months to
formulate proposals to counter BEPS.
OECD’s Action Plan
On 19 July 2013, the OECD finally
released the 40-page AP, which
contains 15 separate actions or work
streams with accompanying targeted
timelines. We have grouped the
OECD's proposed actions into four
major categories: (1) general actions
on BEPS; (2) permanent
establishment (PE) and transfer
pricing (TP) actions; (3) treaty actions;
and (4) data and transparency actions.

General actions on BEPS

Addressing the tax challenges
of the digital economy. The AP
calls for a review of different
business models and value
generation in the digital sector.
The expected output (due
September 2014) is a report
identifying the relevant issues
raised by the digital business and
‘possible actions’ to address them.

Neutralising the effects of
hybrid mismatch
arrangements. The need for
action on hybrids is illustrated by
the use of such instruments to
achieve unintended double nontaxation or long-term tax deferral.
The expected outputs (due
September 2014) include changes
to the Model Treaty provisions to
prevent undue tax benefits under
tax treaties for such hybrid
arrangements and consideration
of changes to domestic laws,
primarily in relation to
deductibility.

2
Strengthening CFC rules. The
CAP indicates that the OECD
wishes to see uniform CFC rules to
counter BEPS in a more
comprehensive manner. The
Limiting base erosion via
interest deductions and other
financial payments. The focus
here is on BEPS achieved by
excessive deductible payments
such as related-party interest
payments. The expected output
(due September 2015) includes
recommendations for best
practices in the design of rules to
prevent BEPS through the use of
interest deductions and other
financial payments. A second
output (due December 2015) is
the development of transfer
pricing guidance for the pricing of
related-party financial
transactions.
the related profit attribution
issues.

1)
Intangibles: to develop rules
to prevent BEPS by moving
intangibles amongst group
members. The work will
involve adopting a broad and
clearly delineated definition
of intangibles, ensuring
appropriate allocation of
profits in accordance with
value creation, developing TP
rules or special measures for
transfers of hard-to-value
intangibles, and updating the
guidance on cost contribution
arrangements.
2) Risks and capital: to
develop rules to prevent BEPS
by transferring risks among,
or allocating excessive capital
to, group members. This will
focus on adopting TP rules or
special measures to ensure
that inappropriate returns do
not accrue to an entity solely
because it has contractually
assumed risks or has provided
capital, implying a clear
‘substance’ agenda.
3) Other high risk
transactions: to develop
rules to prevent BEPS by
engaging in transactions that
would not realistically occur
between third parties. The AP
requires clarification of TP
methods; in particular profit
splits in the context of global
value chains. This will also
aim to provide protection
against common types of
base-eroding payments, such
as management fees and head
office expenses.
Countering harmful tax
practices more effectively,
taking into account
transparency and substance.
This action is recommended for
governments, not corporations. It
calls for improvement on tax
transparency, including
compulsory spontaneous
exchange on rulings to
preferential regimes and
substantial activities for any
preferential tax regime. There are
three expected outputs: the first
(due September 2014) is
conducting a review of member
country’s tax regimes; the second
(due September 2015) is
developing a strategy to expand
participation in this area to nonOECD members; and the third
and more challenging output (due
December 2015) involves revising
the criteria on harmful tax
practices.
PE and TP actions

Artificial avoidance of PE
status. The concerns are with
commissionaire arrangements
and MNCs artificially fragmenting
their operations among multiple
group entities to qualify for the
exceptions to PE status for
preparatory and auxiliary
activities. Thus, the OECD will
work on amending the dependent
agent test in Article 5(5) of the
current Model Treaty and the
provisions dealing with the
preparatory and auxiliary
activities in its Article 5(4). The
work on these issues (due
September 2015) will also address
Align TP outcomes with value
creation. The AP rejects the
possibility for alternative income
allocation systems (such as
formulary apportionment) and
confirms the preferred course of
addressing the flaws in the current
TP system. Three actions are
scheduled to be completed by
September 2015.

Re-examine TP
documentation. The AP notes
that asymmetries in information
on TP between taxpayers and tax
administrations potentially
enhance the opportunities for
BEPS. The AP also notes that
differences between countries in
the requirements for TP
documentation lead to significant
PwC
News Flash — China Tax and Business Advisory
costs for businesses. The rules to
be developed will include a
requirement that MNCs provide
all relevant governments with
information on their global
allocation of income, economic
activities, and taxes paid among
countries according to a common
template. This action is due
September 2014.
Treaty actions



Prevent treaty abuse. The AP
identifies a series of measures to
ensure that taxpayers cannot
inappropriately use bilateral
treaties to generate double nontaxation for an activity. The action
(due September 2014) is primarily
to develop best practice antiabuse clauses for use within
treaties and best practice antiavoidance rules that jurisdictions
can implement via their domestic
tax systems.
Make dispute resolution
mechanisms more effective.
Many bilateral treaties include a
mutual agreement procedure
(MAP) based on the OECD Model
Treaty. However, reasons for
unresolved double taxation range
from restrictions imposed by
domestic law on the tax
administration’s ability to
compromise to stalemates on
economic issues such as
valuations. The action (due
September 2015) is to agree on
ways to resolve disputes where
MAP does not work or is not
applied, including the use of
arbitration.
Develop a multilateral
instrument. This action focuses
on the need for a legal basis for
jurisdictions to implement many
of the other actions. The ability to
develop an instrument that
overrides existing treaties or alters
a number of treaties at once will
make it easier for jurisdictions to
implement the necessary changes.
The action (due December 2015)
is to analyse the tax and public
international law issues related to
the development of a multilateral
instrument.
Data and transparency

3
Require taxpayers to disclose
their aggressive tax planning
arrangements. The AP aims to
find best practices on mandatory
disclosure rules for aggressive or
abusive tax arrangements or
structures. The recommendations
for these reporting regimes are
due September 2015.

Establish methodologies to
collect and analyse data on
BEPS and the actions to
address it. The AP is to develop
recommendations regarding
indicators of the scale and
economic impact of BEPS and
ensure that tools are available to
monitor and evaluate the
effectiveness and economic
impact of the actions taken to
address BEPS. The action (due
September 2015) will also identify
the need to respect taxpayer
confidentiality and to consider the
administrative burden on
businesses.
Potential influences the BEPS
Project could bring
The list of areas set out in the OECD
Report and the AP raises a very wide
range of issues and identifies the key
areas of current concerns in the
international tax system. Although
there is uncertainty as to whether or
not consensus among all stakeholders
can be maintained and the actions can
be completed within the proposed
short timeframes, the realities of
political pressures and high
expectations must be recognised.
One may view the AP as setting
parameters for each action item but
leaving considerable scope and
flexibility for the working groups to
formulate their recommendations. It
reflects a good balance between, on
the one hand, clearly identifying gaps
in the current rules, the urgency of
addressing those gaps, and a roadmap
for each working group. On the other
hand, it sets a responsible tone by
putting forth guiding principles,
including the need for clarity,
predictability, and administration
feasibility for governments and
taxpayers, and inclusiveness in the
process for both non-OECD countries
(e.g. China) and business.
With respect to the position of states,
there will likely be gainers and losers
from the reform process encapsulated
in the BEPS Project. This may well
make the process of future work on
BEPS more difficult given the
importance of achieving consensus.
Constructive business input (especially
with the accelerated timelines) is
needed to ensure that any measures
developed are workable in practice,
i.e., with sufficiently clear tests to
permit ready compliance. This seems
especially important with respect to
the changes contemplated for the PE
rules, the re-characterisation doctrine,
and the need to prevent treaty abuse.
Companies may be pressed for more
transparency by shareholders, the
media, civil society organisations, etc.
Businesses will need a common
approach to disclosure of information.
This will facilitate ease of compliance
for businesses and the provision of the
most informative data for regulators
and the public, if such data is
disclosed.
What to expect for China
As a traditional sourcing territory
where BEPS opportunities widely exist,
it is generally in China’s interests to
support initiatives in countering BEPS.
In other words, although the Chinese
Government has yet to express their
official statement towards this
movement, it can be expected that
China will adopt initiatives which
protect its tax base. Tax developments
in recent years in relation to indirect
equity transfer, beneficial ownership,
as well as transfer pricing practices
demonstrate China's awareness and
commitment to countering BEPS. On
the other hand, China would probably
want to ensure that its interest is not
unnecessarily disadvantaged by any
broader initiatives. Participation in the
OECD’s BEPS Project as a key member
of the G20 will more likely give China
greater opportunity to shape and
influence multilateral responses to
BEPS, and in doing so, draw particular
attention to critical areas and the
responses it considers most
appropriate.
For example, China has already taken
strong actions to counter treaty
shopping and given that this issue has
now been highlighted in the AP, it can
be expected that China will play an
active role in formulating global
responses and will push for solutions
aligned to its current efforts.
On transfer pricing rules, in recent
years China has been advocating its
position on intangibles and response
to challenges to comparability analysis
in developing countries (e.g. location
savings and market premium
concepts). While the AP has ruled out
formulary apportionment, there is
much room for application of special
measures beyond the arm’s length
principle. It is probable that China
may take it as an encouragement to
PwC
News Flash — China Tax and Business Advisory
experiment more with non-traditional
methods, including application of nontraditional profit splits on the basis of
a lack of good comparables, it would
likely create more controversies and
uncertainties for taxpayers. If that is
really the case, then it may take time
for other countries to consider and
respond as such approach should
obviously not be a unilateral one.
Chinese enterprises investing abroad
will need to be cognisant of the
increasingly aggressive attitude of tax
authorities around the world which is
already occurring and will accelerate
as a result of the BEPS discussions.
These Chinese enterprises will have to
prepare for the increasing pressures
for transparency and ‘substance’ as
well as a lower tolerance by authorities
for tax planning considered artificial
or contrived.
The take away
In most cases, BEPS strategies are not
illegal under the domestic laws of
relevant countries. However, such
strategies, especially those classified as
aggressive tax planning, or those
resulting in double non-taxation, will
face increasing challenges as a result
of the various initiatives of the BEPS
Project, or possibly due to unilateral
actions taken by individual countries.
Five months ago, when the OECD
published its first report on BEPS, the
timeframes set were widely considered
to be unrealistic and the process full of
uncertainties. The recently published
AP provides more detailed work
streams and expected deliverables
along with more realistic deadlines.
BEPS has significantly changed the
overall global tax landscape. No
matter what actions the tax authorities
in China or other jurisdictions would
take in future, or how long such
4
actions would take to implement, it is
doubtless that BEPS issues must be on
top priority of their work plans.
More immediate attention would be
required from businesses, especially
those who already have tax planning
structures in place. These businesses
need to be aware of the BEPS
developments and the possible impact
to their operations. More importantly,
businesses should from now on
proactively perform internal risk
assessments of their existing and
planned structures, consider the
increased focus on 'substance' and the
likely requirements for more
transparency and public disclosure of
their tax return information and
allocation of profits around their
entities in the world.
Endnote
1.
The G20 Leaders meeting in Los
Cabos, Mexico on 18-19 June 2012
explicitly referred to “the need to
prevent BEPS" in their Final
Declaration. In February 2013, the
G20 finance ministers in their
meeting at Moscow declared to be
“determined to develop measures to
address BEPS, take necessary
collective actions and look forward to
the comprehensive action plan the
OECD will present to [them] in July”.
Recently on 18 June 2013, after the
G8 summit in Northern Ireland, a
one-page statement (referred to as
the Lough Erne Declaration) was
released to call on countries around
the world to, among other things,
change their laws to prevent
multinational enterprises from
reducing their taxes through crossborder structuring arrangements.
PwC
News Flash — China Tax and Business Advisory
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact a member of PwC’s China Tax
and Business Service:
Peter Ng
+86 (21) 2323 1828
[email protected]
Edwin Wong
+86 (10) 6533 2100
[email protected]
Charles Lee
+86 (755) 8261 8899
[email protected]
With over 1,400 China tax professionals and over 80 China tax partners in 14 cities in Mainland China, Hong Kong,
Singapore, and Taiwan, PwC’s China Tax and Business Service Team provides a full range of tax advisory and
compliance services. Leveraging on a strong international network, our tax specialists are striving to offer technically robust,
industry specific, pragmatic and seamless solutions to our clients on their tax and business issues locally. The Global Tax
Monitor recognises PwC as having the strongest overall reputation for tax services in China, with a lead over the competition.
In the context of this News Flash, China, Mainland China or the PRC refers to the People’s Republic of China but excludes Hong Kong Special
Administrative Region, Macao Special Administrative Region and Taiwan Region.
The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The
application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice
specific to your circumstances from your usual PwC’s client service team or your other tax advisers. The materials contained in this publication were
assembled on 25 July 2013 and were based on the law enforceable and information available at that time.
This China Tax and Business News Flash is issued by the PwC’s National Tax Policy Services in China and Hong Kong, which comprises of a
team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business
regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC’s partners and staff in their provision of quality professional
services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies,
business communities, professionals and other interested parties.
For more information, please contact:
Matthew Mui
+86 (10) 6533 3028
[email protected]
Please visit PwC’s websites at http://www.pwccn.com (China Home) or http://www.pwchk.com (Hong Kong Home) for practical insights and professional
solutions to current and emerging business issues.
© 2013 PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Consultants
(Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.