Spotlight on tax controversy
China/Hong Kong tax controversy services
October 2014
It is not uncommon to see cross-border tax disputes arising from the different interpretations
and applications of tax treaties. Multinational corporations (MNC) always want appropriate
dispute resolutions to protect their legitimate rights and also to avoid double taxation. Mutual
Agreement Procedure (MAP) could be an effective means to address the MNC’s concerns.
In light of the international trend to protect tax base (such as the Base Erosion and Profit Shifting
(BEPS) project), doubtless tax authorities around the globe will take increasingly aggressive
attitudes to protect its own taxing right. This will inevitably bring about more tax disputes
between two (or even more) jurisdictions on the issues of taxing rights allocation. Against such a
backdrop, we anticipate that MAP will play a more active role in the international tax arena in the
near future.
Matthew Mui
PwC China Tax Controversy
Partner
MAP in China is no longer merely a concept embedded in tax treaties. We see more and more
MAP cases in China in recent times. MAP has been a well-received dispute resolution channel for
foreign companies deriving income from China. And in recent years, more and more Chinese
MNCs investing overseas are also taking the route of MAP to resolve their tax disputes in
overseas countries. There are different challenges arising from a MAP case requested by a
Chinese company and initiated by a foreign company respectively.
Cathy Zou met with Matthew Mui, Tax Controversy Partner of PwC China and Garry Gao,
Transfer Pricing Senior Manager, to discover how MAP makes cross-border tax disputes resolved
more efficiently, and to share their experiences on some MAP cases in China.
Matthew, your team recently helped
several clients go through the MAP.
Could you share with us some
background?
Garry Gao
PwC China Transfer Pricing
Senior Manager
Matthew – We have handled some cases
where the taxpayer is a foreign MNC, whose
Chinese subsidiaries were investigated. The
cases resulted in tax adjustment by the incharge tax authorities domestically. To avoid
double taxation, the foreign MNC
headquarters asked their competent tax
authority (CA) to make a MAP request to the
State Administration Of Taxation (SAT).
In one case, MAP was sought in a dispute
related to offshore indirect equity transfer by
the CA of the foreign transferor, which is the
first in China. We call this a “MAP inbound
case”. Garry also has handled some “MAP
outbound cases”.
Garry – Yes. In one of my cases, the taxpayer
was a Chinese MNC investing outbound. One
of its subsidiaries, located in a regime with
stringent transfer pricing rules, was
investigated by the local tax authorities. The
taxpayer foresaw the transfer pricing
adjustments that would potentially result in a
double taxation situation within the group.
Therefore, the Chinese headquarters
approached the Chinese tax authority for
MAP.
Matthew – Currently, the MAP cases in
China are mainly about transfer pricing
disputes involving foreign MNC, such as
corresponding adjustments, mainly initiated
by the overseas related parties of the
transactions.
I have also seen an increasing number of MAP
cases covering issues arising from different
interpretation and application of tax treaties.
For example, the determination of permanent
establishment (PE) and the attribution of
profits to the PE, the taxation of passive
income (i.e. dividends, interests and royalties)
and its applicable tax rate, etc.
What is Mutual Agreement
Procedures (MAP)?
Matthew – MAP is a tax dispute
resolution mechanism under tax
treaties. It allows the CA of the
contracting states to discuss, negotiate
and hopefully settle cross-border tax
disputes and clarify uncertain tax issues
on a systematic manner.
So far, China has entered tax treaties
with 99 countries and two regions (Hong
Kong and Macao), which means most of
the cross-border tax disputes can be
resolved though MAP in theory.
Garry – I would like to add on that
China issued a set of new procedural
Guidelines for MAP in 2013, which not
only applies to MAP requests initiated by
China but also covers MAP requests
received by China – a more
comprehensive version than its
predecessor issued in 2005. In China,
the CA is the SAT, and within the SAT,
International Tax Department carries
out that function.
Matthew – It is indeed very
challenging to have a thorough
understanding of the MAP since it is not
a procedure between the taxpayers and
the tax authorities. Instead, it is an
interaction between the CAs. Taxpayers
are not usually involved in the MAP
negotiation themselves unless invited by
the relevant CAs.
If taxpayers are not involved in
the MAP negotiation, how can
they monitor the MAP process?
Garry – As mentioned above, the set of
new procedural guidelines for MAP
provides a more friendly procedure for
the MAP applicants. The Chinese tax
authorities are required to advise the
applicant of their decision at each step of
the MAP process. This is in line with
international practice which makes the
whole process more transparent.
Matthew – On top of that, it is equally
important for the taxpayer to build an
efficient and effective communication
channel with the tax authorities, which is
two-way communication.
2
Very often, the fact pattern of a MAP
case is rather complicated. It involves
the domestic tax regulations of the
jurisdiction where the dispute arises, as
well as the tax treaty concept and
controversial tax issues. If the applicant
can provide a comprehensive reporting
of the fact pattern on the case with good
technical justifications, this can facilitate
the CAs to appreciate the entire
situation, and hence make the MAP
negotiation more efficient and fair.
Garry, what are the incentives of
your Chinese clients to make a
MAP request?
Garry – It is not always easy for
Chinese MNC to deal with a tax dispute
associated with their outbound
investments, mostly due to the limited
technical knowledge about the domestic
tax regulations, experiences and network
in a foreign jurisdiction. The
consequence for a cross-border tax
dispute can be serious as it is also
related to the foreign tax credit issue
back in China. Under such
circumstances, the Chinese MNC may
consider initiating a MAP as an
alternative approach to protect
themselves from unfair treatment and
double taxation they encounter overseas.
In your most recent case, when
did the taxpayer make the MAP
request?
Garry – The client made the request
when its overseas subsidiary was under
the transfer pricing investigation but
had not been concluded.
In most cases, a MAP request can be
submitted at a very early stage where
there is a possibility of tax being
imposed not in accordance with the tax
treaty; that means before the tax has
been charged. This makes MAP much
friendlier than domestic reconsideration
measures.
Garry, what observations do you
have on the SAT’s involvement in
the MAP outbound cases?
Garry – From my experiences, we were
happy to see that the SAT is very
dedicated in the preparation and
negotiation during the whole MAP
process. They have assigned quite a
number of experienced officials to
support the MAP outbound cases. They
studied the details and attended the CA
negotiation meetings. It echoes with the
SAT’s attitude towards supporting
domestic enterprises to “go abroad”.
Another observation is related to China’s
12th Five-year Plan. One of its aims is to
enhance China’s tax administration over
international taxation by putting more
focus on MAP and helping Chinese MNC
mitigate overseas tax risks associated
with their outbound investments.
Then, what attitude does the SAT
hold for the MAP inbound cases?
Matthew – With the principles of
“providing better services to the
taxpayer” and “deepening international
cooperation”, the SAT usually responds
to the MAP request from the foreign CAs
actively. While their focus is to protect
China’s tax base, the SAT is also willing
to help the taxpayers avoid double
taxation through the MAP.
Based on your experiences, what
are the success factors of a MAP
case in China?
Matthew – There are many challenges
in relation to driving and monitoring the
MAP process in China. The success of
MAP depends on a lot of factors, namely,
fact pattern of the case, technical merits,
documentary evidence and more
important is the first-hand
understanding and experience of MAP
process in China as well as in the other
foreign jurisdiction involved.
How would you describe the role
of PwC during the MAP cases?
Matthew – Generally from the start, we
help our clients to identify the key issues
in a MAP case and analyse the technical
merits and possible contradicting views
of the two CAs. We act as a strategic
adviser during the whole process and as
a technical expert whenever the
negotiation touches on controversial
technical issues.
We assist the MAP applicant to have
seamless communication with the
Chinese tax authorities, both at the local
level and the SAT level. Also, our
overseas network teams help us to
appreciate the attitude of the overseas
CA. We sometimes facilitate discussions
between the Chinese and overseas CAs
as well.
With your experience in successful MAP cases, would you say that MAP
can be a resolution for all cross-border tax disputes?
Matthew – Although MAP provides an alternative approach for cross-border tax
dispute resolution, it is not an easy process. Before the taxpayer makes a decision to
initiate a MAP request, it is strongly recommended that comprehensive analysis be
conducted on the effectiveness of the domestic reconsideration options, the capacity
and readiness of the CAs of both China and the foreign jurisdictions.
Sometimes MNC may find MAP very efficient as it can break the deadlock between
the local company and the local tax authority. However, the resolution would largely
hinge on how to play this useful but difficult ‘card’.
It was a story about…
How PwC delivered exceptional value
in MAP cases for both a foreign MNC
deriving income from China and
Chinese MNC investing overseas. Our
experiences reveal that the success of
MAP depends on a lot of factors,
namely, fact pattern of the case,
technical merits, documentary
evidence and most importantly the
first-hand understanding and
experience of MAP in China as well as
the other foreign jurisdiction
involved.
Let’s talk
Matthew Mui
Garry Gao
Partner
+86 10 6533 3028
[email protected]
Senior Manager
+86 532 8089 1897
[email protected]
The Global Tax Monitor recognises PwC China as one of the leading advisers in China for tax controversy by
reputation.
These results are based on the year ending Q4 2013, with a sample size of 156 primary buyers of tax services in China.
Launched in 2000, the Global Tax Monitor (GTM) is an independent survey conducted by research agency TNS, that examines the competitive
position of the top firms in the tax advisory market - globally, regionally, nationally and on an industry basis. It provides a comprehensive measure of
firm reputation, client service and brand health, gained currently from just over 4,000 telephone interviews annually with key decision makers (CFOs
and Tax Directors) in 40 key markets.
Matthew Mui was recognised by the International Tax Review as a global leader in the field of Tax Controversy
in China.
<International Tax Review> publishes Tax Controversy Leaders every year, which is a guide to the leading tax dispute resolution lawyers and
advisers in the world. In addition to highlighting tax professionals, the guide also includes litigators and barristers who may not practise tax on a day
to day basis. Inclusion in Tax Controversy Leaders is based on a minimum number of nominations received. Besides the required number of
nominations, entrants into the guide must also possess (1) evidence of outstanding success in the last year; and (2) consistently positive feedback from
peers and clients.
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This publication is based on the materials and information obtained by August 2014.
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