When untrapped cash is taxed cash News from the · PDF fileWhen untrapped cash is taxed cash News from the Zones Michael Velten Partner: Deloitte & Touche LLP 23 May 2014 Singapore

When untrapped cash is

taxed cash

News from the Zones

Michael Velten

Partner: Deloitte & Touche LLP

23 May 2014

Singapore

Preface

Any discussion about RMB reforms inevitably turns to tax.

Trapped cash may simply mean cash that the tax cost of moving is prohibitive.

Companies may choose to leave cash in China for many reasons – including when

the demand for it resides physically in China, and the fact that leaving it on deposit

can yield relatively highly – but new regulations may mean companies can benefit

from increased connectivity of cash balances.

Developments in the Shanghai pilot Free Trade Zone (FTZ) are particularly

significant. Two-way lending offshore is beginning to emerge, but tax regulation

appears opaque in some instances.

How far has the tax regime been clarified and how can your company engage with

the authorities?

© 2014 Deloitte & Touche LLP 2

3 © 2014 Deloitte & Touche LLP

Cash repatriation from China

Outbound remittances from China: Recent developments

Shanghai FTZ: An overview

Treasury innovation in the Shanghai FTZ

Tax considerations

Contents

Cash repatriation from

China


The conventional ways of cash/profit repatriation

Challenges

• Regulatory limitation on outbound

lending and dividend distribution

• Complicated documentation

requirements and time consuming

process

• Uncertainty on tax treatment

After tax Before tax


Outbound remittances

from China:

Recent developments


Outbound remittances from China What is happening now

Relaxation of tax

procedures for

outbound payments

Bulletin [2013] No. 40 and Huifa [2013] No. 30 remove the

requirements of tax clearance certificate for outbound

payments

Relaxation of regulatory

procedures for dividend

distribution

Huifa [2014] No.2 simplifies the remittance procedure for

dividend distribution

Direct overseas lending Domestic entities are allowed to make loans to overseas

affiliates according to Circular Huifa [2014] No.2.

Relaxation of regulatory

procedures for

outbound investment

Guo Fa [2013] No. 47 replaces the approval requirement with

reporting requirement for outbound investments


Overseas remittance

New rules SAFE (Huifa [2013] No. 30)

“Huifa 30”

• Documentation requirements simplified

− Transaction documents and tax clearance certificate no longer required for payment no more than USD50K

− Transaction documents verification by bank and Bulletin 40 requirements, if exceeding USD50K

− Registration documents with other government authorities no long required

• Reimbursement first time available to all payers and on national basis (as compared to qualifying MNCs and certain local practices in the past), but within a 12-month time window

• Interim dividend payment is permitted

SAFE & SAT (Huifa [2013] No. 40)

“Bulletin 40”

• Simplified filing applies to payment more than USD 50K (vs. USD 30K under old rule)

− Abolished tax clearance certificate requirement

− Submit ―tax filing form‖ to state tax authority

− Present such form to bank

• Advance clearance vs. post audit

− How realistic for the tax authorities to audit non-residents

• Local practice not necessarily simplified – scrutiny intensified

• No relief on tax/withholding obligation

SAFE

(Huifa [2014] No. 2)

“Circular 2”

• Procedures for dividend distribution simplified (see next slide)

• Distribution cap at retained earnings removed

• Overseas lending generally capped at 30% of total equity; tenure of the loan no longer limited to two years


Dividend distribution

Relaxation of regulatory procedures

Documents needed by remitting bank; when repatriating dividends offshore

Before 1 Sep 2013

1 Sep 2013 – 10 Feb 2014 “Huifa 30” & “Bulletin 40”

Effective 10 Feb 2014 “Circular 2”

not exceeding USD 50K

exceeding USD 50K

not exceeding USD 50K

exceeding USD 50K

• Tax clearance certificate Yes No No No No

• Tax filing form N/A No Yes No Yes

• Audit report on profits, dividends and bonuses of the year issued by an accounting firm

Yes No Yes No No

• Resolution of the board on distribution of profits, dividends and bonuses

Yes No Yes No Yes

• Capital contribution verification report issued by an accounting firm

Yes No Yes No No

Frequently Asked Questions

• Can dividend be repatriated exceeding retained

earnings (conflict with FIE Law)? What is the PRC tax

implication of a distribution in excess of the earnings?

• Local implementation (e.g., financial statement and tax

return may still be required at some locations)

• Can dividend be repatriated more than once a year

(e.g., quarterly/semi-annually)?

• Can treaty benefit apply to reduce WHT rate (tightened

beneficial ownership requirement)?


Direct overseas lending

Key considerations

• Foreign currency loans

–Generally capped at 30% of total equity; tenure of the loan no longer limited to 2 year

• RMB overseas lending:

–No cap; longer term; bank to process

• Implementation status of the rule in local practice

• Business tax on interest income and stamp duty on the loan agreement

• Risk of the loan being re-characterized as dividends

Before December 2012: Foreign currency loan was limited to the overseas subsidiary of a domestic company

Effective December 2012: SAFE issued Circular No. 59 allowing foreign currency loans to be made to overseas parent

Effective February 2014:

SAFE issued Circular No. 2 on

January 24, 2014 allowing

foreign currency loans to be

made to overseas affiliates

PBOC rules relax RMB

overseas lending

December 2012 January 2014

July 2013


Relaxation of regulatory procedures for outbound

investment On 2 December 2013, the State Council issued Guo Fa [2013] No. 47 - the

Investment Project Catalogue Subject to Government Approval (2013 Version).

Circular 47 relaxed the regulatory procedure for certain outbound investment

projects by replacing the approval requirement with reporting requirement.

Projects subject to approval Projects subject to reporting

Offshore

projects

a) Approval by Investment

Department of State Council

• Projects with investment from the

Chinese party of over USD1 billion

• Projects in sensitive countries,

regions or sensitive industries

a) Reporting to Investment

Department of State Council

• Investment made by enterprises

managed by central government

• Investment with amount of US$300

million or more made by local

enterprises

Establishment

of Offshore

enterprises

a) Approval by Ministry of Commerce

• Establishment of offshore

enterprises (other than financial

enterprises) in sensitive countries,

regions or sensitive industries

a) Reporting to Ministry of Commerce



enterprises) by enterprises

managed by central government

b) Reporting to provincial government



enterprises) by local enterprises



SFTZ – overview

September 2013

October 2013

2014

• Overall Framework Plan released (released

on 27 September, but effective from 18

September)

• Shanghai Pilot FTZ Administrative

Committee established (28 September)

• Shanghai Pilot FTZ officially launched, and

Negative List released (29 September)

• Foreign Investment Law

suspended in Shanghai Pilot

FTZ (1 October)

• Shanghai Pilot FTZ

Administrative Measures

implemented (1 October)

• Specific pilots: continued rollout

expected

• National level

Administrative

Regulations

• Pilot full

implementation

expected (2014)

Premier Li Keqiang

―Opening-up its [China] economy is an

approach to stimulate domestic demand and

push a new round of reform…

It is time to find a new pilot program. With its

ability and its achievements, Shanghai must

fuel reform through opening-up its economy

and there is still huge potential to realise this…

Based on the existing comprehensive bonded

zones, Shanghai is encouraged to … study,

pioneer and establish a Pilot FTZ‖

Late 2012 March 2013 July, August 2013

• China Central Economic

Working Conference

recommended

acceleration of “free

trade area” strategy

• Standing Committee of

Shanghai Municipal

People’s Congress issued

regulation to establish

the Shanghai FTZ

• Shanghai Pilot FTZ

framework approved in

principle by State Council

(July 3)

• Approval on suspension of

the application of foreign

investment law in Shanghai

FTZ by Standing Committee

of the National People’s

Congress (August 30)

China (Shanghai) Pilot Free Trade Zone Timeline so far


The SFTZ framework

Overall objective

• The SFTZ aims at piloting a number of economic reform initiatives, supporting China’s desire to

open to foreign trade and investment

• Learnings from this pilot will be incorporated into additional free trade zones, on the journey to an

open Chinese economy

Footprint

• Combined area of 28.78 km²

– Waigaoqiao free trade zone & bonded logistics zone

– Pudong airport free trade zone

– Yangshan bonded port

Scope

• The reforms are rooted in 4 areas (trade, investment, administration, and finance), across

6 sectors (financial services, transport, commerce and trade, professional services, culture, and

public services)

• The scope is quite narrow at present, limited by the “negative list” [See next slide]

SFTZ

framework

Trade reform

• RMB cross-border usage

• Cross border investment and transactions

• Off-shore trade

• Re-export hub

Investment

reform

• Market access restrictions, mainly affecting foreign investors, will be lifted

• Tax reform measures to be confirmed

Administrative

reform

• Relaxed rules for registration of foreign companies

• Simplified process for ongoing compliance to local regulations

• Investor protective measures (e.g., protection of intellectual property, anti-monopoly measures)

Financial reform

• Free-flow of capital

• RMB capital accounting liberalization

• Off-shore financial center

• Free trade multi-currency accounts for residents

• Potential for interest rate liberalization


Restrictions in addition to

the negative list

The negative list

Items on the negative list

• Refer to the catalogue for the Guidance of

Foreign Investment Industries, all of the

prohibited and restricted industries

unless modified by negative list

• Encouraged industries: provisions

containing the wording ―Equity Joint Venture

(EJV) or Cooperate Joint Venture (CJV)

only‖, ―EJV only‖, ―relatively controlled by

the Chinese side‖, ―controlled by the

Chinese side‖, ―CJV or partnership only‖

• Permitted industries: with additional

requirements in existing rules and

regulations, for e.g., wholesale of salt

Restrictions in addition to negative list

• Pre-approvals still required even for

domestic investment projects as

stipulated by the State Council

• Foreign investors are prohibited (or

restricted) from investment: in industries

that are prohibited (or restricted), in

projects and activities that compromise

national or public security, and the

business compromise public interest

• Negative list does not apply to public

management, social security, and social

organizations; international

organizations

Areas outside negative list

–reporting applies in place

of pre-approval

Special approval /

examination

required

Current restrictions on market

access for foreign investment

Without

modification

Items not on the negative list

• Pre-approval of foreign invested projects

and foreign investment entity (FIE) set-up

no longer required

• 6 relaxed service industries: listed in the

appendix of the framework plan

• Former relaxations: for e.g., Hong Kong,

Macau, and Taiwan investors entitled to

the more favorable treatment, if any,

available under Closer Economic

Partnership Agreements and Cross-Straits

Agreements

The following existing

regulations still applicable

• Foreign investors undertaking

M&A, strategic investments in

listed companies, capital

contributions using equity

interest of domestic

companies

• National security or

anti-monopoly investigations


SFTZ Tax incentives

Explicit policies Main content

Promote

investment

• Income tax payment (within 5 years) on income derived from

the increase in asset valuation may be paid within 5 years

• Individual income tax incentive in relation to awards to certain

employees in short supply by means of shares or capital

contributions

Promote trade

• Export tax refund for financial leasing companies or the project

related subsidiaries of financial leasing companies

• An aircraft with a dead weight of 25T or greater is entitled to the

preferential import VAT treatment

• The policy that charges custom duties on the domestically sold

goods will be implemented on a trial basis

• Goods imported by the production-oriented enterprises and

production-oriented service enterprises may be exempted from

taxes

• Improve the tax rebate trial policies at the port of departure


People's Bank of China (PBOC) financial

guidelines

General principles

• Finance shall always serve real economy

• Stick to the reform and innovation

• Maintain the risk and steadily progress

the reform

Monitoring and administration

• Obligations of institutions inside the Free

Trade Zone (FTZ)

• Categorized administration and

assessment for non-financial institutions

in the zone

• Take temporary measures due to certain

circumstances

General principles

Bank account system innovation

4 reform

aspects

Convertibility of currency for

financing and investment

Enhancement of

cross-border use of RMB

Boost of interest rate

liberalization

Deepening reform in foreign

exchange administration

Monitoring and administration


Expanded cross-border use of RMB

Notification of PBOC Shanghai Headquarter to support China (Shanghai) Pilot Free

Trade Zone on enhancement of cross-border use of RMB (Yinzongbufa [2014]

No.22)

• All encouraging and supportive policies on enhancement of cross-border use of RMB

promulgated by the state are applicable in pilot zone

• Cross-border RMB settlement for items under current accounts and direct investment –

simplified procedure

• Personal banking settlement accounts – eligible personnel

Specific

businesses

• Overseas RMB borrowing – introduction of new quota concept

• Cross-border RMB cash pooling – leaving banks with more responsibility

• Cross-border RMB Pay On Behalf Of (POBO) / Receipt On Behalf Of

(ROBO) – consolidation of payment under current items with bona fide

business transaction

• Cross-border e-business RMB settlement business – encourage and

support

Administration /

monitoring

• Information reporting

• Anti-money laundering, anti-terrorism financing, and anti-tax evasion


Other developments

SAFE Circular [2012] No. 167

• Pilot for MNCs and SOEs

– Foreign currency cash sweeping

– Foreign currency cross-border borrowing and lending [Limit: mid and long

terms lending and borrowing subject to the ―Overseas Lending Quota‖ and

―Foreign Debt Quota‖ approved by SAFE]

– Foreign currency cross-border cash netting for goods transactions; and

– Centralized payment and collection

• Some of the MNCs and SOEs in Beijing and Shanghai joined these pilots from

2012 and the program has expanded to other cities in mid 2013, e.g. Jiangsu,

Zhejiang, Guangdong, Shenzhen and Hubei

PBOC: 2 December 2013 release

• Free Trade Accounts (FTA) – by FTZ resident

– Free funds flow among:

• The FTA and overseas accounts

• Mainland ―non-resident‖ accounts


Other developments (cont.)

• Other FTA in the FTZ

• Free Trade Account for Non-resident (FTN)

• The same entity’s other bank settlement account for current account

transactions, loan repayment, industrial investment, and other qualified

―cross-border‖ trading needs

PBOC: 20 February 2014 notice

• Two-way cross-border RMB cash pooling allowed for a multinational group

with an operating entity in the FTZ

– RMB funds limited to cash flows from operating and industrial investment

activities not from financing activities

– POBO / ROBO allowed: may receive and make current account payments of

cross-border RMB on behalf of domestic and foreign related parties

• Related parties include ―non-group members‖, which have supply chain

and close business relationships with the group – i.e., certain third parties

– RMB borrowing from overseas for less than one year not capped – cannot be

used to invest in securities, derivatives, entrusted loans



SAFE: 28 February 2014 notice

• FTZ entity may open a Domestic Foreign Exchange Funds Master Account

(―Domestic Account‖)

– To pool forex (FX) of domestic affiliates from funds from foreign capital and

foreign debt

– POBO / ROBO / netting FX current account payments on behalf of domestic

affiliates

• FTZ entity may open an International Foreign Exchange Master Account

(―International Account‖)

– Free flow of funds with overseas accounts and Domestic Account

• FTZ entity may freely convert capital account FX to RMB



SAFE: 18 April 2014 notice

• FX cash management extended to entities outside of SFTZ

– Innovative bank account system for MNCs

– Convenient utilisation of centralised funds of MNCs

– Simplified review of MNC’s documents

– Consolidated quotas of foreign debt and overseas lending

– ―Negative list‖ management for settlement of capital funds and foreign debts



Treasury innovation

Offshore RMB (CNH)

account (HK/SG/

London)

Header Special account

in Shanghai

Domestic

TBA sub A/C

1

Domestic

TBA sub A/C

2

Domestic

TBA sub A/C

3

Header entity is

registered in the

SFTZ

China outside SFTZ

Netting center

/ overseas

entities Overseas

Netting /

POBO /

ROBO

Shanghai Free Trade Zone RMB cross border pooling structure


Key Features

• Two way cash pooling: Centrally

manage cash flow generated from

operating and industrial investment

activities, not from financing activities

• POBO/ROBO allowed: receive and

make current account payments of

cross-border RMB on behalf of domestic

and foreign ―related parties‖ (includes

―non-group‖ members‖)

• ―Netting‖ of relevant receivables and

payables

Benefits

• China liquidity now accessible

• Can use excess funds from overseas

operations to fund China operations

Shanghai Free Trade Zone Foreign currency cross border pooling structure l (cont’d)

Participant A

FCY accounts

Participant B

FCY accounts

Participant C

FCY accounts

Overseas

pool header

Domestic FX

master account

Cross border FX

master account

(Pool header)

China mainland

Overseas

Key Features

• Funds managed via ―FX Domestic

Account‖ and ―FX International

Account‖. Free flow of funds between

the two accounts

• Subject to foreign debt quota

prescribed by the Shanghai branch of

SAFE.

• Additional capabilities compared to

outside FTZ

‒ A foreign-invested enterprise may

freely convert capital account FX to

RMB

‒ General ceiling for offshore foreign

currency loans raised to 50% of

equity (compared to 30%)

‒ SAFE approval not required for

provision of guarantees to offshore

parties and payment of guarantee

fees to guarantors offshore.



Tax considerations

The SFTZ tax regime

• The basic tax regime applies in the FTZ

– Corporate and individual income tax

– Withholding tax

– Business tax and VAT

• Some tax concessions

• Not a tax advantaged zone – yet


Tax considerations • Concentrate funds at Overseas Treasury Centre or Domestic

Treasury Centre?

• Costs vs benefits: Would tax on intercompany loan outweigh

the benefits of using RMB offshore?

• Interest income from China is subject to withholding tax and

business tax. Can the interest recipient claim foreign tax

credit in full? Is there any withholding tax leakage?

• Beneficial ownership: How does the ―Beneficial Ownership‖

test apply to the cross-border cash pooling arrangements?

• If the overseas lender/pool header is subject to tax in China,

how to fulfill the Chinese tax withholding and reporting

requirements?

• Should the Chinese pool header/participants determine their

taxable income for business tax purposes based on gross

interest or net interest?

Overseas

Co A Co B

Foreign Pool

Header

Cash Pool (RMB or

Foreign Currency)

Co X Co Y

FTZ

China


Cash Pooling

Tax Considerations

Tax considerations (cont’d) • Transfer Pricing issues

– Related party transactions under cash pooling includes:

• Intra-group loan between the header and participants

• Contributions by participants

• Performance of administrative role by the header

company

– See next slide Overseas

Co A Co B

Foreign Pool

Header

Cash Pool (RMB or

Foreign Currency)

Co X Co Y

FTZ

China


Cash Pooling

Tax Considerations

Cash Pooling Transfer Pricing Considerations

China Transfer Pricing Requirements

• Enterprise Income Tax Law and Implementation

Rules of the PRC, and,

• Circular 2 (Implementation Regulations for

Special Tax Adjustments (Trial))

‒ Arm’s Length Principle

‒ Documentation requirement: ≥ RMB 40 Million

(e.g., interest, service fees and royalties, etc.)

‒ Thin capitalization rule: i.e., debt-to-equity ratio

of 2:1 for nonfinancial enterprises and interests

deductibility

Frequent Concerns from Tax Bureau

• Difference on EIT among cash pool participants

• Arm’s length nature of lending/borrowing rates

and service returns

• Allocation of cash pool benefits / risks


Cash management –functions & risks

Treasury Services – service return

Lending and Borrowing – interest rate

Arm’s Length Principle

Cash Pooling Transfer Pricing Considerations (cont.)

Key Transfer Pricing Considerations

• How to fit business needs

• Benefits should commensurate with

functions and risks (―F&R‖)

• Allocation of Cash Pool Benefits

– Netting benefits: spread between short-

term debit and credit market interest

rates remains within the pool for the

netted balance

– Volume benefits: centralizing balances

and certain functions allows interest

savings or refinancing of balance by

more favorable interest terms

• FTZ Specific Considerations

CP: cash pool;

CPL: cash pool leader.


Lending/ Borrowing – interest rates

Allocation of cash pool benefits

F&R of participants

Guarantee and credit-

worthiness? FTZ specific

considerations

Compensation for participants

Compensation for CPL

Cash Pooling Transfer Pricing Considerations (cont.)


Transfer Pricing Methods

• Comparable Uncontrolled Price

(CUP)

• Cost Plus / Transactional Net Margin

Method (TNMM)

• Profit Split

Functional and risk allocation is a major

determinant for an arm’s length

allocation of the economic cash pool

profit.

Cost Plus Profit Split CUP

Routine

Non-Routine Pool

Participants

Pool Header

Pool Participants

Pool Header

Pool Header

Total Cash Pool Benefits

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