On 8 May 2017, Mr. Klaus Iohannis, the Romanian president signed a law ratifying the Double Taxation Agreement (DTA) with China. Once ratified by China and becoming effective, the Agreement will replace the existing DTA of 1991 and effective as of 1 January 1993.
In the new treaty withholding tax rate on dividends and interest decreases from 10% to 3%, withholding tax rate on royalties decreases from 7% to 3%, specific provisions on commissions have been eliminated and an update of the provisions on exchange of information.
On 3 May 2017, the Ministry of Finance and the State Tax Administration issued a joint announcement listing the categories of goods benefiting from a reduction in the VAT rate from 13% to 11%. The list includes agricultural products, water, natural gas, coal and other 19 kinds of products. The new tax rate will enter into force on 1 July 2017.
The government of China plans new tax cuts to reduce the burden on businesses, support innovation and stabilize growth. On April 19, tax cuts were approved at a State Council executive meeting presided over by Premier Li Keqiang, after the government announced measures to decrease business costs in the first quarter.
Value added tax (VAT) will be simplified, small and micro companies will enjoy income tax incentives, and pretax deductions for innovation-based tech companies will rise, according to a statement made public after the meeting.
Tax incentives for venture capital firms will expand, with pretax deduction of commercial health insurance nationwide and a package of tax-cuts due to expire by 2016 extended for another three years.
A government work report released in March promised around 350 billion yuan ($51 billion) of cuts to corporate taxes and with business fees cut by around 200 billion yuan in 2017. After the new measures become effective, the total tax reduction will amount to more than 380 billion yuan this year, the statement said.
The meeting ordered authorities to implement the policies as soon as possible and come up with more new measures to reduce business fees. The meeting also approved a draft law on public libraries, which will be forwarded to the Standing Committee of the National People’s Congress for deliberation.
On 10 April 2017, the Senate of Romania approved the Double Taxation Agreement (DTA) with China for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
On 1 April 2017, The State Administration of Taxation (SAT) of China published a Bulletin-6 providing new transfer pricing (TP) guidance and strengthening the Mutual Agreement Procedure (MAP) process. Bulletin 6 is effective from 1 May 2017.
Transfer pricing methods
Bulletin 6 is in accordance with the OECD Guidelines with respect to specified transfer pricing methods and it provides for the comparable uncontrolled price (CUP) method, the resale price method, the transactional net margin method (TNMM), the cost plus method and the profit split method (PSM). Furthermore, Bulletin 6 allows for use of “other methods” where appropriate.
The detailed provisions of Bulletin 6 include governing the MAP process for transfer pricing (TP) cases. Pursuant to Bulletin 6, taxpayers should apply directly to the State Administration of Taxation (SAT) if they wish to invoke the MAP for their transfer pricing cases.
Inter-company services transactions
SAT Bulletin 6 encompasses the provision of empowerment of tax authorities to refuse a deduction for service fees paid to a related party that does not have particular effect. The Bulletin maintains internationally accepted and OECD sanctioned benefit test.
Intangible property transactions
Bulletin 6 contains the following 5 functions under OECD Guidelines that are relevant in determining the allocation of profits from use of intangible property:
- Exploitation and
Location specific advantages (LSA)
The SAT has applied the LSA concept as a bargaining chip in transfer pricing (TP) negotiations for a number of years. Bulletin 6 incorporates comparability analysis in requiring LSA adjustments. Multinational organizations may face an increasing number of cases where the tax authorities make transfer pricing adjustments based on LSAs.
The State Administration of Taxation (SAT) of China recently concluded the first advance pricing agreement (APA) for a cost sharing agreement (CSA) with a Fortune 500 enterprise in Guangdong Province. The CSA-APA focuses on international R&D costs and confirms that the R&D costs borne by the taxpayer relating to the development of intangible assets are deductible for corporate income tax (CIT) purposes and exempt from withholding tax during the 8-year period covered by the CSA-APA.
Cost sharing agreements (CSAs) are newly added content in the Implementation Measures of Special Tax Adjustments (Trial version) (Circular 2), to promote investment in new technology and development of intangible assets in China. The participants to CSAs share in the costs of R&D activities and have the right to enjoy the benefits from the developed or transferred intangible assets.
CSAs are a complex area of transfer pricing and involve issues such as the proper aggregation of global R&D costs and the matching of shared costs and benefits from intangible assets.
The Standing Committee of the People’s Congress of China passed the decision on the amendment to article 9 of the Enterprise Income Tax Law regarding the deductibility of charitable donations, on 24 February 2017. In accordance with the amendment, up to 12% of the enterprise’s total annual profits are deductible for charitable donations. Donations in excess of such percentage may be carried forward to the subsequent 3 years. The amendment became effective from 24 February 2017.