How will BEPS 2.0 impact mainland China and Hong Kong?russonxiao
As mentioned in our previous article, the «Multilateral Convention on the Implementation of the Relevant Tax Treaties on the Prevention of Base Erosion and Profit Shifting (BEPS)» entered into force on 1 September 2022. It aims to revise existing bilateral tax treaties as a package. The OECD (Organization for Economic Cooperation and Development) has issued the final implementation guidance for pillar two of the BEPS 2.0 initiative, and following continued discussions and disagreements over the details of the rules, the implementation of a global minimum tax rate of 15 percent has been delayed until 2024.
On 1 February 2023, OECD released the «Agreed Administrative Guidance for the Pillar Two GloBERules» (hereinafter “Guidance”). These are a set of administrative guidelines for members of the “OECD/G20 Inclusive Framework on BEPS” to implement the GloBE Rules, which make large multinational enterprises (hereinafter “MNEs”) liable for a minimum corporate income tax (hereinafter “CIT”) rate of 15 percent on the income arising in each of the jurisdictions in which they operate. This initiative is commonly referred to as BEPS 2.0.
Both mainland China and Hong Kong have agreed to the minimum tax rate and associated rules, and have agreed to the “Two Pillar Solution” and GloBE Rules, committing to reforming the international tax framework and tackling tax evasion by MNEs. This includes making changes to domestic tax regulations in order to meet the minimum 15 percent CIT rate, hence, this means some multinationals in China may be required to pay top-up taxes in the future. Our article will discuss the potential impact of the China BEPS 2.0 framework on multinationals.
The “Two Pillar Solution” is: –
- Pillar One – focused on profit allocation and nexus, requiring MNEs to pay taxes in the countries where they have users, even if they have no commercial presence there.
- Pillar Two – focused on a global minimum tax rate of 15 percent targeting large MNEs with global turnover above €750 million.
The GloBE Rules only apply to MNEs with a global turnover of at least €750 million. It does not apply to companies that have no foreign presence, government entities, international and non-profit organizations, or entities that meet the definition of a pension, investment, or real estate fund.
For mainland China, this may only require minor adjustments. Mainland China’s standard CIT rate is 25 percent, however, certain industries in certain jurisdictions are eligible for a lower CIT rate of 15 percent. Although this still meets the BEPS 2.0 threshold, various additional tax incentives may put a company’s CIT rate below 15 percent. These jurisdictions will therefore have to ensure that the MNEs that do not meet the threshold for BEPS 2.0 pay top-up taxes to ensure they hit the 15 percent minimum.
For Hong Kong, the situation is similar, although the scope of companies that will be affected will be broader. Effective from 1 April 2018, there’s a two-tiered profit tax rate regime in Hong Kong. The profits tax rate for the first USD 2 million of assessable profits is at a rate of 8.25%, while the one above USD 2 million is subject to a rate of 16.5%. This is Hong Kong’s standard CIT rate, in which the second tier is above the BEPS 2.0 threshold, but the rest, with the various tax incentives available, many companies pay CIT rates of below 15 percent. This could be the one to be focused on, and probably will be required to pay top-up taxes. However, same as in mainland China, the specific practical standards of localization need further attention.
Although the Guidance is the final piece of implementation guidance for IF members, the OECD acknowledges they will continue to work in the coming year before implementation. This will include ensuring the coordinated implementation of the rules over the year, as well as soliciting further feedback from stakeholders in order to further refine the rules and achieve “better tax certainty”.
In the statement released along with the Guidance, the OECD said that the guidance will be incorporated into an updated commentary (interpretation guidelines to the GloBE Rules) later in 2023, replacing the original version released in March 2022. In addition, the IF will “continue to release further Agreed Administrative Guidance on an ongoing basis, to ensure that the GloBE Rules continue to be implemented and applied in a coordinated manner”.
Should you have further questions, please feel free to contact us.
International tax reform: OECD releases technical guidance for implementation of the global minimum tax
«Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy»
 GloBE: Global Anti-Base Erosion
 «Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy»
(Continued from the previous article)
- Provision on bona fide acquisition of false special invoices
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement» defines what is “bona fide”.
It is stated in the Circular that the purchaser shall be deemed to have obtained the false special invoice in good faith if all the following conditions are met:
- a genuine transaction between the purchaser and the seller;
- the sale is made using the special invoices of the province (autonomous region, municipality directly under the Central Government, and cities listed in the plan) in which the purchaser is located;
- all the contents of the special invoices match with the actual ones, such as the name of the seller, the seal, the number of goods, the amount, and the tax amount; and
- no evidence that the purchaser knows that the special invoices provided by the seller were obtained by illegal means.
On the other hand, tax authorities of the purchaser’s location shall grant credit for input tax or export tax refund in accordance with the law, if:
- the purchaser is able to obtain again from the seller a legal and valid special invoice issued by the anti-counterfeit tax-control system; and
- the purchaser has obtained the certificate that the tax authorities in the place where the seller is located have conducted or are conducting an investigation and punishment on the seller’s false special invoices accordingly.
However, if the above conditions cannot be met, the input tax deducted or the export tax refund obtained by the purchasing party shall be recovered accordingly.
In addition, if the taxpayer has obtained in good faith a false special invoice that has been recovered and deducted in accordance with the law, then the taxpayer does not need to consider the provisions of Article 32 of the «Tax Collection Administration Law of the People’s Republic of China»: – If the taxpayer fails to pay the tax in accordance with the prescribed period, and the withholding agent fails to settle the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five percent of the tax due on a daily basis. If the taxpayer fails to pay the tax in accordance with the prescribed period, the taxation authority shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five ten thousandths of the late payment of tax on a daily basis from the date of the late payment of tax. In other words, tax authorities will not add the late payment fee arising from the recovery of past taxes.
- Necessary documentation in case the tax inspection happens
Through the above layer-by-layer analysis, accountants of enterprises need to prepare the necessary financial documents to respond to tax inspection, while supporting themselves if they are bona fide purchasers, including but not limited to: –
- the original special invoice was identified as a false invoice
- purchase and sale contracts/business contracts or other contracts involving the invoice
- the goods involved in the incoming order, outgoing order, transfer orders, or transport documents
- relevant accounting documents
- bank payment voucher
- VAT declaration report for the month in which VAT is deducted, and CIT annual return
- statement of the entire business transaction and tax declaration
To sum up, enterprises do not need to be too panicky after receiving the Notice of Tax Inspection. Prepare the above list of supporting materials first and conduct self-inspection after communicating with the relevant tax officer to understand the situation. Companies that have evidence to prove they are bona fide invoice purchasers should actively respond to the tax authorities’ inspection and cooperate with the follow-up investigation. The enterprise will usually pass the tax inspection successfully if they respect all the conditions mentioned previously.
If you have any questions, please feel free to contact us.
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement»