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LEGAL ASSISTANCE: Impact on Multi-National Companies with Business in China
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China Signs the Multilateral Convention on Mutual Administrative Assistance on Tax Matters


On August 27, 2013, China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”) which implies that all G20 countries have now fulfilled the commitment they made at the Cannes G20 Summit to sign the Convention and move towards automatic exchange of information related to taxation.

Previously, the Convention was only open to members of the OECD and of the Council of Europe. Nowadays, over 55 countries have signed it, including all the G20 countries, and more are expected to join so shortly.

The Convention provides for all possible forms of administrative co-operation between the member countries in the assessment and collection of global taxes. Specifically, the forms of administrative co-operation include, without limitation, spontaneous and automatic exchange of tax-related information that might be related to the global operation of the business of Multi-National Companies (“MNC”s).

MNCs in China, as a consequence, would be impacted by several aspects, such as the investment structure, profits distribution and internal transactions within the group, as well as the expatriation to personnel, which will be addressed later in this article.

Comparison between OECD Model Article 261 and the Convention in terms of Information Exchange

Prior to the Convention, the exchange of information was primarily relied on Article 26 of the OECD Model, which has been widely utilised as the structure in the conclusion of bilateral Double Taxation Agreement (“DTA”) between two countries. Under the OECD Model, a country can require tax-related information from another country when the two countries have concluded a DTA. This means, taking a look into China’s DTA with Spain, the tax-related information of MNCs with presence in Spain can only be collected by Chinese tax authority upon official request from China to the Spanish competent authority under the DTA.

Upon joining the Convention, the exchange of tax-related information would be much simpler, sidestepped the necessity of a DTA between the countries concerned. China now can request such information from any other signing country or countries simultaneously within the Convention. Furthermore, the information related to MNCs which have presence in Argentina might even be obtained automatically by the Chinese competent authority from an exchange system, instead of those upon request only.

Below is a summary and comparison of the characteristics of OECD Model and the Convention respectively.



OECD Model

The Convention

Signing Countries (with China)

Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.


Albania, Argentina, Australia, Austria, Azerbaijan (original Convention only), Belgium, Belize, Brazil, Canada, China, Colombia, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guatemala, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Nigeria, Norway, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, United Kingdom, and United States.


Tax covered

It applies to taxes on income, profits, capital gains, dividends, interest, royalties, employment income or income from estate, etc.

It applies to all kinds of taxes in the OECD Model and also applies to local taxes, compulsory social security contributions, inheritance or gift taxes, etc.


Information can only be exchanged between the two signing parties of the DTA.

Information can be exchanged between two or more signing parties of the Convention.


Main methods of information exchange

On request information exchange.

On request, spontaneous and automatic exchange of information, simultaneous tax examination and tax examinations abroad.




Potential Implications of MNCs in China

As the MNC’s investment information is likely to be obtained by States joining the Convention, MNCs in China might be impacted in the following ways: 

·Indirect investment structure

As a widely acknowledged idea on tax optimisation, many MNCs would apply an indirect investment structure for their investment in China, especially where there is no preferential tax rate within the DTA between their home country and China comparing with the domestic tax rate in China or there is no such DTA. The mentioned tax mainly refers to the Enterprise Income Tax (“EIT”) on income such as dividends, interests, royalties or capital gains sourced from China. A typical investment structure would be like this:

The above example demonstrates that the investor from country S might save taxes from this structure assuming country S has a DTA with Singapore. For example, the dividends sourced from China and remitted to the holding company in Singapore would be subject to 5% EIT under the DTA between China and Singapore, comparing with the 10% domestic EIT rate in China if the dividends would be remitted directly to the investor in country S under a direct investment structure (country S might even impose a domestic tax on such dividends without the said DTA).

Before signing on the Convention, in an eventual tax inspection, the Chinese tax authorities would have needed to liaise with the relevant authorities in Country S on a case-by-case basis to collect the relevant tax information in general terms and regardless of the local Chinese taxation rules. The business information of the investor in Country S might be transparent to tax authorities in China if country S is also a member of the Convention, but Chinese tax authorities would be more likely to raise enquiry/challenge on the look-through exposure. It would need more planning and careful consideration of all the business elements involved to assess upfront if the tax benefits might be available or not to the indirect investment structure. 

·Related party transactions

Similar to the indirect structure, the Transactions between Related Parties (“RPT”s) of the MNCs could also be impacted. MNCs operating in different jurisdictions with different tax rates commonly tend to internally fix the prices of inter-company sales due to internal reasons. As a general principle, the Chinese Transfer Pricing regime requires the RPTs to be performed in accordance with the arm’s length principle. This indicates that the prices for RPTs should be similar or identical with those acceptable in transactions between non-related parties, i.e., the fair market value.

Before the Convention, there the regulatory means for China to obtain information of the global pricing methods were scarce and the taxes in China would be imposed only on the basis of the prices on the transactions involving China. By joining the Convention, Chinese tax authorities now would be able to initiate a simultaneous tax examination with all the other countries concerned.  

·Expatriates assigned to China by MNCs

Expatriation is one of the most common arrangements of MNCs to share internal resources among affiliates. The expatriates assigned to China might receive salaries from both China and abroad due to reasons such as the continuity of social security contribution in their home country and the expatriates would usually be subject to Individual Income Tax (“IIT”) in countries of both residence and income source. For purpose of IIT compliance and optimisation, MNCs usually have internal policies for expatriates.

As from China’s joining the Convention, MNCs might have to pay close attention to the IIT on expatriates in China. For example, China requires expatriates to fully declare their salaries acquired in and outside of China, though there could be certain allocations to eventually reduce the IIT payable by the expatriates. However, in practice, due to the lack of knowledge on such IIT regime of China, information related to overseas salary received by the expatriates might have not been disclosed to the Chinese tax authority.

altGarrigues’ Observations

China is a country receiving significant foreign investment proceeding from various countries. It is not uncommon that the foreign investors, especially MNCs, might have tax optimization schemes via relevant tax planning globally. 

In parallel with Chinas joining of the Convention, foreign investors in China are advised to be more prudent with their tax planning and tax compliance in the future. For example, business substance should be well maintained by relevant affiliates in certain jurisdictions and benchmarking analysis for intra-group pricing shall be well performed by qualified providers, and the IIT compliance of relevant expatriates in China shall be closely monitored.

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