Bulletin 16: China makes a pre-emptive strike on BEPS

BEIJING – China’s State Administration of Taxation of China (SAT) has introduced measures to deny income tax deductions for certain service fees and royalties paid by Chinese companies to their overseas affiliates. The measures may be retroactive as far back as 10 years.

Lawyers Baker & McKenzie say what it terms “these highly controversial measures” were publishedin March 18 in Bulletin 16, and appear to stem from China’s initiatives to implement rules that it views as related to the OECD Base Erosion and Profit Shifting (BEPS) Project.
Bulletin 16 targets service fee and royalty payments made to affiliated companies outside China that do not undertake functions and risks and/or lack economic substance. In the case of royalties, the focus is also on payments to companies that have legal ownership of the underlying intangible assets, such as intellectual property, but have not contributed sufficiently to the creation of value in the intangibles.
“Bulletin 16 appears to be retroactive at least to January l, 2008 and possibly as far back as 10 years, which is the statute of limitations for special tax adjustment cases,” B&M says in a Client Alert.
“The new measures in Bulletin 16 will likely have a significant impact on holding structures, supply chain planning and cash repatriation strategies of multinational companies. At the same time, certain aspects of Bulletin 16 may be open to principled legal challenge, depending on how the SAT and local tax bureaus interpret and implement the new measures. www.bakermckenzie.com (ATI).