China updates general anti avoidance rules

After six years of public consultation, China’s General Anti-Avoidance Rule (GAAR) Measures finally came into effect on 1 February 2015.

China is the latest country to join the global tax community in fighting cross-border tax evasion and profit shifting.

The implementation marked the country’s commitment to reforming its tax regimes to align with the global practices.

The GAAR includes a set of extensive procedures in combating tax evasion, tax avoidance and abuse of trade treaties. It also introduces more stringent audits and administrative requirements, indicating the State Administration of Taxation (SAT) is stepping up its efforts in fighting tax-motivated structures and transactions aimed at shifting profits.

Under the new anti-tax avoidance laws, the State Administration of Taxation (SAT) is empowered to carry out investigations on corporate transactions without commercial purpose and economic substance. A GAAR review requires the taxpayers to submit required documentation in 60 days, with the tax authority having nine months to conclude its investigation. Therefore, companies involved in cross-border business may want to keep a full set of records to help ensure they stay compliant.

The latest measures could be considered the Chinese government’s response to the current international sentiment on the OECD’s Base Erosion and Profit Shifting (BEPS) projects. It is estimated that China loses US$4.8 billion in tax revenue every year to tax evasion and avoidance schemes. The implementation of the GAAR is a logical step for the country in securing tax revenue. It is also seen by tax practitioners around the world as China’s effort in revising its tax policy to embrace the international standards.

Read more about doing business in China

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Wandy  Chan
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