Tuesday, 11 October 2016

China signs third protocol to tax arrangement with Macau

The third protocol to the double taxation arrangement (DTA) between China and Macau, signed on 19 July 2016, contains three major changes:

  • A broadening of the definition of transportation business to include income and profits derived from the operation of ships, aircraft or land transport vehicles in shipping, air and land transport;
  • A reduction from 7% to 5% in the Chinese withholding tax rate on rental payments derived from the leasing of aircraft and ships (the 7% rate that applies for non-aircraft and ship leasing will remain unchanged); and
  • The inclusion of anti-avoidance measures in the dividends, interest, royalties and capital gains articles that will operate to deny benefits under the DTA if the main purpose for entering into an arrangement is to obtain these benefits.

China’s DTA with Hong Kong, another Special Administrative Region of the PRC, contains similar provisions in the fourth protocol to that arrangement (for prior coverage, see World Tax Advisor, 24 April 2015). However, the protocol with Hong Kong also contains a provision expanding the exchange of information article – in addition to China’s individual income tax and enterprise income tax, the tax information exchange obligation also applies to VAT, consumption tax, business tax, land appreciation tax and real estate tax. Under the exchange of information provision, if China’s State Administration of Taxation has questions about a Hong Kong taxpayer with respect to any of the above taxes, the Hong Kong Inland Revenue Department will be required to respond to the SAT’s request. This provision will strengthen the anti-treaty abuse measures and fulfill Hong Kong’s obligations to meet global standards for enhancing tax transparency. It is likely that similar information exchange measures eventually will be introduced in Macau for the same purpose.

Source: Deloitte