BEIJING: China will be at the forefront of embracing the emerging international tax rules to combat base erosion and profit shifting, known as BEPS, as it shifts toward becoming a “capital-export” country, said senior EY executives.
“China is not going to be a laggard. A lot of small developing countries are in a wait-and-watch mode, but China is definitely not,” said Jim Hunter, Asia Pacific Leader of EY.
His comments assume significance in the run-up to the October 5 release of recommendations by the Organization for Economic Cooperation and Development for the 15-point “Action Plan” on BEPS.
EY has been advising the OECD working groups on the draft recommendations that are not enforceable by law, but countries that want to follow them can enact their own laws.
The BEPS Action Plan represents an ambitious effort to modernize and align corporate tax rules globally with value creation and economic activity at the local level.
Under the existing tax regimes, multinational companies have been routinely shifting income from locations of their operations, like developing countries, to low-tax havens.
Developing countries have long decried this practice. Activities like manufacturing that take place in their jurisdictions escape the tax net as most value creation, such as research and development, happened in developed countries.
Multinationals in China carry out R&D and testing, but technology gained from these activities is generally not patented in the country. Intellectual property companies are incorporated in low-tax jurisdictions.
This has strengthened the case for China’s active engagement in crafting BEPS rules from the beginning. But that is not the only reason, according to EY experts, there is a question mark on whether China would collect more tax due to BEPS.
“The answer is, in some cases yes, while in others no,” said Hunter. “Under China’s historical model that it is ‘world factory’ more than ‘world market’, it is yes. But now the situation is different from even five years ago. China is rapidly becoming a ‘capital-export’ country.”
Jay Nibbe, global vice-chair of tax at EY, said another important factor is the emergence of the digital economy, which tends to be services-based. The issue of where the value is created and where the taxation should happen will shift.
“So it’s hard to predict winners and losers as economies continue to evolve and the snapshot of today will be quite different from five years later.
“Ultimately, it’s an economy that will benefit from modernization of its tax system. You’ll see it embrace these new principles. Not only would it encourage additional inbound investment, it would be viewed as business-friendly, and even encourage outbound investment from Chinese companies,” Nibbe said.
What taxpayers really care about is “clarity and consistency” of the rules, he said. They hope that as various countries adopt new policies, rules are consistent that five years from now, even if their economic model changes, they are not constantly changing their taxation approach.
“Certainly for China outbound investment becomes a bigger factor. Chinese companies will also have to follow rules implemented by governments in Southeast Asia, Africa and so on. That clarity and consistency will be important for Chinese companies as well,” Nibbe said.
