China boosts tax reform and its global role

China has put taxes on its priority agenda for reform, exploring changes to domestic taxation as well as raising its profile in global tax issues.

Peter Ng, China tax leader with PricewaterhouseCoopers, said authorities are trying to create a fairer investment environment and portray a more vibrant country image in the international tax arena.

They are piloting and urging more taxation reforms and structural tax cuts to boost industrial upgrading and the transformation of the economic growth pattern.

Globally, China is enhancing its role in the international tax arena, not only participating, but also influencing the agenda setting, especially in the new technology realm.

Ng sat down with Shanghai Daily to discuss tax reforms underway in China and the country's involvement in international tax initiatives.

Q: What are the major trends in tax reform in China?

A: Tax reform is part of a grander agenda as our survey on global CEOs identified five mega trends China needs to adapt to: the global economic power shift to the East, accelerating urbanization, resource scarcity, climate change and technological breakthroughs. These are the foundations that set the direction of reforms China is undertaking based on my understanding. For the first time, China has given taxes a high priority in the country's reform agenda. Tax reform covers a wide range, including indirect taxes, individual income tax, the property tax, consumption tax and resource tax. The changes will have a deep impact across industries.

Q: What industries will be impacted?

A: Take, for example, the value-added tax (VAT) reform that is replacing the business tax for service industries. Started in Shanghai in 2012, the reform has expanded geographically and will include more industries. From June 1, telecommunication companies will be paying VAT instead of business tax, and financial institutions as well as a number of other industries will be included in the future. Such industries will need to adjust to the new system that allows them to claim tax credits from purchasing goods and services. The primary intention of the reform is to eliminate duplicate taxation, and it also helps upgrade the industries. The reform is being planned very carefully.

Also when the consumption tax is reformed and environment taxes are introduced, some high energy consumption or pollutant industries may be affected.

Q: Sometimes companies complain that tax authorities don't listen to them when new policies are adopted. How helpful do you think the tax authorities really are?

A: We can see the attitude of tax authorities changing in several aspects. For example, when the VAT policy was first introduced to replace the business tax, companies in the logistics sector expressed concerns on the uncertainty in the policy and the difficulties for implementation.

The tax authorities listened to feedback from companies and actually amended the implementation procedures. We feel the tax bureau is more proactive now and is more willing to ask companies and professional consultants about their opinions on tax reform. Our firm is actively engaged with tax authorities in exploring the expansion of the VAT and other tax reforms. To better achieve the original intention of policies, the authorities are being more careful in drafting rules.

Q: What kind of international role is China playing?

A: China is beginning to take a more visible role in international forums dealing with taxation. For example, Liao Tizhong, an executive with the State Administration of Taxation, serves as the first vice chair of a UN tax committee. China is also a co-chair of an Organization for Economic Cooperation and Development subcommittee that is helping address tax avoidance issues in relation to the digital economy. China is not a member of the OECD, but it is involved as a G20 member.

Last August, China signed the global Convention of Mutual Administrative Assistance in Tax Matters. It is a milestone move for China to work with other countries on tax administration.

Q: You mentioned tax issues related to the digital economy. What is that about?

A: It is about taxation of digital activities that take place across borders. Consumers, for example in the US, can place orders on a US website for goods that are manufactured in China and probably designed in another country. The concept is that profits should be taxed in the jurisdictions where the economic activities occur. But in a digital era, it's difficult to identify economic activities and where they take place. Do they refer to the manufacturing site, or the point of online sale, or branding or intellectual property? There are also problems in determining profit at each stage.

Q: How does China stack up against foreign countries when it comes to taxation of multinationals?

A: When the global economy is grim, every country wants to protect its tax income. China has the legal and enforcement system to monitor and prevent tax evasion. The government would likely step up tax surveillance, but we think that would be a positive measure in building a fairer environment.