China makes significant progress on tax certainty, launching pilot program for Advance Tax Rulings

China is currently preparing for a new round of revisions to the Tax Collection and Administration Law. As China's national legislature, the Standing Committee of the 14th National People's Congress has listed the revision task as one of the key projects in its five-year legislation plan for 2023 to 2028. Considering taxpayers' demand for the Advance Tax Ruling (ATR) system, the incorporation of ATR in this revision is highly anticipated, with the hope that it will further clarify the ATR's legal status, strengthen the binding force of the system and provide institutionalized guarantees for enhancing tax certainty.

Background

It is widely recognized that tax certainty plays a pivotal role in stimulating investment, fostering economic growth and creating job opportunities. As new business models continue to emerge and the economic environment becomes increasingly globalized, tax certainty enables businesses to make informed operational decisions and manage tax risks effectively. From the government's perspective, tax certainty contributes to a stable and predictable tax environment, which enhances tax compliance.

In practice, investors' demand for tax certainty has been growing significantly. In addition to the well-known Advance Pricing Arrangement (APA) for transfer pricing issues, the ATR regime, which covers a broader range of tax matters, is also widely adopted worldwide. Under the ATR regime, tax authorities provide taxpayers with explicit opinions on how tax policies apply to their foreseeable complex tax matters. On the one hand, the implementation of the ATR system offers taxpayers a clear roadmap for tax treatment and mitigates the risk of tax disputes. On the other hand, for tax authorities, ATR can reduce tax administration costs and considerably optimize the tax environment.

China's exploration of the ATR system spans several decades. In 2013, the State Taxation Administration (STA) issued the "Opinions on further strengthening personalized tax services for large-scale enterprises" (Shuizongfa [2013] No. 145), which introduced the concept of "ATR on tax matters for qualifying large-scale enterprises." In 2015, a draft amendment to the Tax Collection and Administration Law proposed incorporating the ATR into the tax collection and management system, but this was ultimately removed from the final law. However, in recent years, under the guidance of the STA, various cities and regions (e.g., Shanghai, Beijing, Xiong'an New Area, Shenzhen, Jiaxing, Nanjing, Anhui and Hainan) have been actively exploring the implementation of ATR. Shanghai and Beijing took the lead in issuing local regulatory documents in 2023 and 2024, respectively, that stipulate the applicable taxpayers, scope, procedures and other aspects of local ATR. Additionally, it is worth noting that starting from 28 December 2023, the Shenzhen Municipal Tax Bureau has been providing tax compliance risk assessment services for cross-border operating enterprises regarding potential special tax adjustment matters.

Overview of ATR legislation and practices on a national level

• ATR legislation
  
  China is currently preparing for a new round of revisions to the Tax Collection and Administration Law. As China's national legislature, the Standing Committee of the 14th National People's Congress has listed the revision task as one of the key projects in its five-year legislation plan for 2023 to 2028. Considering the strong demand of taxpayers for the ATR system, the incorporation of ATR in this revision, further clarifying its legal status, strengthening the binding force of the system and providing institutionalized guarantees for enhancing tax certainty, is a welcome development.

• Current practices
  
  In practice, China currently provides personalized services for special matters of qualifying large-scale enterprises in the application of the ATR, providing policy certainty for the business decisions of these enterprises. As early as 2012, the STA signed tax compliance agreements with several large-scale enterprises, all of which included provisions for ATRs.

Overview of ATR system and Practices on a Local Level

Brief introduction of local ATR practices

Shanghai took a significant step forward in the development of its ATR system by releasing the Administrative Measures for ATRs (Trial) (hereinafter referred to as the "Shanghai Trial Measures") in 2023. Compared to the local circulars previously issued by other regions in this regard, the Shanghai Trial Measures provide more comprehensive and systematic provisions on the applicable taxpayers and scope, application procedures, and subsequent management matters related to ATRs. This enhances the operability and standardization of the ATR system in Shanghai.

The Beijing Administrative Measures for ATRs (Trial) (hereinafter referred to as the "Beijing Trial Measures") released in the early 2024 share similarities with Shanghai's approach. However, the Beijing Trial Measures clearly outline the circumstances under which an ATR opinion automatically becomes invalid. These circumstances include:

• The taxpayer provides illegal, untrue, inaccurate or incomplete information and materials.
  
  
• The actual tax-related matters differ from the content described in the ATR application materials.
  
  
• The business or transaction activities subject to the ruling have not been implemented within 24 months from the date of issuance of the ATR opinion or, if implemented within this period, the corresponding tax treatment has not been carried out in accordance with the ruling opinion.
  
  
• Changes in tax policies on which the ruling was based have a substantial impact on the ruling opinion.
  
  
• The applicant raises objections to the ATR opinion.

In addition to circulars published by Nansha of Guangzhou, Jiangsu Free Trade Zone Nanjing Area, Hainan, Heilongjiang and Maoming, which briefly outlined the methods for implementing ATRs in their respective regions, public information indicates that tax authorities in Shenzhen, Guangzhou, Ningbo, Qingdao, Xiong'an New Area and other locations have also formulated relevant regulations that have not been publicly released. For reference, the key elements of the publicly released ATR regulations from some regions are summarized in the table below.

Among these, several notable features of the local ATR regulations are worth highlighting:

• Applicable scope — tax matters covered or excluded

  
  The scope of tax matters eligible for ATR is usually outlined by local tax authorities, with some regions further specifying excluded matters. Generally, for a tax-related matter to qualify for an ATR under the current trial measures in these regions, The matter should:

  • Be expected to occur in the near future
    
    
  • Be of significant economic interest to the applicant
    
    
  • Constitute a specific and complex tax-related matter
    
    
  • Have reasonable commercial purposes
    
    
  • Not be prohibited by relevant laws and regulations
    
    
  • Not be directly governed by current tax laws and regulations

  Because explicitly excluded matters vary by region, enterprises with ATR needs should first understand the local policies and the scope of application of the prevailing trial measures. When necessary, they can proactively communicate with the competent tax authorities regarding potential future matters.

• Eligible applicants

  Although the ATR system in China was originally designed to cater to the tax-related matters of qualifying large-scale enterprises, local ATR regulations, with the exception of Maoming, do not explicitly exclude other types of taxpayers (e.g., nonresident taxpayers) from the scope of application. Taxpayers may consult with the local supervising tax authorities or professional advisors regarding their eligibility for an ATR, if needed.

• Covered tax types

  The relevant local tax authorities have not explicitly enumerated or excluded specific tax types in their ATR regulations. In theory, the ATR system applies to the tax types administered by the local tax authorities.

• Cross-border transactions

  The ATR system is widely applicable to various tax-related matters. The regulations released by local tax authorities do not exclude cross-border transactions from the scope of application.

• Joint ruling on cross-region transactions

  Enterprises operating across regions in China may seek ATRs on cross-regional tax-related matters, especially in the context of potentially inconsistent interpretations and applications of tax laws and regulations in different regions.

  Some regions have begun to promote joint ATR mechanism. For example, tax authorities in Shanghai, Jiangsu, Zhejiang, Anhui and Ningbo jointly announced that a rule on "joint ruling" will be launched for large-sized enterprises operating in the Yangtze River Delta region.1 Details are yet to be announced.

  In addition to the Yangtze River Delta region, city clusters such as the Beijing-Tianjin-Hebei region and the Guangdong-Hong Kong-Macao Greater Bay Area have been exploring cross-regional coordination mechanisms for tax-related matters in recent years. It is reasonable to expect that the joint ATR mechanism may be further expanded and implemented across broader regions in the future.

Assessment service for special tax adjustment risks on cross-border transactions offered by the Shenzhen tax authority

In December 2023, the Shenzhen tax authority launched an assessment service for enterprises seeking to improve tax certainty on cross-border transactions.2

The assessment service and the ATR system share some similarities, as both can be understood as mechanisms for preventing tax disputes and improving tax certainty to a certain extent. Nonetheless, the assessment service primarily focuses on conducting a preliminary assessment of the risk level associated with the relevant matters, without providing specific opinions on tax treatments. In comparison, ATRs can involve more complex issues and may have a more significant impact on enhancing tax certainty.

Specifically, enterprises seeking an opinion on the special tax adjustment risk level of their future cross-border transactions can submit a request to the Shenzhen Municipal Tax Bureau for assessment. Upon accepting and evaluating the request, the tax authority will issue one of two types of assessment opinions:

1. The risk of special tax adjustments is low.
2. The tax authority is currently unable to form a conclusion on the risk level of special tax adjustments.

This service may effectively reduce the cost of tax compliance for enterprises with outbound investments. Enterprises should review business operations to help determine whether to file an application.

Precautions and implications

Currently, taxpayers have an increasing need for tax certainty and hope to obtain a written notice of tax treatments from Chinese tax authorities when reporting tax-related matters (such as the tax treatment of indirect share transfers under the STA Public Notice [2015] No. 7). But, according to tax laws and regulations, Chinese tax authorities are not obliged to issue confirmation documents determining tax obligations for nonresidents who have not incurred tax liabilities in China. Despite this, in recent years, Chinese tax authorities have been exploring and implementing pre-tax risk prevention mechanisms (e.g., ATRs and risk assessments) to assist taxpayers in improving tax certainty.

It is important to note that obtaining an ATR opinion on a particular matter does not mean that one is completely relieved of obligations. The taxpayer must follow up with the details in the transaction and comply with the ruling; otherwise, the ruling may become invalid or be revoked. Furthermore, taxpayers must pay attention to the development of ATRs in their respective regions and actively utilize policies to improve tax certainty.

Conclusion

In addition to the cities and regions mentioned above, other regions in China reportedly have also introduced policies related to ATRs, but these have not yet been widely discussed and only provide ruling services for complex tax-related matters of qualifying large-scale enterprises. Taxpayers in various regions who have such needs can actively communicate with the competent tax authorities to seek greater tax certainty.

In terms of legislation, it will be interesting to see whether the ATR concept is introduced in the Tax Collection and Administration Law and whether China will, at the national level, respond to taxpayers' demands to issue unified normative documents based on the pilot methods in various regions to further serve taxpayers.