China to sign OECD multilateral tax assistance convention next week

According to the website of the OECD, the international body responsible for co-ordinating economic policy, Chinese tax commissioner Wang Jun will sign the convention on Tuesday. The convention provides a framework for administrative co-operation between over 50 developed and developing countries when assessing and collecting taxes, with a particular focus on preventing tax avoidance and evasion.

Shanghai-based corporate tax expert Bernd Stucken of Pinsent Masons, the law firm behind Out-Law.com, said that China's accession to the convention would increase the investigation efficiency of the Chinese tax authorities. These had recently become more aggressive in investigating potential cases of tax evasion, he said.

"Among foreigners and foreign companies it has been widespread practice for quite a while not to declare all taxable income in China," he said. "Insufficient information on offshore revenues often resulted in limited success in identifying revenues taxable in China."

"Everybody engaged in business in China is well advised to carefully check whether activities are compliant with Chinese tax laws and regulations and, if necessary, rectify any non-compliance. In particular, long-lasting activities which have never been reviewed bear the risk that they are built on practices which are not fully tax compliant," he said.

The Convention on Mutual Administrative Assistance in Tax Matters was developed jointly by the OECD and the Council of Europe in 1988. In 2009, the agreement was updated to bring it into line with international standards on the exchange of information for tax purposes, and to open it for signature to countries that were not members of the OECD or the Council of Europe. More than 50 countries have either become signatories or have stated their intention to do so since the convention was amended.

The amended convention (17-page / 453KB PDF) is intended to facilitate international co-operation in relation to the application of national tax laws, while still respecting the fundamental rights of taxpayers. It allows for all possible forms of administrative co-operation between states, ranging from the automatic exchange of information to the recovery of foreign tax claims.

Recent work by the OECD includes the production of an action plan on base erosion and profit shifting (BEPS) at the request of the G20, which identifies 15 specific actions to prevent international tax avoidance by multinationals. This was developed following allegations that large companies have been 'profit shifting', or deliberately transferring profits, from high tax jurisdictions to those with lower rates of tax.

"The signing of the convention could provide the Chinese tax authorities with a new, powerful weapon in combating international tax avoidance through treaty shopping," said Robbie Chen, a Shanghai-based tax expert with Pinsent Masons.

"By cooperating with their overseas counterparts, the Chinese tax authorities could strengthen their current practice of scrutinising the beneficial ownership status of treaty benefits applicants, and questioning the purpose and substance of intermediate holding companies," he said.