Shanghai, as the front line in China’s opening-up to the world and one of its most economically dynamic regions, has now rolled out some pioneering initiatives in tax services.
Advance tax rulings
The Shanghai Municipal Tax Service Measures for the Administration of the Work Associated with Advance Tax Rulings (for Trial Implementation), issued on 29 December 2023, represent the first set of rules on advance tax rulings issued by a provincial-level tax bureau in China.
Pursuant to the measures, any corporate taxpayer in Shanghai may apply to the municipal-level or district-level tax bureau for an advance ruling on the specific tax treatment of a complex tax matter expected to arise in the near future.
As a service provided by tax authorities, the objective of advance tax rulings is to ensure certainty and consistency in the application of tax rules, and resolve in advance potential disputes that could arise between the tax authority and a taxpayer.
The system also reflects an important feature of a mature and fully fledged tax system, and is applied widely across the Organisation for Economic Co-operation and Development (OECD).
Although there are no official provisions in mainland China on the advance tax ruling system in the Law on the Administration of the Levy and Collection of Taxes, or other tax policies issued at the level of the State Taxation Administration, local tax authorities have provided advance tax ruling services to taxpayers in certain specific circumstances.
For example, Nansha, Guangzhou issued the Provisional Measures for Advance Tax Rulings in Complex Tax Matters (for Trial Implementation) in 2020; Guangzhou and Shenzhen jointly rolled out joint advance ruling services for international tax matters in 2021; and the Yangtze River Delta region is exploring launching cross-provincial advance tax ruling services.
Against such a backdrop, the measures issued by the Shanghai Municipal Tax Service represent the first generally applicable advance tax ruling mechanism that covers all corporate taxpayers in a tier-1 city, marking a major step forward by China’s tax authorities in terms of tax services.
However, the legal effect of ruling opinions remains a subject of debate.
The measures only outline the general framework of the advance tax ruling system, with detailed provisions on specific implementation very limited. Whether ruling opinions are final and legally binding on the tax authorities remain uncertain.
However, on the whole ‒ based on the basic principle of protection of reliance interests in administrative law ‒ a written ruling opinion issued by a tax authority can still ensure tax certainty for the taxpayer to a significant extent.
Furthermore, a taxpayer needs to comprehensively consider whether to opt for an advance tax ruling.
It goes without saying that introduction of the system can promote certainty and consistency in the application of tax rules and reduce enterprises’ tax compliance costs.
However, the ruling opinions of a tax authority will be affected by various factors such as specific provisions of the tax rules, facts of the case in question, and levy and administration stance of the competent tax authority.
Additionally, applying for an advance tax ruling will not ensure the taxpayer will receive a favourable tax treatment outcome.
Accordingly, before deciding to apply for an advance tax ruling, taxpayers should duly prepare for the possibility of receiving a disappointing conclusion; and fully weigh the strengths of their theoretical defence and practical risks.
Centralised jurisdiction over cases
The Shanghai Municipal Higher People’s Court issued the Regulations for Centralised Jurisdiction over Administrative Cases in Shanghai in which a Tax Authority is a Party, on 23 February 2024.
Pursuant to the regulations, jurisdiction of administrative cases in Shanghai involving tax authorities is centrally exercised by the Shanghai Railway Transport Court and the Third Intermediate People’s Court of Shanghai Municipality.
Additionally, the regulations provide for jurisdiction in such procedures as the retrial and enforcement of effective judgments. The regulations entered into effect on the date of their issuance.
With respect to administrative cases at first instance and appeal accepted by other courts before, and pending as at 23 February 2024, the trial will continue by the courts originally accepting the cases.
For those not registered ‒ and cases not opened before 23 February 2024 ‒ the competent court will need to be determined anew in accordance with the regulations.
Shortly after the issuance of the regulations, the Shanghai Court Tax Trial Division was officially established in the Shanghai Railway Transport Court, making it the first dedicated tax trial division in the country.
The impartial and efficient resolution of tax disputes is a key parameter in the World Bank’s business environment assessments, and a dedicated tax trial division is conducive to enhancing the independence and professionalism of adjudicating tax disputes.
Additionally, the implementation of a cross-regional centralised jurisdiction in Shanghai is conducive to the derivation of uniform criteria for judicial tax adjudication.
Current Chinese tax laws lack clear provisions on certain issues, giving competent tax authorities greater discretion in practice. In some instances it even gives them, to a certain extent, a monopoly on interpreting tax laws.
Additionally, varying interpretations of tax rules by different tax authorities will often lead to inconsistent tax treatment outcomes for the same matter, due to regional differences.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice.
You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com
