CHINA is NZ''s second largest trading partner. The NZ-China bilateral trade volume reached almost 10 billion NZD in 2009. NZ is also the first developed country to negotiate a free trade agreement (FTA) with China. The FTA came into force on 1 October 2008.
NZ has been focusing on the tax treaty developments with traditional partners such as Australia, the United Kingdom and America.
The existing NZ-China double taxation agreement (DTA) was signed in 1986 and the Second Protocol to the 1986 agreement was signed in 1997. The current version has not been updated for almost 13 years and it contains a substantial amount of expired Chinese corporate tax law references that create a lot of confusion for NZ users especially those who do not have much knowledge of China''s domestic tax law.
REASONS FOR AMENDMENTS
(1) The China Corporate Income Tax (CIT) law
This regime was enacted in 2007 with its detailed implementation rules issued in the same year. It became effective on 1 January 2008. This new regime has replaced the following two sets of old Enterprise Income Tax Laws.
? The Enterprise Income Tax Law (EIT) – previously applicable to domestic enterprises such as state-owned enterprises, collectively-owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises.
? The Foreign Investment Enterprises and Foreign Enterprises Income Tax Law (FEIT) – previously applicable to foreign enterprises and foreign invested enterprises.
Before 2008, NZ businesses in China were mainly taxed under the FEIT regime. China used to tax local firms and foreign invested firms differently.
The old Chinese tax incentive programs (tax reductions/exemptions) were designed to attract foreign investments and the local resident companies were not entitled to many of these benefits.
There were tax discrimination issues back to that time. Under the CIT, these two sets of corporate tax laws have become one complete set.Both local and foreign firms will be taxed under the same regime.
One big issue here is that the existing DTA is still referring to the expired China FEIT regime. However you can argue that under paragraph 2 of Article 2 of the DTA, it provides that the DTA "shall apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes".
My opinion is that the new China CIT law is certainly not identical and not substantially similar to the old law for the following reasons.
? The old FEIT regime referred in the current DTA was designed solely for foreign firms and now it has been replaced with a brand new tax regime that covers not only the foreign firms but also thelocal Chinese firms.
? The new China CIT law contains income tax rates, tax treatments and tax incentive programs that are substantially different from the old FEIT regime.
? The 1997 Second Protocol has already amended Article 2"taxes covered" by removing one category of taxes from the DTA list. We should take a consistent approach now and update the DTA when there is a major tax reform in the treaty partners.
Another big issue is the current tax sparing provisions under paragraph 3 of Article 23 are also referring to the expired tax incentive provisions of China. The old Chinese tax incentive programs offered tax reductions/exemptions to firms who had big investments in special economic zones, coastal areas and some remote areas.
The tax incentives under the new CIT laws are more industry-oriented. The new rules abolished the old tax incentives for foreign firms to invest in special regions, but instead provides incentives for high-tech, government supported infrastructure, agriculture, environmental protection and energy saving industries.
Again, you can argue that paragraph (b) and (c) of Article 23provides that if any future amendment that is only in minor respects or any new provision that has substantially similar character, the application of the existing tax sparing provisions won''t be affected.
However my opinion is that China has offered substantially different tax incentives under the new CIT law (new "industry-oriented" vs old "special economic regions"). There are uncertainties about whether the NZ tax authority has confirmed that all the new tax incentive provisions under the China CIT law should be accepted and applied to the existing DTA.
If China offers tax reduction to businesses that invest in certain agricultural products it might not be in the best interests of the NZ government to grant tax sparing credits to NZ tax residents who invest in such products in China. Due to these changes and uncertainties, it is better to update the existing tax sparing provisions in the DTA with the latest information.
(2) Tax sparing agreements under
NZ has or had tax sparing arrangements with China, Fiji, India, South Korea, Malaysia and Singapore (due to expire). Tax sparing means NZ grants tax creditsto NZ residents who are deemed to have paid foreign taxes that were actually reduced or exempted by the foreign country.
The NZ government has indicated its intention of withdrawing from all the existing tax sparing agreements on different occasions.
The main reason is that NZ tax base may have been abused by these provisions and there were loopholes exposed. In the next treaty talk, NZ may consider recommending the withdrawal of the tax sparing agreement with China. Of course, it is not a pure tax issue rather a
mixture of economic and political factors.
A conservative approach might be recommending a longer transitional period for withdrawal e.g. 15-20 years. It would be a challenging task for NZ tax authority if such discussion starts.
Although the current NZ-China DTA is still workable, there are urgent needs to update it with the latest tax law developments. Here are my recommended amendments.
? Article 2 of the DTA needs to be amended the new CIT law.
? Sub-paragraph (a) of paragraph 3 of Article 23 (tax sparing provisions) needs to be amended to reflect the new tax incentive provisions provided under the new China CIT law. The NZ tax authority has to confirm to what extent they would accept these new tax incentives provisions that should be applicable to the existing DTA.
? The NZ tax authority may consider recommending withdrawal from the tax sparing provisions in the next treaty talk. A conservative approach is preferred eg: a transitional period of 15-20 years.