On 22 June 2011, the State Administration of Taxation issued the Announcement concerning the Effectiveness and Implementation of the Tax Information Exchange Agreement between the Government of the People's Republic of China and the British Virgin Islands and its Protocol ( 关于« 中华人民共和国政府和英属维尔京群岛政府关于税收情报交换的协议»及议定书生效执行的公告) which provides that the Tax Information Exchange Agreement between the People's Republic of China (“PRC”) and the British Virgin Islands (“BVI”), which was executed on 7 December 2009, with its explanatory Protocol signed on 11 December 2010, would be deemed effective as of 31 December 2010. The arrangements under the Agreement will apply to all income earned since 1 January 2011.
This Agreement establishes a framework between the PRC and BVI for the sharing of tax information, including with respect to the identity of shareholders in BVI companies. This Agreement shall provide greater transparency with respect to the BVI, which is seeking to improve its tax haven reputation.
Scope of Agreement
The Agreement specifies the particular taxes that are subject to information exchange, which includes PRC enterprise and personal income tax and BVI income, payroll and property tax. The sharing of tax information applies regardless of the nationality or residency of parties subject to the information request, provided the information is in the requested party's jurisdiction.
The information to be shared under the Agreement includes that foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.
Information regarding the ownership of companies, and the individuals within the ownership chain, falls within the scope of information that may be requested under the Agreement. The Agreement will allow the PRC tax authorities to obtain specific information concerning beneficial and legal ownership of BVI companies, permitting the potential extraterritorial imposition of PRC taxes. The identities of investors in BVI companies which have to this point been confidential will cease to be so with respect to PRC tax investigations.
Information Exchange Procedures
The Agreement does not provide for general information sharing. A specific information request is required, and the requesting party must demonstrate the requested information's foreseeable tax relevance. Significant disclosure concerning the object of the examination or investigation and the information sought is required in connection with the request. The requesting party needs to have conducted a thorough investigation prior to requesting information through the Agreement. The Agreement protocol specifically excludes “fishing expeditions” from the scope of the request. Some level of knowledge will be required in order to use of the Agreement to acquire specific information.
Information requests must be made in writing and the Agreement sets forth time frames for response. If information requested is not available, the receiving party will be obligated to undertake information gathering measures to obtain the information, even if such information is not needed for its own tax purposes and the activities investigated would not constitute crime in its own jurisdiction. The Agreement does not require a disclosure of commercial secrets, and all information disclosed pursuant to the Agreement is required to be kept confidential.
The scope of assistance includes permitting requesting party officials to come to the requested jurisdiction to participate in an investigation. These officials may meet with the tax payor, inspect records and attend on site audits.
The Agreement also sets out limited circumstances under which a requested party can decline to cooperate with a request under the Agreement, including when the request fails to conform with the Agreement, revealing the information would be contrary to public policy or the requesting party does not have the right to obtain the information in its own jurisdiction.
The effectiveness of this Agreement will be a major benefit for the Chinese tax authorities who now have a great opportunity to enforce the anti-avoidance provisions of PRC tax law and should improve the extraterritorial application of the PRC tax regulations. This Agreement may make it easier for Chinese tax authorities to enforce the provision of Tax Circular 698, which imposes PRC withholding tax on certain indirect transfers of PRC assets.