On 1 July 2018, the State Administration of Taxation (SAT) issued Announcement  No. 37 (“Announcement 37”). This clarifies certain alterations to the application of interest income provisions of the Agreement Between the government of the People’s Republic of China and the government of the republic of Chile for the Elimination of Double Taxation and the Prevention of Tax Evasion and Avoidance with respect to Taxes on Income (“China-Chile DTA”). These alterations are made pursuant to a most favoured nation (MFN) rule included in the Protocol to the DTA. The alterations to the DTA treatments apply retroactively from 1 January 2017.
The MFN rule in the DTA Protocol states that:
In the event that pursuant to an Agreement concluded with a country after the date of signature of this Agreement, Chile agrees to a lower rate of tax in paragraph 2 of Article 11, such new rate shall automatically apply under the same conditions as established in that other Agreement, for the purposes of this Agreement when the provision of the first-mentioned Agreement becomes applicable, in particular with reference to financial institutions wholly owned by the government. In such case, the competent authorities shall by mutual agreement settle the mode of application of this paragraph.
Under the initially signed China-Chile DTA, paragraph 2 of Article 11, a 4% withholding tax (WHT) rate would be applied to interest arising to interest arising to banks, insurance companies and other financial institutions, with a 10% rate applying otherwise. The DTAs subsequently signed by Chile with Italy and Japan introduced additional circumstances in which reduced interest WHT rates could be applied and, by effect of the MFN rule, these are extended to the China-Chile DTA. Specifically:
The China-Chile DTA and its Protocol were signed on 25 May 2015 in Santiago and formally entered into force on 8 August 2016. Amongst China’s DTAs, it is the China-Chile DTA that adopts the greatest number of BEPS treaty changes, including those relating to permanent establishment (see KPMG China Tax Weekly Update (Issue 48, December 2016) for details). The MFN rule in the China-Chile DTA is also quite unique in China DTA practice.
In September 2017, the SAT had issued Shui Zong Fa  No. 103, setting out the reporting and documentation requirements for taxpayers operating business across tax districts, as well as the responsibilities of relevant local tax bureaus (LTBs) and state tax bureaus (STBs).
Given that all provincial LTBs have officially merged into STBs since 15 June 2018 (see KPMG China Tax Weekly Update (Issue 24, June 2018) for details), the SAT issued Announcement  No. 38 on 5 July 2018. This adjusts the relevant policies for adapting the changes, in particular, replacing references to “LTBs” or “STBs” with references to “tax authorities”.
According to the policies for cross-district operations, taxpayers are required to:
Announcement 38 applies from 5 July 2018.
On 5 July 2018, the OECD published a new set of bilateral exchange relationships established under the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA).
Over 100 jurisdictions have committed to exchanging information with each other under CRS. The legal basis for exchange relationships between jurisdictions is found, in most cases, in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the “Multilateral Convention”), in which 124 jurisdictions are participating. Within the framework of the Convention, the CRS MCAA has been signed by 102 tax jurisdictions, and covers Mainland China, Hong Kong and Macau. Countries are required to ‘activate’ the bilateral exchange relationships, made possible through the CRS MCAA, through notifications to the OECD. Alternatively, they may enter into separate bilateral arrangements outside the CRS MCAA.
As of 5 July 2018, there are already over 3200 bilateral exchange relationships activated. The first batch of countries making exchanges had done so starting from September 2017, and the second batch commence this September. Mainland China has already activated 57 bilateral exchange relationships under the CRS MCAA, and exchanges will commence this September.
In September 2014, China committed to implement the OECD CRS for Automatic Exchange of Financial Account Information in Tax Matters, which was developed at the OECD under a mandate from the G20. China is set to commence CRS exchanges in the ‘second wave’ in September 2018.
To facilitate this, in May 2017, China’s SAT along with Ministry of Finance (MOF), Peoples’ Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC) and China Securities Regulatory Commission (CSRC), issued “Measures on the Due Diligence of Non-resident Financial Account Information in Tax Matters” (the “Measures”), and financial institutions in China are currently putting the systems and protocols in place to enable collection and reporting of the requisite non-resident account holder information. Subsequently, the PBOC, SAT and State Administration of Foreign Exchange (SAFE) jointly set out further guidance to facilitate the implementation of the Measures.