Preparing for change: Deloitte PE Interview

One other recent development is the issuance of Bulletin [2012] No 30 (Bulletin 30) on June 29 2012 by the State Tax Administration. Bulletin 30 provides further guidance on the determination of beneficial owners. By way of background, only beneficial owners are allowed to enjoy reduced withholding tax rates in double tax treaties. Bulletin 30 provides a new safe harbour rule, according to which certain public listed companies will be treated as beneficial owners automatically. Moreover, where income is received from an agent, the principal may apply to be considered as the recipient of the income, provided that the agent declares it is not the beneficial owner.

Bulletin 30 is important to the PE industry because many funds utilise offshore holding companies to invest into and repatriate income from China. Bulletin 30 provides more clarity as to which recipient may qualify for treaty benefits, but there are still some unresolved issues. So we have been helping several PE clients to apply Bulletin 30 to their specific situations, including having dialogues with the local and national tax authorities.

What is a typical day like for you working in PE at Deloitte?

I (Hong Ye) am an international tax and M&A tax partner in the tax group. My main services to PE clients are to advise on tax efficient acquisition structures and financing structures, conduct tax due diligence, support SPA negotiation, and advise on post-acquisition tax advice relating to integration and business model restructuring.

A typical day working on a project for a PE client may be described as busy. From time to time, it can be intensive or challenging. At the end of the project, I feel a sense of accomplishment (most of the time). In the course of the day, I will be discussing the issues identified by my team during the tax due diligence (sometimes I will do field work myself) and assess the level of risk, discussing a technical issue in a tax structuring paper or brainstorming an idea with the team members or other partners, having conference calls/meetings with the clients to discuss various issues relating to the project, or reviewing our deliverable to the client. I ensure our service is of high quality and our advice/solution is practical and effective and my team is responsive.

What is your outlook for the upcoming year?

We believe that more rules and regulations will be published in the foreseeable future affecting the PE industry.

One possible new regulation could be the detailed partnership taxation rules. Partnership is becoming a popular investment vehicle for both Chinese investors and foreign investors. The previous partnership rules only stipulated the principle that partnership itself is not subject to tax and that income should be allocated and taxed at the partner level

We believe the new rule will further provide guidance on a number of important issues, including (i) whether the character of a partnership's income will pass through to partners, (ii) whether a foreign partner will be treated as having a permanent establishment in China, (iii) how will individual partners be taxed, (iv) what is the character of carried interest, (v) can losses allocated to a partner be used to offset the partners' other taxable income, (vi) which tax bureau has jurisdiction over the partnership and the partners, and (vii) whether the GP or partnership has a withholding obligation over an individual partner's tax liabilities.

Furthermore, we believe that we are likely to see further clarifications on indirect transfers of a Chinese company. SAT will probably grant more leniencies when it comes to intra-group transfers provided that certain conditions are satisfied.

We believe that these potential new regulations will have a significant impact on the PE industry and have been informing, educating and preparing our clients for these potential changes. We have also been communicating with tax authorities on behalf of some PE industry associations to reflect taxpayers' point-of-view on key issues.

What was one of the biggest challenges you have had to overcome this year regarding your work?

It would be advising on the partnership tax treatment for RMB funds. The challenge to find a structure that meets a client's commercial need and is most tax efficient is compounded by the reality that China does not have a well-developed partnership taxation rule today. To advise my PE clients on their RMB fund structures, I had to step into a brand new tax territory where there are limited national rules, guidance and precedence and a lot of inconsistent local tax rules and practice. I had to look beyond the limited partnership taxation rules in China and analyse the principles laid out in the PRC Enterprise Income Tax Law, the tax treaties or international practice to reach a reasonable position. In advising my clients, I would take into consideration how the Chinese partnership tax rules would develop and assess how these developments may affect my current advice and try to provide the client with a structure that will work well in the future.

Interviewed by David Tring

Further reading:

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Circular on Promoting the Compliant Development of Equity Investment Enterprises

Foreign investors get $50 billion boost

Private equity taxation plans under fire