Trial Implementation of Advance Tax Rulings in Shanghai

On 29 December 2023, the Shanghai Municipal Tax Service enacted the Administrative Measures of Shanghai Municipal Tax Service on Advance Tax Rulings (for Trial Implementation) (hereinafter referred to as “the Measures”). The Measures provide taxpayers with written rulings for specific complex tax-related matters that are expected to occur in the future. This will increase the certainty of applying tax policies, reducing tax risks, and avoiding negative consequences.

I. Target of Advance Tax Rulings

According to the Measures, “Advance Tax Rulings” are services provided by tax authorities and the service results are delivered in form of a written confirmation. From a legal point of view, the advance tax rulings are not subject to the rules of administrative reconsideration and administrative procedures.

II. Scope of Advance Tax Rulings

The Measure is only applicable to taxpayers registered in Shanghai. The scope includes specific complex matters expected to occur in the future.

However, any of the following matters do not fall within the scope of advance tax rulings:

1. Matters that do not have a specific project plan or will not occur within the next two years.
2. Matters without a reasonable commercial purpose or those that are definitely prohibited by the relevant laws and regulations of the State.
3. Matters that are already covered by existing laws and regulations.
4. Other matters to which advance tax rulings are not applicable.

III. Application process for Advance Tax Rulings

Taxpayers applied for Advance Tax Rulings shall submit an application to the competent tax authority presenting the transactional arrangements, tax position, impact on operations and tax consequences etc. Tax authority will communicate the application with taxpayers. After conducting necessary review and investigation, tax authorities will issue a ruling stating the opinion from tax authority. After issuing the advance tax ruling, tax authorities could perform follow-up review.

The Opinion on Advance Tax Rulings shall only apply to the matters specified in the Application Form for Advance Tax Rulings. It cannot be applied directly to other taxpayers or similar matters.

If the transactional arrangements have substantial change or the tax rules are changed, the advance tax ruling shall be revoked by tax authority. However, taxpayers could notify tax authorities within 30 days and apply for advance tax rulings again.

IV. Our observations

In the background that tax authorities tend to adopt procedures such as “record filing” or “self-assessment tax filing and documents maintenance” in China, taxpayers have to bear certain tax risks, in particular for complex transactions or being in a situation that the tax rules are not clear enough.

In practice, taxpayers usually consult the tax authority on no-name basis to ensure that they are complying with the tax rules. But after completing the tax filings, they may still face the risk of receiving an announcement of adjustment from the tax authority, which may result in make-up of taxes and overdue interest. With the advance tax ruling, more certainties are granted to the enterprises which may assist the management of enterprises in making business decisions.

For example, an overseas group has a restructuring project involving subsidiaries in China and overseas. Due to the complexity of the transaction, it may be difficult for the overseas group to determine the tax obligations in China. In this situation, the Chinese subsidiary may submit an application to the competent tax authority before the implementation of the restructuring and require an advance ruling. With the advance riling, the uncertainty of the tax exposures would be largely eliminated.

The Trial Implementation of Advance Tax Rulings is an effort made by the Chinese tax authorities for the first time. Even though the Advance Tax Ruling is released by Shanghai tax authority, it is still an important step in the Chinese tax administration.