Case: When a "going global" enterprise T leased equipment to its subsidiary in country U and received rental fees, the tax authority in country U did not agree for company T to enjoy the preferential tax rate provided by the tax treaty between the two countries. Company T requested the provincial tax authority where it is located to initiate the mutual agreement procedure under the tax treaty. After negotiations between the State Administration of Taxation and the tax authority of country U, both parties eventually reached an agreement, with country U agreeing to implement the preferential tax rate under the tax treaty.
Analysis: Currently, the role of tax treaties is becoming increasingly important, and differences or disputes in the interpretation and application of tax treaties are gradually increasing. The mutual agreement procedure is a standardized process stipulated in tax treaties for contracting states to mutually discuss tax issues, and it is one of the effective ways to resolve international tax disputes. When there is a dispute over the interpretation and application of other clauses of the tax treaty that cannot be resolved independently, it is one of the six situations where the mutual agreement procedure for applying the tax treaty can be used. "Going global" enterprises can apply to the tax authorities to initiate the mutual agreement procedure in accordance with the "Announcement of the State Administration of Taxation on Issuing the Measures for the Implementation of the Mutual Agreement Procedure of Tax Treaties" (Announcement No. 56 of 2013 by the State Administration of Taxation).
Recommendation: Before engaging in cross-border investments or transactions, "going global" enterprises should not only proactively understand the relevant domestic and foreign tax laws but also be aware of the relief channels for tax disputes. When it is discovered or believed that measures taken by the contracting partner country (region) have resulted or will result in tax actions that do not comply with the provisions of the tax treaty, in addition to obtaining relief through local administrative and judicial channels, they can also reflect and apply to the domestic tax authorities according to the procedures stipulated in the tax treaty. The State Administration of Taxation will negotiate with the tax authority of the contracting partner to resolve the issue, thereby safeguarding their legitimate economic interests. In reality, the process of applying to the Chinese tax authorities to initiate the mutual agreement procedure is quite complex. If necessary, "going global" enterprises can seek help from professionals to prepare relevant materials and negotiation strategies in advance to facilitate reaching an agreement between the tax authorities of the two countries.
