Aims and objectives
The updated research project will focus on China’s “One Belt, One Road” initiative. This initiative was launched at the end of 2013 by President Xi Jinping. Its aim is to improve infrastructure access and interconnection with China’s neighboring countries. More specifically, the Silk Road Economic Belt and the 21st-Century Maritime Silk Road shall be (re-)built and once again bring together China, Central Asia, Russia and Europe and link these countries to both the Indian Ocean and the Mediterranean Sea.
The Silk Road Economic Belt or New Silk Road (NSR), which comprises amongst the States of Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and the Western Chinese provinces of Gansu, Ningxia Hui, Shaanxi and Xinjiang Uygur. The initiative calls for the integration of the region into a cohesive economic area through building infrastructure, increasing cultural exchanges, and broadening trade. It will open up new opportunities for investment in communication links (road, rail and shipping) and new opportunities for cooperation in the areas of energy, transportation, agriculture and manufacturing. To this end, China established the Asian Infrastructure Investment Bank, of which most of the countries on the NSR are members, and contributed USD 40 billion in November 2014 to set up the Silk Road Infrastructure Fund in order to boost the implementation of the project. At the beginning of 2015, the “One Belt, One Road” initiative was approved at the national level.
To achieve this vision will require billions of dollars of investment in infrastructure and the development of new manufacturing centers, many in tax-free zones and a strong and transparent governance framework. The need for such investment was one of the reasons which led the Chinese government to create the Asian Infrastructure Investment Bank (AIIB), one of whose first actions was to set up “The Silk Road Infrastructure Fund”, and to support G20 initiatives in this area.
The main purpose of the “New Silk Road” project launched at the WU is to identify the potential tax barriers that may hinder the development of the region. The project will be a joint collaboration with partner institutions in China. One of the main instruments to remove barriers to FDI is bilateral tax treaties. When negotiating their bilateral tax treaties, countries often use the OECD Model Tax Convention on Income and on Capital and the UN Income and Capital Model Tax Convention as models. These models deal with situations where a taxpayer is subject to tax in more than one country. Their aim is to ensure the fairness of international taxation by eliminating double taxation and double non-taxation. The bilateral tax treaties are dynamic as they are constantly monitored and updated as economies evolve and new tax questions arise. Chinese tax treaty policy is the best example of how the position in the negotiations may change because of some economic factors. Today China strives to improve its tax treaty network by concluding new tax treaties and revising older ones. While China has a broad network of treaties, most of the other NSR countries have very limited treaty networks. Even where there are treaties in place, they do not always reflect the current economic structures and trading partners of the countries.
The project will have a strong focus on removing the legal barriers to using and extending the existing bilateral networks of tax treaties. This is going to provide a comprehensive legal framework for FDI in the NSR region. Research will identify areas where governments need to change existing tax treaties in order to adapt them to the current economic realities and ensure stable and sustainable growth.
Thus, international tax legislation targeted at improving the effectiveness of FDI and ensuring that appropriate use of funds will be examined. Additionally, tax treaty provisions aimed at removing tax barriers to international trade while simultaneously generating the necessary tax revenue for investment in infrastructure will be proposed. Moreover, the impact of the OECD proposals in the course of the BEPS project on the new tax treaties to be negotiated and concluded in the region will be analyzed.
Another essential means to facilitate international trade are bilateral investment treaties (BITs). The network of BITs is incomplete between the Central Asian countries. China does however have BITs with all NSR countries. However, there is considerable divergence in the BIT models that are used by the different countries. Although all do provide for investor to state dispute resolution mechanisms, in the vast majority of countries tax is not explicitly excluded from the BITs. The project will therefore examine the relationship and potential for overlap between investment treaties and tax treaties with a view to determining whether potential barriers for investment may arise from this overlap and how to remove them.
One of the main focus areas of the project will be transfer pricing, both in the context of tax treaties and concerning domestic legislation, as this research area is of the most importance to the development of the countries in the region and was particularly strongly affected by the BEPS proposals. Transfer pricing needs to be harmonized in the NSR countries. Apart from China and Russia, most of the countries along the NSR have simplified transfer pricing rules. Frequently the legislation is lacking, information requirements are weak and the experience of tax administrations in applying the rules are almost non-existent. There are some exceptions. Kazakhstan, for example, has recently initiated new transfer pricing legislation but even this country has little practical experience in the application of such legislation. Therefore, the project’s aim is to propose transfer pricing legislation that will facilitate growth and international trade and be in line with the current international standard.
Tax barriers to the international trade in goods and services, which is one of the main sources of revenue in the area, can arise from both direct and indirect taxation. In the area of indirect taxation, the project will take a closer look at both value added tax (VAT) and excises and tariffs. The VAT systems of the NSR countries deviate from the international norms. Apart from Russia, the other countries on the NSR do not operate standard VAT systems and taxes are frequently levied on exports. VAT refunds are paid, if at all, after long delays. Services, which constitute the main source of revenue of the economies in the area, are given a broad exemption. In many cases, VAT operates very much like a tax on imports only.
As regards tariffs and excises, they are relatively low in NSR States in comparison to other emerging economies, except in the case of agriculture goods. Exports and imports between NSR countries remain limited (less than 1% of Chinese exports and imports go into countries in the region). The exception is an interregional trade in the areas of natural resources, reflecting the construction of a number of regional distribution networks over the last 10 years. Apart from China and Russia, the main trading partners of NSR countries are the EU, the Netherlands, Switzerland, Turkey and the USA.
The project will therefore propose improvements to the VAT legislation that accurately reflect the economic realities of the NSR countries and help facilitate trade in the region instead of constituting a barrier to it. It will also identify the lessons that can be learned from the European legislation in the fields of tariffs and indirect taxation.
Taking into consideration the recent developments in international tax law, the introduction of new standards regarding exchange of information and the fact that Chinese enterprises have become global players in international tax law, the Austro-Chinese Tax Research Network is the perfect forum to research Chinese tax treaty policy with a focus on the NSR initiative. The past experience proves that it provides the necessary know-how and scientific synergies.
In order to reach the scientific and the common objectives of the project, the project partners plan the following actions and activities:
Double Tax Treaties
Austrian and Chinese researchers will examine the existing tax treaty network between NSR countries to identify which provisions may require modifications to facilitate trade and investment within the NSR. Moreover, the Austrian researchers will identify the lessons to be learned from the experience of EU countries. Among others, the following questions will be addressed:
Are the current tax treaties facilitating the financial intermediation which will be required to finance the NSR project?
Do the provisions in tax treaties concerning the treatment of interests hinder the debt financing infrastructure investment which will be necessary for the project?
Do tax treaties provide the certainty that investors seek?
Are the dispute mechanisms in the tax treaties effective? And if not, what could be done to make them more effective?
In addition, the feasibility of and need for implementing a multilateral instrument will be considered taking into account the experience of the OECD during the development of the multilateral instrument as part of the BEPS project (Action 15). This instrument would contain the most relevant provisions for the update of the bilateral tax treaty network of NSR countries.
Double Taxation Treaties and BITs
Austrian and Chinese researchers will undertake an analysis of the linkages between tax treaties and BITs in the region and how these could be strengthened or made more consistent in order to encourage cross border investment.
Transfer Pricing Rules
Austrian and Chinese researchers identify the key topics that need to be addressed by domestic transfer pricing legislation in NSR countries by examining the historical and economic background, national and international legislations and current practices. They will analyses already existing provisions to determine whether they are consistent in the countries involved and whether they might constitute a barrier to FDI and international trade in the region. As a result of the analysis, the researchers will propose adequate transfer pricing provisions for both domestic law and tax treaties. Additionally, the Austrian researchers will organize a training program on transfer pricing legislation and implementation.
Value Added Tax Systems
Austrian and Chinese researchers will undertake a comparative analysis of the VAT systems in the region and recommend how these should be modified to facilitate intra-regional trade. Moreover, they will examine the feasibility of an NSR VAT multilateral convention and propose a model for such a convention.
The results of this project are presented in conferences, workshops/training sessions and lectures in the P.R. China. More precisely, participating researchers presented the outcome of the research at an international two-day conference in Beijing in June 2017.
The Austro-Chinese Tax Research Network has successfully established teaching activities for undergraduate and master students both from Austria and China over the last years. Chinese delegates visited Vienna to give lectures for students in the field of international tax law and tax policy in China. Conversely, Austrian delegates visited China for a series of lectures on international tax treaty law. Therefore, the project partners envisage to organize another five-day lecture on international tax law in Beijing to undergraduate students and master students from PKU and CUFE in the 1st half of 2017.
The envisaged project will be coordinated and supervised by Prof. Michael Lang. Prof. Jeffrey Owens, former Head of the Fiscal Affairs Division of the OECD, will support the coordination of the project intensively. The conference in Beijing will jointly be organized by the Institute for Austrian and International Tax Law, Peking University Tax Law Center and CUFE. The introductory course on tax treaty law in Beijing and the 4th Xiamen Summer School on International Tax Law in Xiamen will mainly be organized by PKU/CUFE and Xiamen University respectively.
The proposed project forms a basis to create and reinforce lasting collaboration and connections between the network partners. This is important since frameworks for international taxation can only be established in an excellent manner if international coordination and cooperation concerning research in the specific field is pursued.
By further promoting the already existing network of social and scientific connections, it will be possible to stay in contact and to realize scientific exchange and further collaboration also when the specific project is concluded.
Participant organization Participant(s) Country WU (Vienna University of Economics and Business) Prof. Jeffrey Owens & Team Austria Peking University Tax Law Center / CUPL (China University of Political Science and Law) Associate Prof. Jiguang Zhai China Chinese University of Hong Kong Prof. Julien Chaisse Hong Kong (Greater China) Chinese University of Hong Kong Assistant Prof. Yan Xu China Sun Yat-Sen University Prof. Yang Xiaoqiang & Team China Xiamen University (XMU) Prof. Yixin Liao China Xiamen University (XMU) Associate Prof. Gang Li China
The network is also in discussion with the research institute of SAT (State Administration of Taxation) and the Ministry of Finance from China.
The Activities of the Austrian-Chinese Tax Research Network Focus on:
High quality and internationally competitive joint research activities
High-quality training for Chinese tax officials
Short-term and long-term research stays at WU