Meaning
Optional filings allow parties to an offshore transaction to disclose the deal to Chinese authorities before a formal audit begins. Voluntary tax reporting is a mechanism for transferors and transferees to manage their compliance risk under notice 7. By submitting the details early, the participants can seek a preliminary opinion on the taxability of the transaction.
Disclosure Choice
Any party to the agreement, including the Chinese target company, can initiate the process. While voluntary tax reporting is not a legal requirement, it is the standard method for avoiding the five percent interest surcharge on late payments. The submission includes the share transfer agreement and a report on the commercial substance of the offshore holding company.
Administrative Submission
Tax offices review the documents to determine if the deal should be recharacterized as a taxable event. Under the voluntary tax reporting framework, the bureau may request additional information about the global structure and the history of the investment. This review often leads to a formal assessment of the tax due.
Penalty Mitigation
Timely disclosure demonstrates a commitment to transparency and legal compliance. In cases where tax is found to be payable, voluntary tax reporting allows the parties to settle the debt at the base benchmark interest rate. This reduction in the cost of non-compliance is the primary reason for choosing to report an offshore deal.
