Permanent Establishment: An Evolving Concept under China’s Tax Treaties (1983-2013)

Abstract

This review of permanent establishment (PE) articles in China’s tax treaties/arrangements together with the interpretation of these articles in China provides a partial window onto the economic, regulatory and institutional changes which have taken place in China. In addition, this review tells us a great deal about how those changes, in the wider context, have shaped and influenced China’s international tax policy and will continue to do so. From the 1980s to the mid-1990s, the PE article in the UN Model was considered to be the preferred blueprint for China. However, more features of the PE article in the OECD’s Model Tax Convention on Income and on Capital (OECD Model) have been squeezed into China’s treaties signed after the mid-1990s. With regard to interpretation, the OECD commentary has been used by the State Administration of Taxation (SAT) as an important source of reference in order to develop its own interpretation of PE articles. Since China is a non-OECD member state, the SAT is also left with enough space to design and experiment with innovative tax rules outside of the OECD forum. As a new era of international tax regime dawns, signaled by the Base Erosion and Profit Shifting (BEPS) Action Plan, it remains to be seen how China’s approach to addressing treaty issues may possibly become a “new force” which adds particular, focused thinking and, quite possibly, adapted-values to key future discussions within the international tax community.