New rules issued on taxation of foreign company’s representative office in China
On 20 February 2010, the State Administration of Taxation (SAT) issued a circular entitled “Tentative Measures for the Administration of Taxation on Representative Offices of Foreign Enterprises” (Guoshuifa [2010] No.18 (Circular 18)), to clarify and update the taxation policies with respect to representative offices (ROs) in China. The circular, which applies retroactively as from 1 January 2010 and abolishes previous guidance governing ROs, sets out the requirements relating to the methods to be used to calculate tax, the tax
filing procedures, etc. applicable to ROs.
Circular 18 abolishes the other tax circulars on ROs, namely, Guoshuifa [1996] No. 165, “Notice on Relevant Issues Concerning the Strengthening of the Tax Collection and Administration of Representative Offices of Foreign Enterprises”; Guoshuifa [2003] No. 28, “Notice on the Tax Collection and Administration of Representative Offices of Foreign Enterprises”; and Guoshuihan [2008] No. 945, “Notice on Relevant Issues Concerning the Examination and Approval Procedures for a Tax Exemption for Representative Offices Established by Foreign Countries’ Governments and Other Organizations.”
- Highlights of Circular 18
As a result of Circular 18, the methods of filing an Enterprise Income Tax (EIT) return and an application for an exemption from EIT are no longer determined based on the principal business of the head office of an RO. The new EIT treatments are as follows:
l EIT returns should be submitted and tax paid based on the profits attributable to an RO. Business Tax (BT) and Value Added Tax (VAT) returns should be submitted and tax paid in accordance with the relevant tax regulations.
l An RO is required to maintain accounting books and records based on official and valid vouchers. It also must accurately calculate its taxable turnover and profits (“actual amount method”) based on a principle that reflects the actual functions performed by the RO and the risks borne. An RO should submit quarterly EIT and BT returns based on actual results within 15 days after the end of each quarter, and submit a VAT return and pay VAT due in accordance with the deadlines stipulated in the “Provisional Regulations of Value Added Tax” and implementation rules.
l If an RO is unable to provide a complete accounting record or if it cannot calculate its income and expenses with reasonable certainty, the tax authorities reserve the right to use one of the following “deemed amount methods” to determine taxable turnover and profits:
- A cost-plus method for an RO that is able to provide accurate details of its operating expenses but cannot accurately substantiate its turnover or costs; and
- The deemed profit method (based on the turnover) for an RO that is able to provide accurate turnover information but the cost and expense details are not clearly shown.
l An RO that is taxed according to one of the deemed amount methods may apply to the tax authorities to use the actual amount method if the RO can demonstrate that it can now maintain sound accounting books and records to calculate accurate taxable turnover and profits.
l Where the deemed amount methods are applicable, the deemed profit rate is increased from 10% to no less than 15%.
l If the cost-plus method is used, the expenses required to be included in the cost-plus computation as required by Circular 18 remain almost the same as those under the old rules. However, Circular 18 provides that expenditure incurred on fixed asset additions and leasehold improvements will be treated as one-time expenses – an RO cannot use depreciation or amortization charges for purposes of the cost-plus computation.
l Circular 18 requires that the local tax authorities no longer accept applications for an exemption from EIT under the old rules, and should review and revisit the taxability of those ROs that were previously approved for the tax exemption. ROs that believe they are eligible for an exemption from EIT pursuant to a relevant tax treaty (or tax arrangement) may apply to the tax authorities for the exemption in accordance with the “Administration Measures on the Application for Preferential Treatment under a Tax Treaty by Nonresidents” (Guoshuifa [2009] No. 124).
New policies issued by China’s State Council to boost foreign investment in China
The State Council issued Several Opinions on Further Improving the Work of Foreign Capital Utilization on 6 April 2010.
- Amendment to the Catalogue of the Guidance of Foreign Investment Industries
l Areas open to foreign investors will be expanded. Foreign investors will be encouraged to invest in high-end manufacturing, hi-tech, modern service industry, “new energy” and energy efficiency.
- Incentives for multinationals and R&D
l Transnational companies are encouraged to establish regional headquarters, R&D centres, procurement centres, finance management centres and accounting centres in China.
l Qualified foreign invested R&D centres could apply for exemption of custom duties and value-added tax as well as consumption tax levied at the time of importation regarding products necessary for technology development before 31 December 2010.
Private equity
l Foreign investors are encouraged to establish venture capital enterprises and private equity funds in China, and better exit regimes will be implemented.
- Central and western regions
l Foreign investors are encouraged to invest in labour-intensive industries in the central and western regions which satisfy environmental protection requirements. Tax incentives in these regions would continue to apply to foreign invested enterprises (“FIEs”).
l Foreign banks are encouraged to establish branches or representative offices and operate their business in the middle-west regions.
l Qualified FIEs will be able to list in the domestic stock market and overseas stock markets, and could issue corporate bonds and middle-term negotiable instruments in China. The scope of offshore entities able to issue RMB bonds in China will be expanded.
Approval procedure and devolution
l Most projects whose total investment is below US$300 million in the permitted or encouraged categories will be approved by the local government. (Previously, this threshold was US$100 million).
l The FIE approval procedures and the foreign exchange settlement regime will be simplified, and the approval time limit shortened.
l In addition, formalizing existing practice, the Opinions state that FIEs with difficulty meeting their funding schedules will be allowed to obtain extensions for capital contribution.
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taxation
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