New Rules For Non-Resident Enterprise Income Tax
March 24, 2010
On February 20, 2010, the State Administration of Tax (the “SAT”) issued “Measures on the Administration of Approval and Collection of Non-resident Enterprise Income Tax” (the “Measures”). Non-resident corporations, defined in Article 3, Paragraph 2 of the Enterprise Income Tax Law of China, are governed by the Measures regarding enterprise income tax (EIT) issues. The EIT of representative offices of foreign enterprises is covered by Circular 18 [2010] issued by SAT on the same day. The Measures went into effect of the date of issuance.
Under the Measures, non-resident enterprises shall: set up their account books in accordance with the Law on the Administration of Tax Collection and relevant laws and regulations; record and settle their accounts in accordance with legal and valid invoices; and, in accordance with the principle of correspondence of actual functions to assumed risks, accurately calculate their taxable income, and report and pay the EIT for their actual situation.
If a non-resident corporation has not properly kept account books and cannot calculate the amount of its taxable income, the tax authority will use one of the following methods to decide the amount of payable EIT.
(1) Gross Income-Based Method — This method should be applied when a non-resident corporation calculates its gross income correctly but cannot accurately compute its costs and expenses. The formula is as follows:
Deemed taxable income = Gross income * Deemed profit rate
(2) Cost-Based Method – This method applies when a non-resident corporation calculates its costs and expenses accurately but cannot correctly compute its gross income. The formula is as follows:
Deemed taxable income = The total of costs and expenses / (1 – Deemed profit rate) * Deemed profit rate
(3) Expenditures-Based Method – This method applies when a non-resident corporation accurately calculates its expenditure for operations but cannot correctly compute its gross income or its costs and expenses. The formula is as follows:
Deemed taxable income = Total of expenditure for operations / (1 – Deemed profit rate – EIT rate) * Deemed profit rate
The tax authority should use the deemed profits rate below when calculating the deemed taxable incomes:
(i) The deemed profit rate for income from project construction, design and consulting is 15% to 30%;
(ii) The deemed profit rate for income from management service is 30% to 50%;
(iii) The deemed profit rate for income from other business activities should be no less than 15%.
The tax authority may raise the profit rate if it reasonably holds, with good grounds, that the actual profit rate of a non-resident corporation is higher than the corresponding deemed profit rate. Where a non-resident corporation generates income from more than one type of the activities listed above, the tax authority shall divide the income from the different types of activities and apply appropriate deemed profit rate to the different elements of the income. If the income cannot be divided accurately, the higher deemed profit rate will be applied.
When a non-resident corporation provides equipment installment, training, management and other services to a Chinese resident buyer of its equipment or other goods, the sales contract of such equipment or goods may not stipulate the price of such related services, or the price of service may be unreasonable. In those cases, the tax authority can refer to the general price in the same or similar industry and decide the deemed income from the services provided. In case where there is no general price to refer to, the tax authority may decide the deemed income from the service, which should be no less than 10% of the total price of the sales contract.
With regard to non-resident enterprises providing labor services for customers located in China, if the entire service is provided within China, the revenue in full shall be subject to EIT in China. If the service is provided both inside and outside of China, then the revenue shall be divided by services provided within China and outside of China, and the revenue derived inside China shall be subject to EIT.
Source: Jingyuan Sun
www.sheppardmullin.com
Related Posts:
New Tax Rules For Representative Offices Of Foreign Enterprises
March 12, 2010
On February 20, 2010, China’s State Administration of Taxation (the “SAT”) issued a Notice On Interim Measures For Tax Administration Of Representative Offices Of Foreign Enterprises (Guoshuifa [2010] No. 18, also referred to as “Circular 18″). Circular 18 states measures governing enterprise income tax (EIT), business tax, and value added tax (VAT) on representative offices of foreign enterprises (including those in Hong Kong, Macau and Taiwan). It takes effect retroactively as of January 1, 2010.
Main Points
Enterprise Income Tax
According to Article 6 of Circular 18, a legally registered representative office of a foreign enterprise must set up accounting books pursuant to relevant laws, regulations and rules. Furthermore, it must maintain the books based on legitimate vouchers, calculate the amount of its taxable income and tax liabilities according to the principle that function should match the risks taken, and declare EIT and business tax amount 15 days before the end of a quarter.
In a case where a representative office cannot correctly keep the books or calculate its costs and expenses, or where it does not objectively declare taxes as required, the governing tax authority can determine its taxable income by either of the two following methods:
1. Expenditure-Based Method – This method applies to representative offices that can correctly calculate its expenditure on operation but not its gross income or costs and expenses.
The formulas are:
Deemed gross income = Expenditures for operation of current period / (1 – Deemed profit rate – Business income tax rate;
Deemed payable tax amount = Deemed gross income x Deemed profit rate x EIT rate.
Expenditures for operations include: (i) salaries, bonuses, allowances, welfare allowances paid inside and outside of China to its personnel; (ii) payments on equipment and immovable properties; (iii) communication expenses; (iv) traveling and accommodation expenses; rental payments for equipment, and other expenses. The other expenses include: (i) cost of samples (including its transportation) purchased by the representative offices within China for the head quarter; (ii) storage and customs clearance expenses incurred within China when samples are shipped to China; (iii) interpretation and translation expenses for personnel of the headquarter who visit China; (iii) bid documents expenses for projects in China paid by the headquarter on behalf of its representative office.
The cost of purchasing fixes asset and the cost of decoration when an office is opened or relocated will be treated as one-time expenditures for operation when occurred. The expense that is actually incurred for marketing and public relationship is treated as an expenditure for operation. In addition, interest income cannot be used to offset against the expenditures for operation.
The following are excluded as expenditures for operation: Charitable donations made in cash within China, late payment fees and fines paid in Cash by the representative offices, and expenses unrelated to the representative office’s business and paid by it on behalf of the head quarter.
2. Gross Income-based Method – This method should be applied when an representative correctly calculates its gross income but cannot accurately compute its costs and expenses. The formula is as follows:
Deemed EIT = Gross income x Deemed profit rate x EIT Rate
According to Circular 18, the new deemed profit rate is 15%, amending the previous rate of 10% which was used for more than a decade. The actual profit-based method will replace the expenditure-based method and the gross income-based method if a representative office can accurately keep the books and compute its taxable income and gross income correctly.
VAT and Business Tax
Under Circular 18, representative offices that engage in VAT and taxable business activities will be subject to VAT and business tax according to the relevant laws and regulations. According to the relevant Chinese laws, VAT is imposed on sales of merchandise services related to processing, repairing and assembling and import of goods.
Other Matters
Detailed document list and procedure for tax registration and fillings are also provided for by Circular 18. In addition, representative offices seeking tax treaty benefits must complete tax registration and filings pursuant Article 6 of Circular 18, and must follow the applicable tax treaty and Guoshuifa [2009] No. 124 regarding nonresidents’ eligibility for tax treaty treatment.
Guishuifa [1996] No. 165, Guoshuifa [2003] No. 28 and Guoshuihan [2008] No. 945 are abolished upon Circular 18′s effective date of January 1, 2010. Local tax authorities no longer accept applications for EIT exemption by representative offices, but they will continue to handle the EIT exemption applications that have already been approved.
Source: Jingyuan Sun
www.sheppardmullin.com
Related Posts:
Ministry of Public Security Issue Stricter Rules for Foreign Representative Offices
January 18, 2010
China’s State Administration for Industry and Commerce (“SAIC”) and Ministry of Public Security issued a joint Notice on Further Administration of Registration of Foreign Companies’ Resident Representative Offices (the “Notice”) on January 4, 2010, in light of increased problems with foreign representative offices providing counterfeit registration materials and violating rules regulating their business operations in China. The Notice heightens the scrutiny over registration procedures, personnel structure, and operations of foreign representative offices, which the issuing administrations claim will enhance the enforcement of current regulations and help maintain economic and market order. There is no direct requirement in such Notice that the new restrictions established will be applied to foreign representative offices of certain professional-services firms (including law firms) and liaison offices of foreign-invested enterprises. A summary of changes outlined by the Notice is as follows:
Additional Requirements for Registration and Renewal
In order to register a representative office in China, a foreign company must provide an apostilled certificate of incorporation from its jurisdiction of incorporation indicating that it has been in existence for at least 2 years. This certificate must be notarized, certified by the appropriate national or regional government authorities of the company’s country of incorporation, and authenticated by the Chinese embassy or consulate with competent jurisdiction in such country. Documents describing the company’s financing structure and capital capabilities, as well as evidence of the company’s creditworthiness, must also be submitted.
In order to renew a registration certificate, a foreign representative office must provide documentation demonstrating its permission to continue business operations as granted by the relevant authority overseeing its jurisdiction of incorporation. It must also provide a new apostilled certificate of incorporation each time it renews its registration certificate.
Unlike previously, where a registration certificate could be valid for up to 3 years depending on local regulations governing each representative office in question, the Notice now uniformly limits the validity of a registration certificate to 1 year for all foreign representative offices. For certificates that have been issued and have passed the 1 year mark, holders must go to the local SAIC branch for a renewed certificate.
Limit on the Number of Representatives
The number of representatives a foreign company can appoint in its Chinese representative office must be in accordance to the number that its type of business requires. Although this definition is unclear, the Notice states that generally, the number cannot exceed 4 individuals, including the chief representative. Existing offices that have more than 4 individuals currently can only decrease that number and are not permitted to add more foreign representatives.
Field Checks on Operations
Local SAIC branches will now conduct field checks on foreign representative offices within 3 months after they have obtained registration certificates. If a foreign representative office is found to have provided fake registration materials or changed its address without updating the change on its registered documents, it will be punished immediately by rules that apply to each respective violation. Representative offices that are found engaging in direct operations and collecting fees will be treated as illegal operation without registration and punished accordingly (including fines, termination of China visa and even criminal liabilities).
Conclusion
As the SAIC collaborates more closely with the Ministry of Public Security to regulate the activities of foreign representative offices, foreign companies must be conscientious about official procedures for registering their foreign representative offices, renewing their registration certificates in a timely manner, and conducting operations according to Chinese law. Further, the compliance and legal department of such foreign representative offices need to be fully aware of the possible time consuming issue of the said renewal procedure, since the notarization and authentication procedures mentioned above may take more than 3 weeks in extreme cases.
Source: Jennifer Ding
www.sheppardmullin.com
Related Posts:
