Managing business activities and investments in China often

Transcription

1 TAX CONSIDERATIONS Tax and business structuring issues BY JIE LIANG, ANGELA PAN AND ERIC SUN Managing business activities and investments in China often requires more time and resources than what is typically required in other countries. This is a function of both the taxation and regulatory environment. Since the enterprise income tax (EIT) reform in 2008, regulations and interpretations have been frequently issued by central and local governments to provide guidelines on the implementation of the new law. Keeping up with the frequent changes in tax law affecting foreign investments in China is critical to the success of doing business in China. Some of the most common questions asked by new foreign investors in China relate to: The country s legal and administrative framework The different types of taxes Tax incentives Legal entity structuring through favorable treaty countries Transfer pricing Taxation on non-resident enterprises Taxation of non-chinese individuals This chapter will provide a general discussion of these common issues. Legal and administrative framework In China, laws are published in statutory instruments which are issued by various sources at different levels of government, ranging from national to local. Tax collection and administration processes, with some exceptions, are performed by local tax bureaus (note that import/export taxes are collected by the Customs authorities). Each company will generally be assigned an in-charge Jie Liang, Angela Pan and Eric Sun are based in Deloitte's Shanghai Office. An AmCham Shanghai Publication 33

2 tax officer from the local tax bureau who will monitor and supervise the company s tax registration process, use of official invoice (known as fapiao), tax filing and collection, and other general tax compliance-related issues. The in-charge tax officer is often an important portal between the taxpayer and the bureau. There is no tax court in China. To resolve tax controversy, a taxpayer often needs to go through the administrative review process before initiating any legal procedure. Overview of major taxes The summary below covers the most commonly applicable types of taxes in China. Individual income tax (IIT), levied on both Chinese and foreign nationals receiving wages, salaries and various prescribed income at progressive rates up to 45 percent. Enterprise income tax (EIT), levied on both foreign invested enterprises and domestic enterprises at rates up to 25 percent. Whereby dividends, royalties and interest paid to a nonresident company are subject to EIT in the forms of withholding, at 10 percent currently, reduced by the applicable tax treaty. Turnover taxes Value-added tax (VAT) Levied at rates up to 17 percent on all units and individuals that are involved in the sale of goods, the provision of processing, repair and replacement services within China, or that import goods into China. There is an inability to fully reclaim input VAT incurred during the production of exported goods, which results in additional costs for many Chinese exporters. Lower tax rates are offered to a selected base of taxpayers, including enterprises engaged in encouraged industries and smallscale enterprises. Business tax Levied at rates up to 20 percent on all units and individuals that are involved in the provision of taxable services, the transfer of intangible assets or the sale of immovable property within China. Consumption tax Levied at rates up to 56 percent on all units and individuals that manufacture, subcontract for processing, or import certain types of consumer goods into China. Turnover taxes reform From January 2012, China launched a new wave of reform for its turnover tax system, with an aim to support the modern service industry by introducing VAT into the service sector to replace the application of business tax. This 34 China Orientation Guidebook

3 A unified income tax rate of 25 percent has been established in the new EIT law. Lower tax rates are offered to a selected base of taxpayers, including enterprises engaged in encouraged industries and smallscale enterprises. wave of reform was first launched in Shanghai under a pilot program and will soon be extended to other economically developed regions. The industries covered in the first wave of reform included the transportation industry and certain modern service industries. Qualified taxpayers under the pilot reform are now entitled to recover input VAT which was previously part of the cost of the company. There are numerous other taxes and charges that could potentially apply, including Stamp Duty, Deed Tax, Land Appreciation Tax and Real Estate Tax, depending on the business and activities of the taxpayers. Enterprise income tax The new EIT law, which came into effect January 1, 2008, is a milestone in the history of the PRC tax system, ending nearly three decades of preferential tax treatment for foreign invested enterprises (FIEs) over domestic enterprises and unifying the law into one tax code. A unified income tax rate of 25 percent has been established in the new EIT law. Lower tax rates are offered to a selected base of taxpayers, including enterprises engaged in encouraged industries and small-scale enterprises. Tax rates under new Enterprise Income Tax law: Statutory Tax Rate 25% High and New Tech Enterprise 15% High-Tech Service Enterprise 15% State Encouraged Western Region Development Enterprise 15% Small-scale Enterprise 20% Ownership structuring through favorable treaty countries A foreign investor must decide whether to invest directly in a Chinese enterprise or through an intermediary holding company established in a third country. The application of tax treaties may be a relevant consideration for tax efficient fund repatriation and exit strategy. China has signed over 90 tax treaties or agreements with foreign governments, as well as similar arrangements with the special administrative regions of Hong Kong and Macau. Hong Kong, Singapore, Switzerland and Luxembourg An AmCham Shanghai Publication 35

4 are commonly used locations for intermediary holding companies with investments in China. As they have become more cognisant of treaty shopping issues, the Chinese tax authorities are monitoring the use of low tax jurisdictions for inbound investment. Holding company planning has been significantly affected under the new tax regime with a general anti-avoidance rule (GAAR) doctrine. In addition, guidance has been released to tighten up the treaty benefit claimed by a non-resident enterprise or individual. A gain recognized by a non-resident enterprise from the direct transfer of an ownership interest in a Chinese resident enterprise is subject to tax in China at a rate of 10 percent (unless exempted by the applicable tax treaty). Non-residents are now also required to report the details of certain indirect share transfers of Chinese resident enterprises. If the holding company structure is proved to be abusive, such intermediate h o l d i n g c o m p a n i e s w o u l d b e disregarded and the transaction would be deemed as a direct transfer of the ownership interest in the Chinese enterprise and therefore subject to China tax. Transfer pricing China has contemporaneous transfer pricing documentation (TPD) rules requiring qualified entities to submit contemporaneous transfer pricing documentation attesting that all domestic and cross-border related party transactions are conducted at arm s length. The highest tax authorities in China, the State Administration of Taxation (SAT), has asserted that FIEs with single or limited functions should generally maintain a certain profit margin and should not suffer a loss. Taxation for foreign enterprises Followed by the concept of tax resident, enterprises are classified as resident enterprises and non-resident enterprises. A Chinese resident enterprise is subject to Chinese income tax on its worldwide income. Non-resident enterprises shall pay enterprise income tax on income sourced within China. As mentioned earlier in this chapter, a 10 percent withholding tax applies to dividends, interest, royalties and certain gains derived by non-residents (subject to potential reduction under an applicable tax treaty). In addition, non-resident enterprises are subject to EIT on income sourced within China from its establishment in China and for income sourced outside of China that is effectively connected with its establishment in China. Non-resident enterprises claiming tax treaty benefits are required to follow certain application procedures and documentation requirement. This is part of SAT s intensified efforts to enhance the taxation of non-resident enterprises. 36 China Orientation Guidebook

5 Taxation of non-chinese individuals Foreigners working in China are generally liable for PRC individual income tax. Taxable income includes 11 categories, including wages and salaries, business income and various prescribed personal income or remuneration. Under a recent tax reform in September 2011, wages and salaries are taxed at progressive rates ranging from 3 percent to 45 percent in seven tax brackets. Since October 15, 2011, all foreign individuals legally working in China have been required to participate in China s social security system, unless exemption is provided under a social security Totalization Agreement signed between China and the individuals home country. Although this rule is not fully implemented throughout the country, it will lead to additional costs for multinational companies managing foreign individuals working in China. Individuals earning more than RMB120,000 a year, which includes most expatriates, will be obliged to submit annual tax returns to the tax authorities within three months following the end of the tax year, in addition to the monthly tax returns submitted by their employers and other withholding agents. Summary regulatory and tax environment is critical for success. Investigation and due diligence is particularly important for new investors in China. Despite the recent changes and rapid development, China is not yet a country of law with respect to taxation. The existing tax law and explanatory regulations and circulars can be difficult to navigate for foreign investors that are accustomed to a more developed tax system. In addition, local bureaus implementing the various tax laws have particularly w i d e d i s c r e t i o n i n h o w t h e y administer the tax law, resulting in variance of practices from one part of the country to another. About Deloitte Deloitte is one of the leading professional service providers in the world and in the Greater China region. We have over 13,500 people in 21 offices in Beijing, Hong Kong, Shanghai, Taipei, Chongqing, Dalian, Guangzhou, Hangzhou, Harbin, Hsinchu, Jinan, Kaohsiung, Macau, Nanjing, Shenzhen, Suzhou, Taichung, Tainan, Tianjin, Wuhan and Xiamen to provide audit, tax, consulting and financial advisory services to public and private clients spanning multiple industries. www. deloitte.com China will continue to attract foreign investors for many different reasons. An awareness of the An AmCham Shanghai Publication 37