News Flash. China Tax and Business Advisory

Transcription

1 News Flash China Tax and Business Advisory November 2012 Issue 26 Our China Tax and Business Service Team Contacts National Cassie Wong Tel: : +86 (10) cassie.wong@cn.pwc.com Northern China Edward Shum Tel: +86 (10) edward.shum@cn.pwc.com Central China Peter Ng Tel: +86 (21) peter.ng@cn.pwc.com Southern China Charles Lee Tel: +86 (755) charles.lee@cn.pwc.com With over 1,300 China tax professionals and over 50 China tax partners in 13 cities in Mainland China, Hong Kong, Singapore, and Taiwan, our PwC China Tax and Business Service Team provides a full range of tax advisory and compliance services. Leveraging on a strong international network, our tax specialists are striving to offer technically robust, industry specific, pragmatic and seamless solutions to our clients on their tax and business issues locally. The Global Tax Monitor recognises PwC as having the strongest overall reputation for tax services in China, with a lead over the competition. New challenges to enterprises with headquarters and branches across provinces on filing corporate income tax return On 12 June 2012, the Ministry of Finance, the State Administration of Taxation ( SAT ) and the People s Bank of China jointly issued a circular Caiyu [2012] No. 40 (hereinafter referred to as Circular 40 ) entitled the <Administration Measures for the Allocation and Budget Management of Corporate Income Tax ( CIT ) for Enterprises with Headquarters and Branches across Provinces>. Circular 40 is effectively an extension of an old circular Caiyu [2008] No. 10 (hereinafter referred to as Circular 10 ) released by the same three governmental bodies back in Circular 10 sets out the framework on how the CIT liabilities shall be calculated and settled by enterprises with headquarters and branches across provinces in China and how the CIT revenue shall be allocated between the central and local governments. The current mechanism for the provisional and annual CIT filing with headquarters and branches across provinces based on Circular 10 and a few supplementary circulars 1 is briefly summarized in the Appendix. Circular 40 now introduces a few changes that will affect the computation of the CIT amount to be allocated among the branches (during both provisional and annual filing) and the CIT settlement mechanism (during annual filing). Circular 40 will take effect from 1 January 2013 to replace Circular Such as Guoshuihan [2008] No.28, Guoshuihan[2008]No.747 and Guoshuihan[2009]No.221, etc., all of which were issued by the SAT.

2 In this issue of News Flash, we would like to highlight the major changes that will be brought by Circular 40 and share our observations. Major changes brought by Circular 40 More complicated tax settlement/refund mechanism during annual CIT filing As summarised in the Appendix, currently, the overall CIT payable for an enterprise shall be allocated among the headquarters and the branches and be settled with the respective local level in-charge tax bureaus during provisional CIT filing. However, the annual reconciliation filing and payment/refund is only required to be carried out by the headquarters with its local level in-charge tax bureau. Under Circular 40, the mechanism for provisional CIT filing remains the same. However, Article 4 of Circular 40 provides that, going forward, the final tax payable or refund during annual CIT filing shall be allocated to the headquarters and branches and be settled with (or refunded by) their respective local in-charge tax bureaus. The revenue distribution mechanism amongst the central and local governments during annual filing (which is illustrated in the Table below) under Circular 40 appears to replicate the mechanism currently adopted for provisional CIT filing (i.e. Table A1 in the Appendix): Table - Distribution of revenue (allocation of revenue burden) during annual CIT filing under Circular 40 Party to settle the tax payable / receive the Headquarters Headquarters Branches refund Allocation percentage of tax payable / refund 25% (A) 25% (B) 50% (C) Revenue distribution (or allocation of revenue burden in case of tax refund) Central government (A) x 60% (B) x 60% (C) x 60% Local government (A) x 40% - (C) x 40% Temporary account - (B) x 40% - Base period to account for the three parameters will be changed As indicated in the Appendix, currently, during provisional CIT filings, 50% of the tax payable shall be allocated among and settled by the branches pursuant to a prescribed formula. The formula for provisional CIT filing remains unchanged under Circular 40 and its application will be extended to annual CIT filing going forward. However, the base period for determining the amounts of the three parameters (i.e. revenue, salary cost and asset of the respective branches which is used to compute the allocation ratio for each branch in the formula) is changed under Circular 40. As shown in the diagram below, enterprises will be required to use the amount of the three parameters of the prior year (i.e. Year 2) to determine the allocation ratio for branches for the provisional and annual CIT filings for the current year (i.e. Year 3). News Flash China Tax and Business Advisory 2

3 PwC observation Change of the annual filing mechanism To enterprises with headquarters and branches across provinces, this is mainly a change in tax compliance procedure/process but would not affect the overall tax position/burden of the entire enterprise. Management need to adjust the internal tax compliance process in several aspects (e.g. staffing, timing, funding, etc.) to ensure the smooth and timely completion of the annual CIT filing at both the headquarters and branches. This would be a challenge for enterprises with large number of branches across the country (e.g. retail and logistics businesses, etc.) The change would also impact enterprises with a tax refund position during the annual reconciliation filing in view of the complex refund procedures. In the future, management of these enterprises would have to deal with the local tax bureaus at the locality of the headquarters and all the branches. They would be facing more uncertainties in terms of the timing of the tax refund. Change of base period to account for the three parameters As indicated in the diagram above, pursuant to Circular 40, enterprises will be required to use the amount of the three parameters of the prior year (i.e. Year 2) to determine the allocation ratio for branches for provisional and annual CIT filings of the current tax year (i.e. Year 3). But there may be a problem that most of the enterprises may not have received their audited financial statements for Year 2 by the time of the provisional CIT filing for the 1st quarter of Year 3. It is uncertain whether enterprises would be allowed to use the amounts from the unaudited financial statements of Year 2 in this case. Effective date Circular 40 will take effect from 1 January It is uncertain whether it will apply to the annual CIT filing for the year 2012 which takes place in early Conclusion The CIT filing mechanism for enterprises with cross-regional business operation is much more complicated than normal CIT filing for single-office enterprises. Circular 40 is the first time that the Chinese revenue authorities introduce changes to the existing mechanism which was put in place back in Shortly after the issuance of Circular 40, the SAT launched a nationwide review on CIT revenue allocation status of enterprises with cross-regional business operation. Both initiatives send out the signal that the Chinese revenue authorities are revisiting the mechanism to make sure it is working properly to achieve the intended revenue collection and allocation model. All enterprises with headquarters and branches across provinces will be affected by Circular 40. Management need to be aware of the impacts and adjust the internal compliance process where necessary. We will keep monitoring the developments, especially the uncertainties under Circular 40, and share our insights in due course. If there is no clarification from the SAT, it is possible that the local level tax bureaus may provide their own interpretation on certain administrative matters under Circular 40. So it is equally important for the enterprises to keep close dialogue with their local in-charge tax bureaus. News Flash China Tax and Business Advisory 3

4 Current CIT filing mechanism for enterprises with headquarters and branches across provinces Calculation of CIT payable for the entire enterprise In both provisional and annual CIT filings, the profit and loss of the headquarters and all the branches shall first be combined in order to come up with the overall taxable income and CIT payable 2 for the entire enterprise. Provisional CIT filing During provisional filing, the CIT payable for the entire enterprise shall be allocated amongst the headquarters and branches in the following manner: Step 1: The overall CIT payable shall be allocated firstly between the headquarters and the branches on a 50:50 basis: Party to pay the tax Headquarters Branches Allocation percentage of overall tax payable 50% 50% Appendix Step 2: Then the allocated amount for the branches (50%) will be further allocated among the branches according to three parameters, namely, the gross revenue, salary cost and asset value of the respective branches. The allocation formula is set out as follows: Formula to compute CIT payable for each branch during provisional CIT filing CIT to be paid by a branch at the local level = 50% of the CIT payable of the enterprise X Allocation ratio for the branch Whereas: Allocation ratio for the branch = Total revenue of the branch Total revenue of ALL branches X Total salary cost of the branch Total salary cost of ALL branches X Total asset of the branch Total asset of ALL branches X 0.30 The allocated amounts will be paid to the respective tax bureaus at the localities of the headquarters and each branch accordingly. Table A1 below illustrates how the CIT revenue is distributed between the central government and local governments of the headquarters and branches. 2 If the headquarters and branches are subject to different CIT rates, the computation of the CIT payable will be more complicated and is not discussed here for simplicity purpose. News Flash China Tax and Business Advisory 4

5 Table A1 Distribution of revenue during provisional CIT filing Party to settle the tax Headquarters Headquarters Branches Allocation percentage of overall tax payable 25% (a) 25%(b) 50%(c) Revenue distribution Central government (a) x 60% (b) x 60% (c) x 60% Local government (a) x 40% - (c) x 40% Tax payment to the temporary account which will be reallocated to the local governments periodically - (b) x 40% - Annual (reconciliation) CIT filing The annual CIT filing is only required to be performed by the headquarters for the entire enterprise and the relevant tax payable or tax refund shall be settled with (or obtained from) the in-charge tax bureau of the headquarters. In other words, the overall CIT payable/refund does not need to be allocated to the branch level during the annual filing. Table A2 below illustrates how the CIT revenue is distributed between the central government and local governments during annual filing. Table A2- Distribution of revenue (allocation of revenue burden) during annual CIT filing Party to settle the tax payable / receive the refund Headquarters Branches Allocation percentage of tax payable / refund 100% (A) - - Revenue distribution (or allocation of revenue burden in case of tax refund) Central government (A) x 60% - - Local government - Temporary account (A) x 40% - - News Flash China Tax and Business Advisory 5

6 In the context of this News Flash, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers client service team or your other tax advisers. The materials contained in this publication were assembled on 6 November 2012 and were based on the law enforceable and information available at that time. To make enquiries about our China tax and business advisory services, please feel free to contact the following lead specialist partners: Accounting & Payroll Services Steven Wong Tel: +86 (10) steven.wong@cn.pwc.com China Business & Investment Advisory Anthea Wong Tel: +86 (10) anthea.wong@cn.pwc.com Customs & International Trade Damon Paling Tel: +86 (21) damon.ross.paling@cn.pwc.com Domestic Enterprises Tax Services Elton Huang Tel: +86 (21) elton.huang@cn.pwc.com Financial Services Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Indirect Tax Alan Wu Tel: +86 (10) alan.wu@cn.pwc.com International Tax Services Edwin Wong Tel: +86 (10) edwin.wong@cn.pwc.com Mergers & Acquisitions Nick Dignan Tel: nick.dignan@hk.pwc.com Registration & Corporate Compliance Matthew Wong Tel: +86 (21) matthew.mf.wong@cn.pwc.com Tax Accounting Services Terry Tam Tel: +86 (21) terry.sy.tam@cn.pwc.com Tax Controversy Services Xiaoying Chen Tel: +86 (10) xiaoying.chen@cn.pwc.com Tax Valuation Services Ray Zhu Tel: +86 (21) ray.zhu@cn.pwc.com Transfer Pricing Jeff Yuan Tel: +86 (21) jeff.yuan@cn.pwc.com Value Chain Transformation Steven Tseng Tel: +86 (21) steven.tseng@cn.pwc.com International Assignment Services / Human Resources Services Northern Region Edmund Yang Tel: +86 (10) edmund.yang@cn.pwc.com Central Region Stacy Kwok Tel: +86 (21) stacy.kwok@cn.pwc.com Southern Region Jacky Chu Tel: jacky.chu@hk.pwc.com Our regional contacts: Beijing Edward Shum Tel: +86 (10) edward.shum@cn.pwc.com Chongqing Robert Li Tel: +86 (23) robert.li@cn.pwc.com Dalian Rex Chan Tel: +86 (411) rex.c.chan@cn.pwc.com Guangzhou Daisy Kwun Tel: +86 (20) daisy.kwun@cn.pwc.com Hangzhou Jenny Chong Tel: +86 (21) j.chong@cn.pwc.com Hong Kong Charles Lee Tel: charles.lee@cn.pwc.com Macao Grace Cheung Tel: grace.cheung@hk.pwc.com Nanjing Jane Wang Tel: +86 (25) jane.y.wang@cn.pwc.com Ningbo Ray Zhu Tel: +86 (21) ray.zhu@cn.pwc.com Qingdao Steven Wong Tel: +86 (532) steven.wong@cn.pwc.com Shanghai Peter Ng Tel: +86 (21) peter.ng@cn.pwc.com Shenzhen Charles Lee Tel: +86 (755) charles.lee@cn.pwc.com Singapore Lennon Lee Tel: lennon.kl.lee@sg.pwc.com Suzhou Linjun Shen Tel: +86 (512) linjun.shen@cn.pwc.com Taiwan Steven Go Tel: +886 (2) steven.go@tw.pwc.com Tianjin Kelvin Lee Tel: +86 (22) kelvin.lee@cn.pwc.com Xiamen Mike Chiang Tel: +86 (21) mike.chiang@cn.pwc.com Xian Elton Huang Tel: +86 (29) elton.huang@cn.pwc.com This China Tax and Business News Flash is issued by the PwC National Tax Policy Services in China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PricewaterhouseCoopers partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui Tel: +86 (10) matthew.mui@cn.pwc.com Please visit PricewaterhouseCoopers websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.