Post by Nelson on Mar 13, 2009 8:30:47 GMT 4
China: Grandfathering rules for the new value-added tax provisional regulations
The newly-revised value-added tax (VAT) provisional regulations and their implementation rules abolished both VAT refunds for foreign invested enterprises (FIE) purchasing domestically manufactured equipment and VAT exemptions for imported equipment. Grandfathering rules were subsequently issued in late December 2008.
1. Circular on ceasing to apply the tax refund policies
A circular on ending the tax refund policies on FIE purchases of domestically manufactured equipment, jointly issued by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT), Cai Shui [2008] number 176.
According to this circular, where an FIE purchases domestically manufactured equipment on or before June 30 2009, and the VAT special invoices are verified as correct by the tax authority, the FIE can choose to file for a VAT refund under the old policies. However, the following criteria must be satisfied: (a) the confirmation letter for FIE projects in compliance with the national industrial policies must have been obtained before November 9 2008, and filed with the tax authority before December 31 2008; (b) the FIE must have obtained VAT special invoices, and filed for the tax refund with the tax authority; (3) the purchased equipment must be on the list of qualifying domestically manufactured equipment.
2. Announcement [2008] number 43, jointly issued by the MOF, SAT and customs
According to this announcement, where the confirmation letter on the nationally encouraged domestic or foreign capital projects has been obtained before November 10 2008, and the equipment and technology, fittings and spare parts forming a complete set of equipment have been declared for importation before June 30 2009, the tariff and import VAT exemption shall continue to be available in accordance with the old regulations. After July 1 2009, import VAT shall be imposed, while the tariff will continue to be exempted in accordance with the old tariff exemption rules.
Partnership tax
On December 23 2008, the MOF and the SAT jointly issued the notice on issues concerning income tax of partners in partnership enterprises (Cai Shui [2008] number.159) effective retroactively as of January 1 2008.
1. Pass-through tax treatment of the partnership enterprise
Under the notice, a partnership enterprise will not be subject to enterprise income tax or individual income tax, irrespective of whether the partners are individual persons or legal persons. Instead, each of the partners will be liable for tax only on their separate and individual taxable income allocated from the partnership enterprise. Individual partners will be subject to individual income tax and legal person partners will be subject to enterprise income tax.
2. Calculation of the taxable income of the partners
The notice provides that the partners will recognise income on an annual basis. The following rules of priority will be applied to determine the appropriate allocation of taxable income to partners:
* allocate pursuant to the written partnership agreement;
* allocate under a subsequent agreement among the partners if the partnership agreement is silent or unclear;
* allocate based on the percentage of the paid capital contributions by the partners if the partners fail to negotiate an allocation;
* allocate based on the number of partners pro rata if the percentage of capital contributions cannot be determined.
3. Non-use of losses
It is very interesting to note that where the partners are legal persons, the losses of the partnership enterprise may not be used by the legal person partner(s) to offset their income from other sources.
Special tax adjustments
On January 8 2009, the SAT approved a circular Guo Shui Fa [2009] number two. This circular contains the final version of the implementation measures of special tax adjustment, which lay out detailed rules administering all aspects off special tax adjustments.
The chapters include general rules, filing and examination of related party transactions, administration of contemporaneous documents, transfer pricing methods, transfer pricing audit and adjustment, advance pricing agreement, cost sharing agreement, administration of controlled foreign companies, administration of thin capitalisation, general anti-avoidance, adjustment and international negotiation, legal responsibility and supplementary provisions.
We set forth a few highlights for your attention:
* Compared with the previous draft versions, the percentage of shares owned by the parent in related party transactions (RPT) has been reduced from 25% to 20%, and common senior management might also lead to RPT recognition.
* According to the measures, non-residents that have permanent establishments in China and file enterprise income tax in China are required to prepare RPT documentation.
* The simplified contemporaneous documentation provision has been cancelled, and the threshold for exemption from the documentation requirement has been increased from RMB 20 million ($
) to RMB 200 million.
* It is easier for enterprises to apply for an advance pricing agreement. The annual RPT requirement has been reduced from RMB 100 million to RMB 40 million.
* The RPT filing deadline is May 31 annually. However, for the first filing year, 2009, the deadline has been extended to December 31.
Withholding enterprise income tax for non-resident enterprises
The SAT recently issued the provisional administrative measures on withholding enterprise income tax for non-resident enterprises (Guo Shui Fa [2009] number 3), finally clarifying the situation on tax liability on share transfers between foreign parties.
1. Offshore share transfer
Before the issuance of the measures, the tax law did not specify how to withhold income tax for offshore share transfer transactions where both parties are non-residents, and the practices at local levels were inconsistent. Now the measures have clarified the situation as follows:
* The target company is responsible for reporting the deal to local tax authority by submitting the share transfer contract when going through tax registration certificate change formalities;
* The transferor should pay enterprise income tax by itself or through an agent. The target company should help with the tax collection matters;
* Where the target company fails to go through the tax registration certificate change formalities, it may be subject to a penalty up to RMB10, 000.
It should now be clear that the transferee foreign enterprise has no responsibility for withholding tax on an offshore transfers – its responsibility is limited to reporting the transaction to the relevant authorities.
2. Withholding tax registration and payment system
When the acquiring enterprise is a domestic company, it will be the withholding agent. The withholding agent should within 30 days after the share transfer contract is concluded apply for registration with the responsible tax authority. Each time tax is withheld, the withholding agent should submit the PRC enterprise income tax withholding form together with relevant documents to tax authority.
3. The obligation remains with transferor
Where the withholding agent fails or is unable to withhold tax for the transferor, the tax payment obligation remains with the transferor. The transferor should pay the tax within seven days after the withholding due date; otherwise it could be subject to a penalty from 50% to five times of the under-paid amount plus late payment.
4. Applying for the benefit of tax treaties
Enterprises may apply for the benefit of an applicable tax treaty; where the enterprise fails to apply, domestic tax laws should prevail. However, after a non-resident enterprise has paid tax according to domestic tax laws, it may still apply for the benefit of a tax treaty, and upon examination and verification, tax authority should refund the over-paid tax.
Foreign invested projects catalogue for central and western regions
The national development and reform commission and the Ministry of Commerce jointly issued foreign invested projects catalogue for central and western regions (Order [2008] number 4) on December 23 2008. Following that, the general administration of customs on January 19 2009, issued order [2009] number 4 in order to provide detailed instructions.
According to the first order, qualified projects in the central and western regions can continue to enjoy FIE tax incentives. The impact on enterprise income tax is that qualified projects can continue to follow 15% tax rate until 2010 according to Cai Shui [2001] number 202.
According to the second order, newly approved projects in the catalogue may enjoy FIE incentives with the customs duties exempted and import VAT collected. For the projects that have gained approval before December 31 2008, the old FIE incentives still apply and import VAT may be exempted. However, the enterprise should file at local customs. For projects under construction which do not fall into the year 2004 catalogue but qualify under the year 2008 catalogue, the enterprise may still apply for tax incentives as described above by obtaining confirmation letters; nevertheless, any collected tax should not be refunded.
Stephen Nelson (stephen.nelson@kingandwood.com.hk), Beijing & Hong Kong
The newly-revised value-added tax (VAT) provisional regulations and their implementation rules abolished both VAT refunds for foreign invested enterprises (FIE) purchasing domestically manufactured equipment and VAT exemptions for imported equipment. Grandfathering rules were subsequently issued in late December 2008.
1. Circular on ceasing to apply the tax refund policies
A circular on ending the tax refund policies on FIE purchases of domestically manufactured equipment, jointly issued by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT), Cai Shui [2008] number 176.
According to this circular, where an FIE purchases domestically manufactured equipment on or before June 30 2009, and the VAT special invoices are verified as correct by the tax authority, the FIE can choose to file for a VAT refund under the old policies. However, the following criteria must be satisfied: (a) the confirmation letter for FIE projects in compliance with the national industrial policies must have been obtained before November 9 2008, and filed with the tax authority before December 31 2008; (b) the FIE must have obtained VAT special invoices, and filed for the tax refund with the tax authority; (3) the purchased equipment must be on the list of qualifying domestically manufactured equipment.
2. Announcement [2008] number 43, jointly issued by the MOF, SAT and customs
According to this announcement, where the confirmation letter on the nationally encouraged domestic or foreign capital projects has been obtained before November 10 2008, and the equipment and technology, fittings and spare parts forming a complete set of equipment have been declared for importation before June 30 2009, the tariff and import VAT exemption shall continue to be available in accordance with the old regulations. After July 1 2009, import VAT shall be imposed, while the tariff will continue to be exempted in accordance with the old tariff exemption rules.
Partnership tax
On December 23 2008, the MOF and the SAT jointly issued the notice on issues concerning income tax of partners in partnership enterprises (Cai Shui [2008] number.159) effective retroactively as of January 1 2008.
1. Pass-through tax treatment of the partnership enterprise
Under the notice, a partnership enterprise will not be subject to enterprise income tax or individual income tax, irrespective of whether the partners are individual persons or legal persons. Instead, each of the partners will be liable for tax only on their separate and individual taxable income allocated from the partnership enterprise. Individual partners will be subject to individual income tax and legal person partners will be subject to enterprise income tax.
2. Calculation of the taxable income of the partners
The notice provides that the partners will recognise income on an annual basis. The following rules of priority will be applied to determine the appropriate allocation of taxable income to partners:
* allocate pursuant to the written partnership agreement;
* allocate under a subsequent agreement among the partners if the partnership agreement is silent or unclear;
* allocate based on the percentage of the paid capital contributions by the partners if the partners fail to negotiate an allocation;
* allocate based on the number of partners pro rata if the percentage of capital contributions cannot be determined.
3. Non-use of losses
It is very interesting to note that where the partners are legal persons, the losses of the partnership enterprise may not be used by the legal person partner(s) to offset their income from other sources.
Special tax adjustments
On January 8 2009, the SAT approved a circular Guo Shui Fa [2009] number two. This circular contains the final version of the implementation measures of special tax adjustment, which lay out detailed rules administering all aspects off special tax adjustments.
The chapters include general rules, filing and examination of related party transactions, administration of contemporaneous documents, transfer pricing methods, transfer pricing audit and adjustment, advance pricing agreement, cost sharing agreement, administration of controlled foreign companies, administration of thin capitalisation, general anti-avoidance, adjustment and international negotiation, legal responsibility and supplementary provisions.
We set forth a few highlights for your attention:
* Compared with the previous draft versions, the percentage of shares owned by the parent in related party transactions (RPT) has been reduced from 25% to 20%, and common senior management might also lead to RPT recognition.
* According to the measures, non-residents that have permanent establishments in China and file enterprise income tax in China are required to prepare RPT documentation.
* The simplified contemporaneous documentation provision has been cancelled, and the threshold for exemption from the documentation requirement has been increased from RMB 20 million ($
) to RMB 200 million.* It is easier for enterprises to apply for an advance pricing agreement. The annual RPT requirement has been reduced from RMB 100 million to RMB 40 million.
* The RPT filing deadline is May 31 annually. However, for the first filing year, 2009, the deadline has been extended to December 31.
Withholding enterprise income tax for non-resident enterprises
The SAT recently issued the provisional administrative measures on withholding enterprise income tax for non-resident enterprises (Guo Shui Fa [2009] number 3), finally clarifying the situation on tax liability on share transfers between foreign parties.
1. Offshore share transfer
Before the issuance of the measures, the tax law did not specify how to withhold income tax for offshore share transfer transactions where both parties are non-residents, and the practices at local levels were inconsistent. Now the measures have clarified the situation as follows:
* The target company is responsible for reporting the deal to local tax authority by submitting the share transfer contract when going through tax registration certificate change formalities;
* The transferor should pay enterprise income tax by itself or through an agent. The target company should help with the tax collection matters;
* Where the target company fails to go through the tax registration certificate change formalities, it may be subject to a penalty up to RMB10, 000.
It should now be clear that the transferee foreign enterprise has no responsibility for withholding tax on an offshore transfers – its responsibility is limited to reporting the transaction to the relevant authorities.
2. Withholding tax registration and payment system
When the acquiring enterprise is a domestic company, it will be the withholding agent. The withholding agent should within 30 days after the share transfer contract is concluded apply for registration with the responsible tax authority. Each time tax is withheld, the withholding agent should submit the PRC enterprise income tax withholding form together with relevant documents to tax authority.
3. The obligation remains with transferor
Where the withholding agent fails or is unable to withhold tax for the transferor, the tax payment obligation remains with the transferor. The transferor should pay the tax within seven days after the withholding due date; otherwise it could be subject to a penalty from 50% to five times of the under-paid amount plus late payment.
4. Applying for the benefit of tax treaties
Enterprises may apply for the benefit of an applicable tax treaty; where the enterprise fails to apply, domestic tax laws should prevail. However, after a non-resident enterprise has paid tax according to domestic tax laws, it may still apply for the benefit of a tax treaty, and upon examination and verification, tax authority should refund the over-paid tax.
Foreign invested projects catalogue for central and western regions
The national development and reform commission and the Ministry of Commerce jointly issued foreign invested projects catalogue for central and western regions (Order [2008] number 4) on December 23 2008. Following that, the general administration of customs on January 19 2009, issued order [2009] number 4 in order to provide detailed instructions.
According to the first order, qualified projects in the central and western regions can continue to enjoy FIE tax incentives. The impact on enterprise income tax is that qualified projects can continue to follow 15% tax rate until 2010 according to Cai Shui [2001] number 202.
According to the second order, newly approved projects in the catalogue may enjoy FIE incentives with the customs duties exempted and import VAT collected. For the projects that have gained approval before December 31 2008, the old FIE incentives still apply and import VAT may be exempted. However, the enterprise should file at local customs. For projects under construction which do not fall into the year 2004 catalogue but qualify under the year 2008 catalogue, the enterprise may still apply for tax incentives as described above by obtaining confirmation letters; nevertheless, any collected tax should not be refunded.
Stephen Nelson (stephen.nelson@kingandwood.com.hk), Beijing & Hong Kong