Problems relating to Trade and Investment on China
11. Restriction on profits remittance abroad |
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Issue |
Issue details |
Requests |
Reference |
| (1) Restricted Remittance Overseas for the Non-Trade Consideration, Service Fees, Royalty, Etc. | - External remittance procedure for non-trade transactions on royalty for technical licencing at its centre is quite complex. It involves licences of plural ministries and agencies, including bureau of commerce, national administration of copyright, trademark office, and state intellectual property office, in addition to the bank's external remittance licence. Compared to leading countries, these GOC's requirements on registration are excessively burdensome. - From time to time, taxation bureau disapproves MFS's remittance to Japan for royalties under technical licencing agreement provided by its parent in Japan. In PRC, where the amount of such remittance exceeds 5 million USD, the applicant needs to visit Administration of Taxation (AOT) to obtain stamps in acknowledgement of the receipt of the payments for withholding tax, royalty fees, etc. In addition, another visit to administration of foreign exchange is necessary to obtain the remittance permit. Despite the completion of tax payment, in one case, due to the tax authority's refusal of the stamp on remittance application, there was a case in which remittance had been suspended for two years in the amount of 1.7 billion approx. AOT took the position that the Member Firm's Subsidiary having operated in negative profit is not qualified for remittance in huge amount as royalty payment (in Wuxi). - A Member Firm experienced time consuming, complex payment procedures in the case where technical service was provided to a Member Firm's Subsidiary (MFS) without transferring Intellectual Property Right (IPRs). - From time to time, Administration of Foreign Exchange (AOFE) suspends MFS's payment to member firm made in foreign currency in an arbitrary, nebulous manner in total absence of clarity. - Administration of Foreign Exchange (AOFE) strictly controls remittance abroad so that AOFE's approval is hard to obtain. It results in collection delay in Japan. |
- It is requested that GOC: -- streamlines the remittance procedures for non-trade transactions (especially, royalty fees under technical licence agreement), and -- clearly identifies the relations by and among the various schemes. - This is the case that should be raised in a formal investigation for transfer pricing taxation. It is requested that AOT refrains from halting the individual remittance. - For the benefit of business development on mutual parties, it is requested that GOC clearly identifies the taxation and overseas remittance procedures. - It is requested that GOC: --repeals the restrictions to the extent possible, if not, --enhances transparency. - It is requested that GOC deregulates the regulation on foreign remittance. |
- Trademark Law, Article 40(3) - Regulations on Administration of Import and Export of Technologies - Measures for the Administration of Registration for Patent Licence Agreement - Measures for the Administration of Registration for Technical Licence Agreement |
| (Action) - In PRC, foreign exchange current transactions items are subject to examination by designated foreign exchange banks. On-line examination is made on foreign trade items under the export/import current transactions collation system (husuo-zhidu), while non-trade items are subject to examination by submitting the examination materials to designated foreign exchange banks. Furthermore, foreign remittance made on account of non-trade items of current transactions could be subject to supervisory inspection by State Administration of Foreign Exchange (SAFE). Where single payment exceeds the amount equivalent to USD30,000 on non-trade items for provision of service by foreign enterprises or foreign individuals on account of service trade revenues, dividends, share-outs, profits, finance lease fees, revenue from transfer of fixed assets, revenue from transfer of equity interest, remuneration for labour by individuals residing abroad, etc., SAFE and State Administrations of Taxation require submission of "certificate of taxation", which may be obtained by first filing application to the competent taxation bureau for final submission to the presiding local taxation authority. "Application form for taxation certificate required for payment of foreign exchange on service trade, etc." must accompany copy of contract or the minutes of consultation, receipt or invoice, tax payment certificate, etc. In the event where the presiding taxation authority denies rationality of payment for royalty, service fees, and interest, external remittance is not possible. - Under Circular of the State Administration of Foreign Exchange (SAFE) and the State Administration of Taxation (SAT) on relevant issues concerning the pilot implementation of archival filing of taxation on external payments for trade in services (No.8 [2008] of SAFE), SAFE and SAT decide to practice pilot implementation in such six regions as Tianjin, Shanghai, Jiangsu, Sichuan, Fujian and Hunan (Pilot Regions) from April 1st, 2008, to implement the administrative measures of archival filing of taxation prior to the external payment for trade in services. When a domestic institution registered in a pilot region handles an external payment for trade in services which is equivalent to the amount of more than USD 50,000 (not including USD 50,000) at a designated foreign exchange bank in a pilot region (bank), it shall, in advance, file for archival purpose with the competent state taxation authority within the jurisdiction with the photocopies of relevant contracts, fill out and submit the table of archival filing of taxation on external payment for trade in services for domestic institutions. - Remittance abroad of royalty requires firstly registration of the technical licence agreement with the Commercial Department of the local government, receipt of proof of payment for business tax from the taxation authority, and finally, the receipt of the licence for remittance abroad issued by SAFE. In this fashion, layer after layer of administrative check up is involved for bringing out foreign currency abroad. - Since unification in 2008 of the enterprises income tax rate at 25% for both foreign funded enterprises and domestic enterprises in 2008 under the PRC Enterprises Income Tax Law, by the merger of the two laws, the taxation authority tends to deny royalty payments to related parties. - "Agreement among GOJ,GOK and GOC for the Promotion, Facilitation and Protection Of Investment" has signed on 13 May 2012 and in Article 13 Thereof provides for obligation to secure the freedom of remittance and establishment of the approval deadline for remittance procedures. - Technical import agreement requires registration of contract at Ministry of Commerce (MOC). Unless accompanied by the Contract Registration Certificate, remittance abroad of the consideration for the technical licence fee, etc. is disallowed, provided, however, that, after 1 September 2013, the remittance abroad of the consideration for the technical licence fee is made possible without presentation of the contract registration certificate. (Article 6 of "Detailed Rules for Guiding Foreign Exchange Control on Trade in Service." Promulgated on 18 July 2013). - On 17 May 2014, Japan/China/ROK Investment Treaty entered into force. Article 13 specifies the obligations to secure freedom of remittance and the deadline for approval of remittance approval. |
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| (Improvement) - On 1 September 2013, GOC deregulated the requisite procedures (submission of contract to the State/Local Administration of Taxation (SLAT), Declaration for payment to banks before remittance, certification of tax payment, remittance from the banks authorised for foreign exchange) concerning external remittance on technical instructions fees, service fees, etc. As a result, (1) The maximum amount requiring prior notification to SLAT has been reduced from USD 50,000 to USD 30,000, and (2) submission to bank of certification of tax payment upon external remittance has become no longer necessary, (excepting Notification, which must be submitted). |
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| (2) GOC's Demand for Reduction in Royalty Rates | - The subsidiary of our member firm was summoned by MOC for reduction in the royalty rate without any justifiable reason (as far as the party to the licencing agreement was concerned), despite the fact that examination of technical licence agreement has been shifted to a mere registration. In effect there has not been a single case where the rate has been changed. However, it has wasted much time, resulting in delays in payment. - GOC intervenes on the royalty rate under the technical licence agreement. It makes it practically impossible to raise the royalty rates to the level comparable to other countries. |
- It is requested that GOC refrains from executing de facto examination of technical licence agreement for which no examination is legally required. - It is requested that GOC improves the state of affairs to allow the licensors' retrieval of the proper consideration for the technical assistance. |
- Regulations of the People's Republic of China on Administration of Import and Export of Technologies SC[2011]No.331 Issued on 10 December 2001 & amended on 8 January 2011, Article 17 |
| (Action) - On 28 April 1993, "Guideline for Signing Technology Import Agreement and its Examination and Approval Principles" was repealed. The Guideline provided that the running royalty must not be higher than 5% on net sales amount, and not higher than 20% of the net profit generated by the contract goods. Nevertheless, it is said that these requirements persist to certain extent to this day even after the repeal of the guideline. |
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| (3) Additional Tax Collection, Penalty on Royalty Fees for Use of Trademark | - AOT directs Member Firm's Subsidiary (MFS) to add to the price of parts and materials imported from its parent (member firm) the amount of royalties for the manufacturing know-how that MFS pays to member firm. Extension of tax consequences to the parent is a matter of concern. "Royalty fees for manufacturing know-how" should concern only the finished products, NOT the imported materials. - Customs duty levied on materials and parts, royalty on imported machinery and equipment, royalty on trademark usage, and imposition of fines. Regional differences exist in these matters. |
- It is requested that GOC conducts its customs duty valuation in accordance with the international standard. | - GAC Order (No. 213) Articles 11, 12, 13 - Measures for Assessment and Determination of Taxable Price On Import/Export Commodity (2006) - Customs Regulation on Evaluating Licence Fees for Imported Cargoes (2003) |
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