Problems relating to Trade and Investment on China
14. Taxation Systems |
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Issue |
Issue details |
Requests |
Reference |
| (1) Unique Taxation System | - There are numerous special taxation systems applicable to foreign legal entities. Transfer price taxation system, loss carried forward system, etc. are different from the general taxation systems used in EU and the United States. | - It is requested that GOC: -- takes step to overhaul the legislation and carries out a fair and square tax investigation, and -- carries out tax investigation based on the taxation standard as close as possible to the global standard. |
- Enterprise Income Tax Law |
| (2) Unjustified Share Transfer Tax | - Transfer in Japan of shares in PRC enterprises is taxable in PRC (direct transfer). Transfer in Japan of shares in an enterprise that holds shares in a PRC enterprise is also taxable in PRC. (indirect transfer) | - It is requested that GOJ and GOC specify in the Japan?PRC Tax Treaty in such a way that the tax levy on the transfer yield between Japanese corporations accrues only on the Japanese side. | |
| (3) Difficult Deduction in PRC of Withholding Tax Levied Overseas | - Withholding tax of 15% levied upon consignor on revenue from development consignment in Thailand and India is not refundable in PRC so that either consignor or consignee must the tax burden. | - It is requested that GOC resolves the problems through International Consultation on Tax Payment. | |
| (4) The competitive edge has been reduced due to imposition of high rates of VAT | - Since April 2006, GOC has started to impose 20% of excise tax on goods priced at more than RMB10,000, CIF. - Operational profitability has declined on import of clocks, due to the heavy burdens of import duty and VAT. - GOC levies 17% VAT on export of corrugated cardboard sheet (provided, however, that 13% is refunded (net 4% levy) when shipped as corrugated cardboard package). - On normal import goods, importers incur VAT 17% on top of custom duty (Average 10%), which together deprives competitive edge of imported goods. |
- It is requested that GOC reduces the excise tax. - It is requested that GOC further reduces various taxes and dues on imported goods, to liberalise the market for foreign enterprises. - It is requested that GOC reduces VAT rate on export (as it debilitates the international competitive edge). - It is requested that GOC either reduces or repeals the import tariffs. |
- Customs Regulations and Provisions - Customs Tariff of PRC, etc. |
| (Action) - The PRC taxation system is characterised by the indirect tax of 60%. In her 2008 national tax revenue, the domestic VAT occupied 22.4% of the total tax revenue, or 23.3% up against the same period of the previous year. This percentage corresponds to the increase in added values for the domestic consumption. - Import VAT is levied on the taxable amount plus import duty (or excise tax in some cases). Import VAT = (taxable amount + import duty amount + excise tax amount) x 17% (or 13% in some cases). - On 24 March 2016, MOF and State Administration of Taxation (SAT) promulgated notice on implementing the pilot programme of replacing business tax with value-added tax in an all-round manner (No. 36 [2016] of MOF). Pilot programme for reform, replacing business/service category subject to business tax with value-added tax, began from January 2012 in Shanghai city, from August 2013, implemented statewide, and finally since 1 May 2016, all business categories/services have become subject to value-added tax. |
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| (5) VAT not Refunded or Delayed | - In the case of enterprises operating at low margin from stock, etc., "inequality" persists between "advance payment of VAT" and "advance receipt of VAT", whereby the former is larger than the latter all the time. On the Balance Sheet, a firm enters excessive VAT payment as unrefunded VAT, which gets adjusted in the following months. However, the fact is that the cash remains in the Taxation Bureau's vault for a certain period all the time. Depending upon the enterprises' formation, advance receipt of VAT does not result. Its disposal on the cost and tax accounting remains uncertain, and undefined. - MFS exported products through a Chinese domestic trading company (a Shanghai free trade pilot zone enterprise). After completing the export customs clearance in the Chinese supplier's name, MFS directly exported the products overseas. However, foreign currency being payable by a Chinese enterprise, the Chinese supplier is unable to receive VAT refund (at Kunsan, Wuxi, Dalian, etc.) While the foreign currency scheme has been deregulated, its linkage to the taxation system has not yet been completed. Enterprises remain unable to enjoy the benefit of the new system. |
- It is URGED that GOC considers and establishes the system for dealing with the unrefunded VAT. - It is requested that GOC clarifies the new VAT refund scheme. |
- Notice of MOF and the SAT on VAT and Consumption Tax Policies for Exported Goods and Labour Services (No. 39 [2012] MOF) |
| (Action) - GOC issued on 14 September 2006 "Notice on Adjusting the Tax Refund Rates of Certain Commodities and Supplementing the Catalogue of Prohibited Commodities in Processing Trade, MOF, SAT [2006] No.139" that repealed or reduced the VAT refund rates. - GOC repealed tax refund on 83 items of steel products, while reducing the refund rate to 5% on 76 items. ("Notice of SAT on Adjusting the Export Tax Refund Rates Library" (Letter No. 862 [2007] of SAT) and "Handling of Tax Refund on Steel" (SAT [2007] No.64)). - GOC repealed in July 2007 Tax Refund on 37% over 533 items of export products and reduced the refund rate on 2,268 items. - In 2008, after Lehman Brothers shock, GOC has turned to stimulate economy by sporadically raising the VAT refund rate to support export from PRC. - On 13 April, MOF, GAC and GAT jointly promulgated "Notice on Provisional Measures on Import Duty Revenue relating to Adjustment of Catalogue for Major Technological Equipment" to revise the Catalogue for Major Technological Equipment and Parts (enforced from 25 April 2010) (GOF/GAC/GAT [2010] No. 17). The Amended Catalogue comprises of: (1) "Catalogue of State Supported Development of Major Technological Equipment and Products (2010 Amendment)" ("Technology Equipment Catalogue"), (2) "Catalogue for Main Parts and Raw Materials for Major Technological Equipment and Products (2010 Amendment)" ("Main Parts and Raw Materials Catalogue") and (3) "Non-Tax Exempted Import of Major Technological Equipment and Products (2010 Amendment)" ("Non-Tax Exempted Catalogue"). Main Parts and Raw Materials for Major Technological Equipment and Products listed in "Non-Tax Exempted Catalogue" are not entitled to exemption of Import Duty and VAT. Each Catalogue will be revised in each year, and Each Catalogue of 2010 Version will replace Each Catalogue of 2009 Version. - Since 15 July 2010, GOC has repealed refund of 5-17% on 406 items in 6-sectors, including processed materials of iron and steel and non-ferrous metals, plastics, agrochemicals, etc. These measures are noteworthy as an indicator of GOC's policy change toward removal of its policy for supporting export. |
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| (Improvement) - MOF and SAT issued on December 10, 2004 "Notice on Raising Refund Rates of VAT for Certain IT Products". The practical date of implementing this Notice enforced on November 1, 2004 is based on the export date filled in by Customs on the Export VAT Refund Bill. This Notice also raised the VAT refund rate from the previous 13% to17% on the high-technology related 40 products (including IC, mobile communication equipment, LCD display, hard disk drive, cell-phone, numerically controlled machine, etc.). - SAT on 29 March 2005 issued "The Reply of SAT on Issues Regarding Tax Refund (Exemption) for Export Claims via Bonded Zone (Letter No.255 [2005] of SAT)", which enables applicants to file applications based on the date noted by Customs on the cargo list from the last Bonded Zone from which goods are exported. This agreement provides that date of issuing customs clearance certificate (CCC) shall be the date on which the goods are first delivered to the bonded zone. Previously, applications for refund filed by enterprises outside the bonded zone could not be timely made, because the Customs in the bonded zone issued CCC devoted exclusively for export tax refund after all goods were exported. - SAT issued on July 12, 2006 "Notice about the Refund (Exemption) of Tax on Exported Goods" enforced retroactively from July 1, 2006, to resolve the issues arising from differences in VAT refunds by Provinces. This Notice expressly states: consumption tax is not subject to tax refund besides; the statement of the requisite documents; and the deadline for the refund process. It also states failure to timely file the refund applications and/or submission of incorrect request for refund documents deprives the applicants of the VAT refund. In such event, export sales are treated as domestic sales. - "Notice of MOF, National Development and Reform Commission, MOFCOM, GAC, and SAT on Adjusting the Tax Refund Rates of Certain Commodities and Supplementing the Catalogue of Prohibited Commodities in Processing Trade", issued on 14 September and enforced on 15 September 2006, adjusts tax refund rates in a wide range of export products. This adjustment is said to divert trade frictions, to secure resources and to adjust industrial construction. The majority of products subject to adjustments include raw materials, and industrial products with relatively small amount of processing, and consequent low added values. The 255 items subject to tax refund rescission include coal, non-ferrous minerals such as silicon, mercury battery, charcoal, and cross tie, and 1,130 items subject to reduction in refund rates include steel (from 11% to 8%), and cement (from 13% to 11%), and 191 items subject to increase in refund rates include important equipment such as generating equipment, certain IT products such as computer parts, bio medical goods, high-tech products encouraged for export (from 11% to 13%), and certain processed goods made of agricultural products (from 11% to 13%). - On 12 November 2008, the Executive Meeting of the State Councilors decided to raise the export VAT refund rates over 3,770 items as a means to expand the domestic demand. - Thanks to the amendment of VAT since January 2009, deduction from the purchase cost has been made possible on VAT, which had to be recognised as Fixed Property Cost till then. - After the Lehman Brothers shock, GOC reversed its gear toward stimulation of economy, raising the VAT refund rates over 8,000 items in total for 7-times up to June 2009. - According to the News Flash, PRC's Tax Revenue continued to grow, up by 18.8% or RMB5.4 trillion in FY2008, and up by 9.1% or RMB6.3 in FY2009. While the total amount of the domestic VAT of RMB1,830 billion or 5.8% in FY 2009, the total amount of export VAT refund was RMB586 billion or up by 10.6% against FY2008. Previously, the VAT refund was procrastinated. However, the VAT refund has been fairly expedited in a better timely manner. |
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| (6) Instability / Changes in VAT Refund Rates | - Since September 2006, GOC reduced the VAT refund rate on steel products in stages to avoid foreign trade frictions with overseas countries due to the rapid increase in export. However, since the latter half of 2008, the export suddenly nose-dived. In light of promoting export, GOC made an about turn on its policy and raised the VAT refund rates in stages. On 22 June 2010, MOF released repeal of refund (previously 9%) on 48-tariff lines (HS) of steel products effective from 15 July 2010, as part of its policy to curb export of high resource/energy consuming products. On 1 January 2013, GOC affected a partial expansion of VAT from 9% to 13% for 7227.9010 and 7227.9090, subdivided from the old Code 722790. |
- It is requested that GOC maintains a stable export policy to eliminate confusions on the part of exporting enterprises. | - MOF Notice on VAT Refund on the Canceled Portion of Goods (CaiShui [2010] No. 57) |
| (Action) - GOC has shifted its policy from suppressing export to promoting it. Beginning 1 August 2008, it has raised the export VAT refund rates. - Effective 1 December 2008, GOC has raised the export VAT refund rates on 3,770 items including labour intensive products, and electrical products. - In January 2009, GOC raised the export VAT refund rate on hi-tech hi-added value electrical products. - On 27 March 2009, Ministry of Finance (MOF) and State Administration of Taxation (SAT) promulgated SAT Notice [2009] No. 43 that raised the export VAT refund rates on 3,802 items, including light industrial products, textiles, and IT products. - Effective 1 June 2009, SAT raised the export VAT refund rates in order to maintain stable export on various items, including processed agricultural products (15%), electrical products including broadcasting machineries and equipment for television (17%), and steel products (9%). - On 1 July 2012, MOF and SAT promulgated and implemented "Notice on VAT and Consumption Tax Policies for Exported Goods and Labour Services" (CaiShui[2012]No.39) and "Administrative Measures for Value-added Tax and Consumption Tax on Export Goods and Labour Services" (CaiShui[2012]No.24) with the view to organise the multiple rules, measures and notices concerning VAT and VAT policy on export goods and labor services. |
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| (Improvement) - On 1 January 2015 the VAT refund scheme on boron added alloy steel has been repealed. (However, VAT refund scheme on alloy steel plate continues to exist.) |
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| (7) Additional Tax Levied due to the Revision in Import VAT Calculation Method | - GOC changed import VAT calculation method from "actual amount of import" to "export amount x rate (calculated from the past results (from August 2013 and thereafter)". The thrust of the change in the calculation method and the resulting sytemisation is understandably a needed step to attain the optimum efficiency at SAT. However, it has forced application of the uniform average, which has resulted in a vastly increased amount of tax payable. |
- It is requested that GOC applies the system more flexibly in application of the uniform sytemisation, by reflecting the economic circumstances of each company, although across-the-board sytemisation has been inevitable. | - VAT and Consumption Tax Policies for Exported Goods and Labour Services - Administrative Measures for Value-added Tax and Consumption Tax on Export Goods and Labour Services |
| (8) Irrational VAT Refund Procedures on Imported Equipment | - While VAT on imported equipment is basically refundable, it is refunded only within the scope of the value added to the sales amount. However, where investment is made into equipment in the front process, no immediate increase in sales (in the form of finished products) results, so that the VAT refund period by necessity is stretched to a long period of 5-years. | - It is requested that GOC: -- separates export/import of normal commodities and imported equipment, and -- makes VAT refund basically in lump sum. |
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| (9) Vexatiously Complex VAT Refund Procedures on Export Trade | - The procedures on tax refund have become quite cumbersome recently, a heavy burden. Furthermore, the process is quite time consuming, forcing enterprises to absorb the burden of the cost of accrued interest caused by the delay. |
- It is requested that GOC: --clarifies its legislative system, and --improves responsive handling of the tax refund procedures. |
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| (10) Limited Purchase Tax Deduction From VAT on Enterprises in the Bonded Zones | - Enterprises in bonded zones may receive VAT deductions from materials and parts procured in RMB and other expenses paid in RMB only to the extent of the amount, corresponding to the amount of sales in RMB. While the majority of enterprises generate sales mainly from sales in bond, non-deductible VAT willy-nilly ends up as cost of operation. It leaves no merit for FFEs entering the bonded zones. | - It is requested that SAT enables the receipt of unrealised VAT refund by filing the final tax return, as it is done in Japan. | |
| (11) The Risk of Double Tax Levy due to Differences in TPTS Rules | - Especially as regards Transfer Price Taxation System (TPTS), its interpretative rules vary from one country to another - Member Firm no exception. It is faced with a potential risk of double taxation levy. | - It is requested that GOC ensures: -- alignment of its legislation with the world standard TPTS guidelines, and -- enrichment of the advance confirmation system. |
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| (12) Thorough Overhaul of Legislation for Removal of Double Taxation Levy | - The legislative overhaul took place for resolving double taxation. (e.g., Announcement No. 49 [2014] of State Administration of Taxation (SAT) "Reissuing the measures for the exemption of value-added tax on cross-border taxable services in the collection of value-added tax in lieu of business tax (for trial implementation)". | - It is requested that SAT continues its efforts for further legislative overhaul for resolution of double taxation. | |
| (13) Arbitrary TPTS Investigation | - GOC carries out investigation on the transfer pricing taxation, should profitability of FFEs declines, and levies taxes based on unilateral reasons under the transfer pricing taxation. - In light of the statewide and the local governments' tax revenue shortage, there appears an apparent tendency for beefing up tax collection efforts based on their own unique interpretation of TPTS. This poses a serious grave risk for enterprises to maintain the unperfected operation in the PRC regions. |
- It is requested that GOC: -- overhauls legislation on transfer pricing taxation system, and -- carries out a fair tax investigation. - It is requested that GOC implements the taxation system by the objective observation of enterprises' business status. |
- Income Tax Law - Detailed Rules for the Implementation of the Income Tax Law - Notice of SAT of Taxation on Issuing the Measures for the Implementation of Special Tax Adjustments, etc. |
| (14) Irrational Selection of Comparable Enterprises under the Transfer Pricing Taxation System (TPTS) | - In implementing the transfer pricing taxation, PRC Taxation Authority, being anxious to secure additional tax amount, fails to consider the corporate functional similarity in selecting a comparable enterprise to determine the "adequacy of the profit rate under the transactional unit net margin method" of member firm's foothold in PRC. The member firm's subsidiary (MFS), being a manufacturing foothold of member firm (MF) in Japan, is responsible for a commissioned manufacturing function, based on the materials and parts supplied by MF and resells the products so manufactured back to MF. Comparable enterprises selected by GOC include those with R&D function with higher rates of profit. It fails to reflect the actual state of affairs, whereby MFS is compelled to operate under the lower profit rate to meet the most severe competition. | - It is requested that GOC: -- turns its thought to the functional similarities of enterprises, not just the product similarity, and -- reflects the actual state of affairs in the market in determining the profit rate. |
- Enterprise Income Tax Law |
| (15) Application of Deemed Tax | - SAT exercises tax levy based on deemed profit, which does not reflect reality of enterprises investigated. Furthermore, no remedy is available for correcting the double taxation. - In transfer pricing investigation, SAT seeks certain profit level (tax levy based on deemed profit). |
- It is requested that SAT revises its tax levy under TPTS that truly reflects reality of the enterprise investigated. - It is requested that both GOJ and GOC get together to harmonise mutually the TPTS investigation. |
- Enterprise Income Tax Law |
| (Action) - Provisions on Assessment and Collection of Non-Resident Enterprises Income Tax (GuoShuiFa[2010]No.19) lays down the basis for determining "deemed profit" on non-resident enterprises: (1) 15%-30% profit rate on enterprises engaged in contract construction, design and consultation, (2) 30%-50% profit rate on enterprises engaged in administrative service, and (3) 15% on more profit rate on enterprises engaged in provision of other services, or operational activities other than services. Notwithstanding the foregoing provisions, the taxation authority may determine tax rates, which are higher than the foregoing, in the case where the authority holds the evidence that the effective profit rates of the non-resident enterprises apparently exceed the foregoing rates, it may assess the enterprise income tax, by applying the rates higher than the above-mentioned rates. |
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| (16) Disunity of the Customs Valuation Price between SAT and GAC | - Since 1 January 2009, SAT investigators have attempted to verify the justification for consideration for consulting fee/royalty payments excess a certain level, and legitimacy of consideration, while GAC gives another look from the stand point of legitimacy of consideration. Concerning the transactions between related parties, between SAT and GAC, respective viewpoints, and opinions differ in numerous points. | - It is requested that the authorities consider use of the documents considered in TPTS investigation for valuation of the price at the customs clearance. | |
| (17) Follow-up investigation of TPTS | - After tax levy under transfer price taxation system (CTPTS), GOC carries out follow-up investigation for 5-years. | - It is requested that GOC repeals the 5-year follow up investigation after TPTS investigation. | |
| (18) Expanded Interpretation of PE Tax Levy for the Service Provisions and Expatriates | - A Japanese enterprise provides various services to locally incorporated enterprises in PRC. While these services include a variety of operations not necessarily related to "provision of technical service", the Taxation Authority (TA) lumps together all of them as a project concerned with provision of technical service. It holds that "provision of consulting service for more than 6-months" forms accreditation of PE (Permanent Establishment), and orders Japanese expatriates to pay personal income tax. (Guanzhou). Under the Japan-PRC Tax Treaty, "provision of consulting service in excess of 6-months" establishes PE. However, such provision is not found in tax treaties with other major developed countries. In implementing this provision, TA interprets the term, "single project", too broadly. TA lumps together different kinds of services as single project, while adding up the period of stay on various projects for the engineers on business trip, in order to facilitate its reaching the conclusion that the operation is PE. - An employee stationed in Hong Kong must file tax return, if his stay in PRC exceeds 183-days. - A Japanese expatriate in the payroll of a Business Division in Japan provides technical assistance to a consigned manufacturing factory in Shenzhen (CMF) to set up and complete its mass production line. Under the expatriate agreement, Firm in Japan assumes the wage for the expatriate. While the firm by right should conclude the consignment agreement with CMF and invoice a member firm in Japan for the wage of the expatriate, it is difficult for the firm to do so in the absence of work about which to conclude "consignment agreement" with CMF. - Where service fees accrue in the context of technical support that a parent company provides to its subsidiary in PRC, by dispatch of a technical staff for a short term, the determination basis of tax treatment is not clearly laid down for example, by the attributes of services provided (activities related to technological introduction, general activities, etc.) Foreign investors are unable to prepare contracts correctly so that chances are that the taxation authority may determine the enterprise as PE. - Without any particular amendment in taxation system, in 2010, Guangzhou Taxation Authority suddenly tightened its collection of PE tax levy, so that the stay period of the employees on business trip is made not individually but lumped into the total of the project unit. - In some cases, invoicing for provision of service, etc. is susceptible of GOC's PE determination, leading to GOC's income tax levy. - By the abrupt change in implementation of the PE tax levy, GOC has begun levying the new tax burden upon engineers/enterprises that support business activities in PRC. GOC's interpretation of Japan?PRC tax treaty, used as the basis for tax levy, is obscure to the Japanese side. It requires propulsion of a speedy consultation between Japan and PRC toward clarification of implementation changes, increased transparency in interpretation, and rationalised implementation. Furthermore, upon occurrence of the double taxation levy, it is requested that both GOC and GOJ ensure propulsion of mutual consultation in the quest for its rational solution. - A Member Firm files tax returns and pays locally in PRC, income tax, in lieu of withholding tax, relative to technical support provided to its subsidiary (MFS) in Guangzhou city. Under the Japan-PRC tax treaty, the trigger point of the PE determination is 6-months (183-days). Nevertheless, GOC regards a single day stay as 1-month stay in calculating the stay period for the technical support. |
- It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - Upon introduction of new taxation system, or changes in taxation system or tax rates, it is requested that GOC affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation. - It is requested that GOC overhauls the taxation system and assures its transparency. - It is requested that GOC overhauls the Taxation System and assures its transparency. - It is requested that GOC discontinues irrational finding of PE. - It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - It is requested that GOC: -- affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation., -- overhauls the taxation system and assures its transparency., and -- discontinues its irrational PE approval. - It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - It is requested that GOC: -- affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation., -- overhauls the taxation system and assures its transparency., and -- discontinues its irrational PE approval. - It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - It is requested that GOC: -- affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation., -- overhauls the taxation system and assures its transparency., and -- discontinues its irrational PE approval. - It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - It is requested that GOC: -- affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation., -- overhauls the taxation system and assures its transparency., and -- discontinues its irrational PE approval. - It is requested that: -- GOC/GOJ amends the tax treaty, and for the time being, -- TA improves its implementation based on tax treaty. - It is requested that GOC: -- affords FFEs opportunities for exchange of dialogues and secures transparency, such as provision of sufficient and proper explanation., -- overhauls the taxation system and assures its transparency., and -- discontinues its irrational PE approval. - It is requested that GOC and GOJ advance mutual consultation toward amending and ratifying tax treaty that includes provisions for withholding tax exemption upon dividends from overseas' subsidiaries, utility, charges, interests, etc. and expand the tax treaty network. - It is requested that GOJ includes PE tax levy and its concept in the agenda for the coming Japan-PRC mutual consultation table. |
- Japan-PRC Tax Treaty - Japan-PRC Tax Treaty, Article 5(5) - Enterprise Income Tax Law - Notice of SAT about the Issues Relevant to the Execution of the Royalty Clauses of Tax Treaties GuoShuiHan [2009] No.507 - Article 5(3), (5) of Japan/China Tax Treaty -- Notice on printing and publishing "Several Practical Measures for further strengthening the Taxation Administration" -- SAT Letter on "Research for the Status of Income Tax Collection of Enterprises concerned with Provision of Service to Domestic Enterprises through dispatch of Personnel from Overseas Institutions." - Article 3 of GuoShuiHan[2006] No.694 - Provisions on Assessment and Collection of Non-Resident Enterprises Income Tax (GuoShuiFa [2010]No.19) promulgated on 20 Feb. 2010 |
| (Action) - On 1 March 2009, "Provisional administrative measures governing tax collection on contracted projects and provision of services by non-resident enterprises", SAT [2009] No.19, was enforced. Non-resident enterprises contracting construction, installation, assembly, repair, etc., or providing service such as processing, repair, design, technical and instructions, regardless of the requirements for industrial /commercial registration, must register as taxpayer with the tax bureau where the project is located within 30 days of concluding the contract for the project or reaching agreement, and then file the final tax returns at the year end. PRC enterprises / individuals that benefit from the contract or the service subject to withholding tax must register as taxpayer with the tax bureau where the project is located within 30 days of from the date on which payment obligation for the withholding tax has arisen. - Since 2009, SAT has tightened its withholding tax levy on non-resident individuals and enterprises. Under the PRC tax legislation, a Japanese enterprise sending to PRC its staff, who will engage in sales, administration or consultation activities for a certain period (6-months under the JCTT), or even longer, will form the basis of the PE recognition. Where the expatriate practically maintains the employee/employer relationship with the head office while on business trip, the recognition of the PE status takes place. Operational income vested in PE could be taxable with corporate income tax, operational tax, and individual income tax. - Announcement promulgated in April 2013 on "Relevant Issues concerning Levying Enterprise Income Tax on the Services Provided within China by the Personnel Dispatched by Non-resident Enterprises Announcement No. 19 [2013] SAT" expressly elaborates the judgement basis for determining the circumstances in which FFEs (dispatching resident representatives to an enterprise incorporated in PRC) are found subject to PE Tax Levy. |
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| (19) Tax levied upon Remittance of Expatriates' Wages to Headquarters | - If member firm in Japan pays expatriate's wage payable in Japan and then invoices the amount to our member film's subsidiary (MFS), a locally incorporated subsidiary in PRC, then, such payment is deemed to be revenue from provision of service as consultant PE under Article 5(4) of Japan/China Tax Treaty, attracting income tax levy. (expatriates' PE) | - It is requested that GOC/GOJ clearly defines the provision of consultant service specified under Article 5(4) of Japan/China Tax Treaty for mutual agreement. | - Article 5(4) of Japan/China Tax Treaty - China Company Income Tax Law - Indian Company Income Tax Law |
| (20) Cut off of Remittance to Headquarters by Expanded Interpretation of PE Tax Levy | - Remittance to Japan headquarters of expatriates' salaries used to be frequently suspended, under the suspicion that such remittance attracts PE tax levy. The issue was on the way to resolution by SAT's promulgation of Detailed Implementing Regulation (DIR). As it is, the DIR remains unpublished. It suggests revival of the unresolved issues. | - It is requested that GOC strictly administers the tax legislation, by curving the expanded interpretation of permanent establishment. | |
| (21) Business Tax Levied on Interest received from External Related Parties | - Since 2013, GOC has deregulated cross border capital deposit or (borrowing), which had been previously restricted. GOC now authorises direct capital deposit or (borrowing), restricted, however, to the parent company outside PRC under the direct capital relationship. On the other hand, it has become apparent that GOC levies business tax on interest received by the subsidiary from its external related parties. (Note: No business tax is payable on interest received by a legal entity incorporated within PRC for the fund deposited at a bank, as it represents the transactions between enterprise and bank. | - It is requested that: -- GOC expands the scope of the parties not only from the parent company under the direct capital relations, but also to indirect parent or brethren companies. -- GOC repeals the business tax levied on interest, and -- GOC makes fund deposit possible not only in foreign currency but in RMB also. |
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| (22) Inactive Usage of Bilateral Japan-PRC APA Scheme | - While the system exists for advance pricing agreement (APA) under the transfer pricing taxation, it has not made any progress in substance. - In PRC, it is stipulated that Municipal or Autonomous Body Taxation Authority or higher authority accepts application for Japan/PRC Bilateral APA. Where plural legal entities subject to APA are included, State Administration of Taxation (SAT) will support and take the initiative in investigation. However, in practice, it takes a long time before the issues are ironed out and the uniform understanding is reached. During the pendency of this period, filing of APA itself is not accepted. |
- It is requested that GOC internationalises its taxation system by introduction of international financial reporting standards. - In light of the fact that the bilateral APA is the negotiation between the authoritative organs of both countries, it is requested that SAT integrates the APA window or takes the initiative for the coordination. - During the pendency of the APA application period, it is requested that the local taxation authority prioritises the APA examination and suspends the TPTS investigation. |
- Japan-PRC Tax Treaty - Enterprise Income Tax Law, Article 42, Regulation on the Implementation of the Enterprise Income Tax Law, Article 113 - Rules for the Implementation of the Law on the Administration of Tax Collection, Article 53 |
| (Action) - According to Annual Advance Pricing Agreement Report [2010] released by SAT, 4-bilateral and 4-unilateral APAs were signed during the Fiscal Year 2010. Incidentally, the number of cases for bilateral APA examination/consultation shows accelerated increment from 13 cases in 2009 to 21 cases in 2010. |
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| (23) Arbitrariness in Interpretation and Implementation of Taxation Laws | - Interpretation of tax laws is unstable. Judgement varies by officers in charge of the taxation authority. Many taxes are not included in tax laws, but are levied and collected frequently by individual Notices. Even taxation officers are not kept abreast of the latest Notices. - Despite the articulate definition of the special tax treatment under the law, where an investment company (controlling company) purchases the shares of a subsidiary of existing company, it remains possible that the local taxation authority in charge would not approve carryover of capital gain tax. This state of affairs continues. |
- It is requested that GOC harmonises its implementation of tax laws nationwide. - It is requested that GOC implements such state-wide measures as the competent taxation authority promptly completes the approval procedures for special tax treatment. |
- Notice of MOF and SAT on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (No.59 [2009] MOF) - Announcement of SAT of Taxation on Issues concerning the Application of Special Tax Treatment in the Equity Transfer of Non-Resident Enterprises (Announcement of SAT No. 72 [2013], |
| (Action) - Since 1 January 2008, Enterprise Income Tax Law of PRC has been enforced, and has been applied equally to both domestic and foreign enterprises in common. The FFE preferential tax treatment has been repealed and enterprise income tax of 35% applies across the board to both domestic and foreign enterprises. - MST, MOF and SAT promulgated on 24 April 2008 Notice on Printing and Distributing the Administrative Measures for Determination of High and New Tech Enterprises that sets forth the requisite conditions and application procedure for enterprises to acquire the qualifications, The Measures has been implemented retroactively from1 January 2008. - On 7 July 2014, SAT promulgated "Notice in Support of Tax Service Innovation in the China (Shanghai) Pilot Free Trade Zone". In addition, Shanghai Municipal Government at Press Conference announced its policy to develop the taxation online system called "Ban Shui Yi Wang Tong (A Single Net Gets Across All Tax Matters)". |
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| (Improvement) - Until now, laws concerning enterprise income tax have taken the dual system under provisional regulations of PRC on enterprises income tax and income tax law of the People's Republic of China for enterprises with foreign investment and foreign enterprises. While the former has been applied to domestically capitalised enterprises such as State owned enterprises, group enterprises and joint-stock companies, the latter has been applied to foreign investment enterprises and foreign enterprises such as China-foreign joint venture enterprises and solely foreign funded enterprises. On 16 March 2007, enterprise income tax law of PRC (President Order No.63) was promulgated and has been enforced since 1 January 2008, together with new regulation on the implementation of the income tax law of PRC (State Council Order No.512). The regulation comprises of 8 chapters, namely, general provisions, taxable amount, tax amount, tax revenue preferential treatment, withholding tax, special adjustment of payable tax, tax collection administration and annex in total of 133 Articles. Along with the enforcement of new regulation on the implementation of the income tax law of PRC and regulation on the implementation of the income tax law of PRC, provisional regulations of PRC on enterprises income tax and income tax law of the PRC for enterprises with foreign investment and foreign enterprises promulgated by the State council were repealed. - On 17 September 2007, SAT released "Notice on Adjustment of Enterprise Income Tax Rates", reducing the enterprise income tax rates over 8 business sectors, such as manufacturing, entertainment, etc. According to SAT's "Notice of SAT on Printing and Distributing the Measures for Verification Collection of Enterprise Income Tax (for Trial Implementation)", the new tax rates are: agriculture, forestry, stock-farming, fishery 3-10%; manufacturing 5-15%; wholesale, retail and trade 4-15%; traffic and transportation 7-15%; construction 8-20%; restaurant business 8-25%; entertainment 15-30% and others 10-30%. Prior enterprise income tax rates were among others manufacturing 7-20% and entertainment 20-40%. Enterprise income tax rate on real-estate developers remains unchanged. - GOC has introduced "tax compliance agreement" system that allows taxpayers an opportunity to consult with the taxation authority concerning the provisions in tax legislation, and interpretation of which is ambiguous. For the time being, the system will be implemented on certain specified enterprises as a pilot programme. |
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| (24) Shortage of the Grace Period for Implementing Tax Policy | - In general, in the taxation and foreign exchange administration fields, the number of cases has not diminished, whereby detailed implementing rules become available immediately after or only after the promulgation of their laws. For example , while VAT reform in Shanghai area has been enforced since 1 January 2012, it was only by the end of November 2011 right before the law promulgation that the notice reached MFS. Furthermore, detailed implementing rules remained indefinite so that even after 1 January 2012, MFS remained unable to issue some invoices to its purchasers. Furthermore, in 2004, when the monetary base of the real estate was established, the details had not been nailed down in the broad outline released in the 4th quarter of the same year, so that practical work had to be affixed only by the yearend. Moreover, its enforcement was extremely cumbersome, as its enforcement date was not from 2015 but retroactive to the beginning of 2014. - By Notice MOF No. 37 [2013] Ministry of Finance and the State Administration of Taxation, beginning 1 August 2013, VAT 6% and additional tax 0.83% have become payable. Precisely, in the member firm's case, GOC additionally charges terminal handling charge (THC), container imbalance charge (CIC), and emergency bunker surcharge (EBS), relative to shipping companies for export cargoes destined to Japan. It is said that the collection of additional duty is not universal in practical implementation. It seems collection does not take place in certain cases. The group representative on behalf of shipping companies, forwarders, and shippers have submitted their views stating: (1) The absence of the detailed implementing rules on MOF No. 37 [2013], and (2) The abnormal nature of PRC measures under the tax treaties. PRC's action on international ocean/marine freight, etc. is extremely unusual in light of the conventional practice of avoiding tax levy on international marine/ocean freight, etc. by any specified country. We are given to understand that some amendment is due on 1 January 2014. However, nothing has changed to this date. - Abrupt and frequent amendments in taxation system and tax rates affect the amounts of remittance to Japan of royalty and expenses of expatriates dispatched to PRC. |
- It is requested that GOC executes the reform in accordance with the precisely laid down systematic plans and promulgates Detailed Implementation Rules before the reform enforcement. - It is requested that Business Group Representative or GOJ will submit proposal to GOC on its unreasonable tax levy, in light of the SAT's methodology: (1) Promulgate law on tax levy, (2) Wait and see reactions. Should there be strong resistance, review the law or let the Notice stand without enforcement. - It is requested that GOC: -- gives advance notice on taxation system and tax rate changes, and -- thoroughly publicises the full details. |
- Notice MOF and SAT on the Tax Policies for Implementing across the Country the Pilot Program of Levying Value-Added Tax in Lieu of Business Tax on the Transportation Industry and Some Modern Service Industries, MOF No. 37 [2013] - Law on Taxation System of PRC. |
| (25) Paucity of Deductible Foreign Taxes in Japan-PRC Tax Treaty | - Business Tax is not included in the deductible foreign tax under Japan-PRC Tax Treaty, compelling enterprises to bear the tax burden. | - It is requested that business tax is included in the Japan-PRC Tax Treaty. | - Japan-PRC Tax Treaty |
| (26) Insufficient Coordination Between SAT and Local Tax Authority | - While local taxes including urban construction tax are concerned with VAT, SAT's approval and licence are required for VAT application, payment, refund, etc. Where approval or licence is delayed due to SAT, ups and downs in local tax payment result (particularly, new or revisions), the amount of local taxes payable increases or decreases. In such an event, coordination is poor between SAT and the local taxation authority. | - It is requested that SAT and local authorities improve their collaborative working relationship. | |
| (27) Tax Administration differs by regions | - Depending upon the location, the administration method and the requisite documents vary by each local taxation bureau. On transactions between the parties located in different jurisdiction of tax offices, it takes a quite involving preparation in order to submit the relative documents and unification of understandings, impacting on submission of the tax refund application. - Tax Authority's views vary in certain cases by each district within the same Shanghai area. Furthermore, transfer price taxation system and loss carried forward accounting system differ from the General accounting practices prevailing in EU and USA. - There has been no significant improvement on the tax administration issues, in regard to enterprises within the bonded zones. |
- It is requested that the taxation authority integrates the implementation of the tax law. - It is requested that GOC administers its taxation system closely in line with the globally standard taxation system. - It is requested that the administration will continue its best effort for inter-departmental coordination, mutual information sharing, etc. |
- General Tax Scheme - Law on Taxation System of PRC. |
| (28) Rather Expensive Residual Value of Depreciation | - In principle, the residual value of depreciation is at 10% high, so that it inflates the burden upon the company after the deduction of expense and taxes and other public duties required for the sale. | - It is requested that GOC allows depreciation down to memorandum value (In Japan 1 yen, now). | |
| (29) Discriminatory Consolidated Tax Payment | - Consolidated tax payment reportedly available to state enterprises is not authorised to FFEs. If inflates the effective burden upon enterprises as a group so that foreign investors must think twice before making a full-scale investment into PRC. | - It is requested that GOC introduces consolidated tax payment for FFEs to enable a Member Firm's further expansion as a group of enterprises. | |
| (30) SAT Personnel's Failure to Distinguish between F/S and Tax Collection Accounting | - Our member film's subsidiary (MFS) executes its book keeping by delivery and inspection of delivered goods and recording on the book of account (Journal Entry) the sales and cost of sales (financial statement (F/S) accounting), separate from the tax accounting. In many cases, Tax Authority strongly urges to have the invoice issued and have it in hand. Many tax officers fail to understand the differences between the accounting kept on accrual basis and tax accounting and demand the same kind of explanation each time. Some officers fail to see the points explained. | - It is requested that SAT provides proper training to its tax inspectors including the F/S Accounting, separating it from the tax accounting. | - PRC Enterprises Accounting System |
| (31) Personal Income Tax levied upon the portion of the Social Insurance Premium payable by the Employer in Japan | - There have been cases in various provinces in PRC, whereby the taxation authority levies personal income tax on the portion of the social insurance premium payable by employers. It is difficult to accept the alleged authority's assertion that the notification in concern has been repealed. | - It is requested that the taxation authorities show the clear-cut legislative provisions that justify the tax levy. - It is requested that SAT repeals the tax levy, as it means a vast unbearable additional cost, heavily oppressive to business operation. |
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| (32) VAT and Consumption Tax levied on Imported Wooden Flooring Materials | - Imported wooden floor materials attract 5% consumption tax, apart from 17% VAT. Manufacturers of wooden floor materials abound in PRC and they are protected by the effective non-tariff barriers in the name of consumption tax. | - It is requested that GOC repeals the consumption tax levy on imported wooden floor materials. | |
| (33) Quasi Local Tax | - While taxes are clearly defined in the tax law, expenses tantamount to local taxes tend to grow in abundance in Liaoning and Dalian provinces. (For example): -- Liaoning province river/road repair/maintenance fees (RRRMF): (0.1% on sales amount) -- Dalian municipal employment security bond for physically handicapped (total number of employees x 1.7% x average wage of workers) |
- Liaoning province suspended RRRMF for the year 2014, while 2015 remains uncertain. It is requested that the local taxation authority repeals RRRMF for 2015, which remains nebulous. | - Liaoning Province Peoples Government Order No. 263 - Dacanlianfa [2014] No.24 |
| (34) Disunity of Legal Interpretation at Company Tax Window | - Due to the differences in competency of personnel at the company tax window, confusion arises on interpretation of legal issues. | - It is requested that GOC uses its best efforts for the upbringing of personnel competency to resolve confusion that arises at the window on interpretation of legal issues. | |
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