From May 1, 2016, the value added tax (“VAT”) reform has been fully implemented in China, completely replacing business tax (“BT”). Previously, most representative offices of foreign companies in China were subject to BT instead of VAT, and their enterprise income tax (“EIT”) was calculated on taxable profits determined by a deemed profit method based on actual expenditure, by applying a formula designed to consider the effects of BT.

Since all representative offices are now subject to VAT, the State Administration of Taxation (“SAT”) released Announcement [2016] No. 28 on May 5, 2016, to amend the formula accordingly:

  1. Tax base for VAT

Turnover = current period’s actual expenditure / (1 – deemed profit rate)

  1. Tax base for EIT

Deemed taxable profit = current period’s actual expenditure / (1 – deemed profit rate) x deemed profit rate

Date of issue: May 5, 2016. Effective date: May 1, 2016