On December 15, 2008, the Ministry of Finance (MOF) and the State Administration for Taxation (SAT) promulgated the newly-revised Detailed Implementation Rules for the Provisional Regulations on Business Tax of the PRC, MOF & SAT Order (2008) 52, the New BT Rules). The New BT Rules took effect on January 1, 2009.  

The New BT Rules revise several provisions of the previous Detailed Implementation Rules for the Provisional Regulations on Business Tax of the PRC (the Old BT Rules), which were promulgated in 1993. The major revisions reflect: (1) the new definition of “labor services within China;” (2) the need to be consistent with the newly-revised Detailed Implementation Rules for the Provisional Regulations on Value-Added Tax of the PRC; and (3) the objectives of the current tax policies and the administration of tax collection.  

The New BT Rules provide a new definition of ”labor services within China”. According to the new definition, as long as either the service provider or the service recipient is located in China (regardless of where the services are rendered), the services should be deemed as having been provided within China, and therefore the service provider should be subject to PRC BT. This is a big change. Under the Old BT Rules, a labor services provider is only subject to PRC BT if such services are “rendered within China,” but the definition of “rendered within China” is not very clear. With the New BT Rules, we may reasonably expect that, from January 1, 2009 onward, more and more labor services will fall within the expanded scope of “labor services within China” and be subject to PRC BT, even if some such services (e.g., design services 100 percent completed outside of China for a PRC-incorporated company) were not BT taxable under the Old BT Rules.  

To be consistent with the New VAT Rules, the New BT Rules revise the provisions regarding mixed sales and a taxpayer’s engagement in both VAT taxable activities and BT taxable activities.  

The New BT Rules do not change the standard of “principal business” that is currently used to deal with mixed sales. According to this standard, whether a taxpayer is subject to VAT or BT is determined by the taxpayer’s principal business. However, due to the particularity of mixed sales in relation to the construction business, the New BT Rules adopt a special rule from a former tax circular to deal with this type of mixed sales. The rule states that, if a taxpayer provides construction services and concurrently sells self-manufactured goods, it should separately account for the turnover of BT taxable services and the sale of goods, and pay BT on the turnover of such services (without paying BT on the sale of goods). The rule also provides that, if the taxpayer fails to account for the transactions separately, the taxation authority has power to determine the turnover of BT taxable services.  

If a taxpayer engages in both VAT taxable activities and BT taxable activities but fails to separately account for these two types of businesses, under the Old BT Rules the taxpayer should pay VAT (rather than BT) for all such businesses unless the taxation authority decides otherwise. Under the New BT Rules, however, the taxpayer should pay VAT and BT based on the taxation authority’s determination of the sales amount of goods (together with VAT taxable services) and the BT taxable turnover, respectively.  

In addition to the above, the New BT Rules make several other changes, including: (1) adding a clause that explains how to calculate the BT taxable turnover when discounts occur; (2) adding a clause that explains how to calculate the BT taxable turnover for construction services; (3) introducing a new method—using the average price for the same type of taxable activities conducted by other taxpayers in the most recent period—for the taxation authority to determine the BT taxable turnover when such authority thinks the price claimed by a BT taxpayer is obviously and unjustifiably low or when other prescribed situations occur; (4) raising the BT threshold; (5) changing the criterion for whether a transfer of intangible assets occurs within China from “the transferred intangible assets are utilized within China” to “the recipient of the transferred intangible assets is within China”; and (6) other revisions.