CMS, China | Chinese Tax Regulation Update | November 2017
[CMS, China]
Dear Sir or Madam , Please find enclosed our update on the latest developments on Chinese Tax Law. Kind regards, CMS, China
Circular Number
Issuance Date
Effective Date
Topic
What is new?
SAT Announcement [2017] No. 37
2017-10-17
2017-12-01
Corporate Income Tax (“CIT”) withholding for China-sourced incomes obtained by non-PRC tax resident enterprises
The Announcement brings significant changes to CIT withholding practice for non-PRC tax resident enterprises obtaining China-sourced incomes. The Announcement provides detailed guidelines on the concerned issues, and sheds lights upon some of the existing practical issues. Besides, the Announcement contributes to reducing the administrative burden of taxpayers by simplifying some of the administrative procedures. The following are some of the key changes brought by the Announcement:
1.
Tax recordal no longer required
Previously, according to the circular Guoshuifa [2009] No. 3 (“Circular 3”), tax withholding agents used to have the obligation to complete tax recordal for the tax withholding issue at the competent tax authority within 30 days after relevant business contract is signed. According to the Announcement, however, such tax recordal is no longer required. Instead, the withholding agents may choose to submit relevant documents when making the tax declaration and tax payment. In spite of the above, the Announcement clarifies that tax authorities still have the right to ask relevant parties to provide supportive documents. The withholding agent is still obliged to keep full record of documents and evidences relating to the tax withholding issue for the tax authorities’ reference. It is noteworthy that the Announcement does not cancel tax recordal requirement for all business arrangement. For example, tax recordal procedure may still be necessary for outbound payment with large amount, application for treaty benefit, indirect transfer of shares, etc., where some other regulations may apply.
2.
Time of tax withholding obligation for overseas dividend payment
Prior to the release of the Announcement, tax withholding obligation shall be triggered on the date on which the dividend payment decision is made or the date on which the dividend is actually paid, whichever is earlier. According to the Announcement, however, tax withholding obligation shall be triggered only when the dividend is actually paid to overseas shareholders.
3.
Tax declaration deadline for non-PRC resident taxpayers where the withholding agent fails to withhold taxes
According to PRC CIT Law, if a withholding agent fails to withhold taxes, the non-PRC tax resident enterprise, which is the taxpayer, shall declare to the competent tax authority for the underpaid taxes. Prior to the release of the Announcement, Circular 3 and Guoshuihan [2009] No. 698 (“Circular 698”) used to provide details regarding timeline requirement for such declaration obligation. Circular 3 stipulates that the taxpayer shall declare taxes within 7 days after the date on which the withholding agents should have paid the taxes and Circular 698 stipulates that the taxpayer shall declare taxes within 7 days after the agreed date on which the shares are transferred, or the date on which the consideration is received. The Announcement, however, provides more friendly rules to the taxpayer compared with the old regulations. According to the Announcement, under such context (where a non-PRC tax resident enterprise is obliged to self-declare taxes but failed to), the tax authority shall require the taxpayer to make up the taxes before a certain deadline. As long as the taxpayer completes the tax declaration and payment by the deadline provided by the tax authority, the taxpayer will be considered as having completed its tax obligations in time and no penalties shall be imposed.
4.
Distinguishing between two situations of failure of tax withholding
According to the Announcement, the situation where the withholding agent has already made payment to overseas entity but did not remit the taxes to the tax authority shall be further divided into two categories, which may lead to different legal consequences. The Announcement lists four typical situations where the withholding agent shall be considered as having withheld the taxes but not yet paid the taxes to the tax authority (“withheld but not paid”). While in all other situations other than the four listed, the withholding agent shall be considered as not having withheld the taxes (“not withheld”). According to the PRC Tax Collection and Administration Law, the “withheld but not paid” situation and “not withheld” situation are subject to different legal consequences.
5.
Selection of foreign exchange rate where payment is made in foreign currency
1.
For outbound payment in foreign currency, previous regulations provided a vague description by stipulating that the foreign exchange rate of “tax withholding date” shall be used to convert the foreign currency into RMB for tax calculation purpose without clarifying whether this refers to the date on which the tax withholding obligation is triggered or the date on which the taxes are actually paid. This, however, is now made clear by the Announcement by stipulating that the foreign exchange rate of “the date on which the tax withholding obligation is triggered” (which refers to the date on which the payment is actually made/to be made) shall be used.
2.
If non-PRC tax resident enterprises voluntarily declare taxes before the tax authority requires tax payment, the medium foreign exchange rate of “the day before the day on which the tax payment receipt is issued” shall be used to convert the foreign currency into RMB.
3.
If the tax authority requires the non-PRC tax resident enterprises to pay taxes within a given period of time, the medium exchange rate of the “day before the day on which the tax authority makes the decision of requiring tax payment” shall be used to convert the foreign currency into RMB.
6.
Calculation method for asset transfer income where transfer price and original investment/purchase are in foreign currencies
Prior to the release of Announcement, Circular 698 provides guidelines for calculation of asset transfer incomes where the transfer price and original investment are in different currencies. According to Circular 698, firstly transfer price shall be converted into the currency of the initial investment. Then asset transfer income calculated in the currency of the initial investment shall be converted into RMB. Under the Announcement, however, both the transfer price and the original investment shall be converted into RMB (if they are both in foreign currency). Selection of the exchange rate shall follow the rules as outlined in Section 5 above.
7.
Clarification on competent tax authorities and their respective roles
With an increasing number of cross-region transactions, it is usually the case that more than one competent tax authority are involved in one single transaction, particularly when the withholding agent is located in a different place from which the income derives. The Announcement clearly distinguishes “the competent tax authority of the place where the withholding agent is located” from “the competent tax authority of the place where the income derives”, making it clear the respective roles and duties of the tax authorities. This also provides a clear guideline for the taxpayer/withholding agent to find the right tax authority to declare and pay taxes:
1.
The withholding agent shall declare and pay the taxes to the competent tax authority of the place where the withholding agent is located;
2.
The Announcement includes a list indicating the respective “competent tax authority of the place where the income derives” for different transactions, including transfer of immovable asset, share transfer, dividend income, and interest/rent/royalty income;
3.
If the withholding agent fails to withhold taxes, the competent tax authority of the place where the withholding agent is located shall ask the withholding agent to make up the taxes underpaid and pursue its liabilities according to applicable regulations; if it is necessary to chase the taxpayer for taxes underpaid, the competent tax authority of the place where the income derives shall take corresponding actions;
4.
If the location of the withholding agent differs from the place where the income derives, the competent tax authority, which is in charge of chasing the taxes underpaid, of the place where the income derives shall check the facts with the competent tax authority of the place where the withholding agent is located. The tax authority of the place where the withholding agent is located shall issue written documents informing the competent tax authorities of the place where the income derives about relevant information and facts within 5 working days from the date on which the taxes should have been paid.
8.
Others
1.
For partial transfer of shares which are obtained through several investment/purchase, the deductable cost shall be calculated based on the percentage of the shares being transferred against the total shares possessed by the seller prior to the share transfer;
2.
For non-PRC tax resident enterprises receiving considerations for asset transfer via installment payment, the first few payments shall be considered as recovery of original investment. CIT will only be calculated after all investment cost has been recovered.
This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China. For further information, please contact:
Gilbert Shen Senior Associate Head of Tax Practice Area Group CMS, China T +86 21 6289 6363 F +86 21 6289 0731 E gilbert.shen@cmslegal.cn
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