China Insight: China Tax Regulation Update - December 2016

Circular Number

Issuance Date

Effective Date

Topic

What is new?

SAT Announcement [2016] No. 70

2016-11-10

2016-11-10

Taxation matters of Land Appreciation Tax (“LAT”) after VAT reform

The Announcement clarifies several LAT taxation matters with respect to revenue recognition, cost deduction and LAT clearance:

• Recognition of taxable revenue after VAT reform
  • Revenues for LAT purpose shall not include VAT;
  • For those real property developers collecting advanced payments from customers, tax base for LAT prepayment purpose = advanced payments received – prepaid VAT
• Recognition of taxable revenue for deemed sales of real properties after VAT reform
  • “Deemed sales” of real properties occur when the taxpayer uses the developed properties for staff welfare, awards, investment, distribution to investors, repayment of debts, exchange for non-monetary assets of other entities or individuals. The deemed sales revenue should be the average price of the same type of properties sold by the enterprise in the same region during the same year or, if the average price above is not available, the market price or appraisal price determined by the tax authorities;
  • If the real property developer uses its developed properties to accommodate the relocated habitants whose houses were pulled down, the revenue for LAT purpose shall be determined according to the stipulations in the circular Guoshuihan [2010] No. 220.
• Deduction of tax costs for LAT purpose
  • Deductible tax costs for LAT purpose shall not include VAT;
  • If the local surcharges can be accurately calculated for the project, the accurate local surcharge amounts shall be deducted for LAT purpose. If the local surcharges cannot be accurately calculated, the local surcharges paid based on the prepaid VAT for the project shall be used as deductible amount for LAT purpose.
• Calculation of LAT clearance for a project
  • Taxable revenue = revenue from transfer of properties before VAT reform + VAT-exclusive revenue from transfer of properties after VAT reform;
  • Deductible tax costs = business tax and local surcharges actually paid before VAT reform + deductible local surcharges after VAT reform
• The location where the construction services occur and the name of the project should be reflected on the VAT invoices for construction and installation service fees after VAT reform.  Otherwise such invoice amount cannot be deducted as cost for LAT purpose.
• After the VAT reform, in the event that the appraisal price is not available when the taxpayer transfers old houses and buildings but the invoice of purchase can be provided, the sum of deductible cost for acquiring the land use right and the construction cost of the old house or building shall be determined as follows:
  • invoice amount (including business tax) with an annual increment of 5% from the year of purchase to the year of transfer, if the invoice is a business tax invoice obtained before the VAT reform;
  • invoice amount (including VAT) with an annual increment of 5% from the year of purchase to the year of transfer, if the invoice is a normal VAT invoice obtained after VAT reform;
  • sum of VAT-exclusive invoice amount and non-creditable input VAT with an annual increment of 5% from the year of purchase to the year of transfer, if the invoice is a special VAT invoice obtained after VAT reform

SAT Announcement [2016] No. 73

2016-11-24

2016-11-24

Deduction of items for VAT purpose for the transfer of immovable properties

The Announcement clarifies certain issues regarding deduction of items for VAT purpose for transfer of immovable properties.

• If the taxpayer is allowed to pay VAT based on the difference between the sales proceeds and the acquisition costs for transferring immovable properties and the relevant invoices for acquiring the properties for sale are not available, it can claim deduction by providing the relevant Deed Tax payment certificate of the properties as substitute.
• If the taxpayer submits the Deed Tax payment certificate and claims deduction based on the tax base of the Deed Tax, the following calculation formula should be adopted:
  • if Deed Tax was paid on or before 30 April 2016, VAT payable = (total VAT-inclusive proceeds – business tax-inclusive tax base for Deed Tax purpose) * 5% / (1 + 5%);
  • if Deed Tax was paid on or after 1 May 2016, VAT payable = [total VAT-inclusive proceeds / (1 + 5%) – VAT-exclusive tax base for Deed Tax purpose] * 5%

SAT Announcement [2016] No. 79

2016-12-11

2016-8-8

Effectiveness of the Sino-Chilean Double Taxation Treaty and the associated protocol

The Announcement stipulates that the Sino-Chilean Double Taxation Treaty (“DTT”) and the associated protocol signed on 25 May 2015 entered into force from 8 August 2016 and are applicable to the incomes received on and after 1 January 2017. The key points that are worth attention of the DTT mainly include the following:

• If a non-individual is regarded by both states as their tax resident, the tax authorities of both states should negotiate to determine its tax residency. If no consensus is reached in this regard, no treaty benefit shall be granted to this non-individual.
• For assessment of a permanent establishment (“PE”) for construction services, the time threshold is “lasting for more than 6 months”. If any highly-related party (i.e. either this party or the service provider directly or indirectly holding at least 50% beneficial interest of the other or at least 50% beneficial interest of both parties held directly or indirectly by a third party) of the construction service provider works on the same site during other periods of time, such time should be counted together for “6 months” testing purpose.
• For assessment of a PE for non-construction services, the time threshold of onsite services is “more than 183 days during any consecutive 12 months period”, but the number of days is not confined to the time spent on the same or connected service projects. In addition, similar to the PE arising from construction services, time spent by highly-related parties shall be counted as well for “183 days” testing purpose.
• The business profit attributable to a PE shall match the functions fulfilled, the assets used and the risks taken by the PE.
• The dividend withholding tax (“WHT”) rate shall not exceed 10%.  Since Chile adopts imputation tax system, PRC tax resident needs to pay surtax for dividends from Chile based on Chilean domestic law. With treaty protection, “Type I income tax” under Chilean tax law can be fully credited when the surtax is calculated. Without treaty protection, only 65% of “Type I income tax” can be used for credit.
• The interest WHT rate shall not exceed 4% for the loans granted by financial institutions. The rate shall not exceed 15% for 2017 and 2018 and 10% for 2019 onwards for other loans.
• The royalty WHT rate for authorizing the right to use industrial, commercial or scientific equipment shall not exceed 2%. The rate for other licensing shall not exceed 10%.
• The DTT grants the taxation right to a state when the shares of a tax resident enterprise of this state are transferred by the tax resident of the other country. Such taxation right is not restricted by additional conditions on the shareholding ratio of equity interest that the transferor holds.
• The DTT stipulates that it should be tested whether a non-resident taxpayer qualifies for enjoying the treaty benefit. The “main purpose test” requires that if the main purpose of an arrangement or transaction is to obtain treaty benefit, the treaty benefit shall not apply. The DTT also sets an article to restrict the tax evasion through setting up a PE, incomes from which are tax-exempted or taxed at a low rate by a contracting state of which the headquarter of the PE is a tax resident, in a third-party low tax jurisdiction to generate incomes from the other contracting state.

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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