- Revisions to forex payments procedures for trade services
- Payments of more than US$3 million subject to tax clearance
On November 25, 2008 the State General Tax Bureau (“SGTB”) and the State Administration of Foreign Exchange (“SAFE”) issued a Circular on Certain Questions about Submission of Tax Payment Certification Regarding Outside Payment for Services Trade Items (“New Circular”), which took effect on January 1, 2009. It marked the second time in 2008 that the PRC government completely changed procedures for outside payment under services trade items.
In March 2008, SGTB and SAFE issued a notice (“March Notice”) stipulating that before making any payment in a services transaction, the payer did not need to pay any relevant tax, only register the information with the tax bureau. Prior to the March Notice, in order to submit services payments outside China, the payer was required to present a certification indicating all taxes had been paid on the services. Upon its issuance, the March Notice was regarded as a means of encouraging services trade and as a sign that China was relaxing foreign exchange controls on payments outside the country.
The New Circular, however, actually reverts the law to where it stood prior to issuance of the March Notice. Under the New Circular, any payment made outside of China for services valued at more than US$3 million may be made only by presenting a Tax Paid Certification – i.e., the payer must pay the tax on the services first, before paying for the services. The March Notice will be abolished when the New Circular takes effect, ending the registration system in place for only 10 months.
The following types of services payments, however, are not subject to this rule, and no Tax Paid Certification needs to be presented for them:
(i) Payments under US$3 million;
(ii) Payments for certain expenses occurred outside of China by China-based entities, such as expenses related to meetings, accommodations, office management, commissions, insurance, damages and transportation;
(iii) Payments for individually used services.
Many commentators believe that, given the world financial crisis, the issuance of the New Circular shows that the PRC government’s concerns regarding outflow of speculative capital, or “hot money,” now exceed its concerns regarding inbound hot money. It is expected that the government may issue more policies to control the flow of foreign currency outside the PRC