China has been streamlining its foreign exchange regime since mid-2012. In its latest step, the State Administration of Foreign Exchange (“SAFE”) of China has issued new rules for foreign exchange payments in the service sector. The new rules simplify procedures and documentary requirements (particularly regarding the burdensome Tax Clearance Certificate) and cancel previous SAFE regulations on the same topic. Significantly, an onshore entity engaging in the trade of services will soon be permitted to retain its foreign currency income offshore.
The new rules are set out in the Guidelines for the Administration of Foreign Exchange under Service Trade and its detailed implementation regulations (“Circular 30”). Circular 30 will come into effect on 1 September 2013.
Historically, the payment of foreign exchange in the service sector has been subject to various restrictions. Certain types of service-related payments must be verified by SAFE before a bank is able to remit or receive foreign exchange payments. In order to obtain SAFE verification, an onshore entity must submit certain documents to SAFE and explain in detail the transaction background. For certain transactions, an onshore payer may also be required to provide certificates issued by national and local tax authorities evidencing the clearance of tax obligations in China (“Tax Clearance Certificates”). Tax authorities would sometimes look substantively into the transaction or make a tax reassessment that could be disputed by the payer. In practice, Tax Clearance Certificates could be difficult to obtain.
- Verification not longer required
From 1 September 2013, all service-related foreign exchange payments can be processed directly with a bank, with SAFE verification no longer being required. The bank will be responsible for verifying the transaction and checking the consistency between the transaction and the corresponding inflow or outflow of foreign exchange. This will be done by the bank through reviewing documents and materials provided by the payer or payee in accordance with the operation rules and procedures of the bank. SAFE will monitor the data submitted by the bank and take action only if irregular foreign exchange payments or receipts are identified.
- Simplified document requirements
For transaction amounts of US$50,000 or less, banks will generally not require supporting documents. However, a bank may still request supporting documents from the payer or payee if the transaction is considered suspicious.
For transactions of more than US$50,000, supporting documents will still be required. However, the documentary requirements have been standardized and simplified. According to Circular 30, the documents that will generally be required are the agreement that sets out the underlying transaction and the payment notice (e.g., a commercial invoice). Additional requirements may also apply to certain specific transactions. For instance, if the transaction is a reimbursement between cross-border affiliated entities, then, in addition, the reimbursement agreement will be required, and the term of reimbursement may not exceed 12 months.
- Tax-related filing
Circular 30 removes the existing requirement for a Tax Clearance Certificate. However, a new Tax Filing Certificate (obtained from the tax authorities) may be required for the remittance offshore of income generated by certain types of services (e.g., technology licensing). The difference between the Tax Clearance Certificate and the Tax Filing Certificate is that the tax authorities will no longer review the substance of the documents submitted when applying for the Tax Filing Certificate. Provided the application documents are complete, the tax authorizes must issue a Tax Filing Certificate.
This new procedure will significantly speed up payments of funds by an onshore payer to an offshore payee. Such payments can now be trapped in China due to challenges in obtaining a Tax Clearance Certificate. Nevertheless, the tax authority may still review the substance of the documents after a Tax Filing Certificate is issued and claw back any underpayment of tax discovered.
- Retaining of foreign exchange offshore
An onshore entity engaging in the trade of services will, upon SAFE approval, be permitted to retain its foreign currency income in an offshore account. The total amount of income retained offshore may not exceed 50% of the total income generated from the cross-border trade in services in preceding year. SAFE has discretion to adjust the amount of the income kept offshore and the time for which the income can be kept offshore.
Circular 30 is another welcome step in SAFE’s effort to simplify and streamline the foreign exchange administration regime. Foreign investors doing business in the service sector are expected to benefit from the new rules by shortening the time and resources required for handling foreign exchange transactions.
In addition, as the burden of verifying transactions will be largely shifted to banks, banks are expected to strengthen their internal rules and be more diligent in reviewing payment documents. Companies engaged in the foreign trade of services should liaise with their banks and become familiar with the new policies so as to ensure that payments are made and received in a timely manner.