China is well known for maintaining a strict foreign exchange control system that regulates funds flowing into or out of China. Under the former exchange regime, a Chinese payer was required to obtain a tax clearance certificate (TCC) by paying the applicable taxes in advance before making any outbound remittance over USD30, 000, with a few instances carved out for this TCC requirement. The advance tax clearance system, on the one hand, played an important role in ensuring the collection of Chinese taxes on the outbound payment since no outbound payment could be made without obtaining the TCC. On the other hand, this TCC system was heavily criticized for holding up remittances and therefore impeding the development of cross-border transactions, especially in the service sector, where it might take months or even years to obtain the TCC.
In response to the criticism and to facilitate cross-border payment, on July 9, 2013, the State Administration of Taxation and the State Administration of Foreign Exchange jointly issued an Announcement on Issues Concerning Tax Filings for Outbound Payments (Announcement), effective from September 1, 2013. This Announcement is also consistent with China’s recent efforts to gradually relax its foreign exchange control.
Changes & Benefits-Simplified Procedures to Speed Up Remittance
This Announcement streamlines the cross-border remittance procedures, as set forth below, thus speeding up outbound payment from China for services and other transactions.
- Record Filing System Replacing the TCC Requirement. The Announcement provides for a new record filing system to replace the advance tax clearance system for purposes of outbound remittance. Under the new system a Chinese payer is required to submit a Record-Filing Form with the competent tax authority, together with the contract or relevant transaction documents (invoices, etc.). Upon receipt of the Record-Filing documents, the tax authority will affix a stamp on the Record-Filing Form immediately without waiting to examine the documents submitted (unlike under the previous system) as long as the documents are complete and the Record-Filing Form is completed. The Chinese payer then can take the stamped Record-Filing Form to the designated bank and proceed with the remittance. In case of multiple payments under one contract, Chinese payers should conduct record-filing with the competent tax authority for each payment, while the contract and the relevant transaction documents are only required during the first filing.
- Payment Threshold Increase. The new tax record-filing requirement applies only if the amount of a single remittance exceeds US$50,000 while under the previous TCC system the limit was US$30,000. Therefore, for a remittance of US$50,000 or less, a Chinese payer is not required to make the tax record-filing and can go directly to the bank to make outbound payment.
- Remittances Covered. This Announcement covers a broad range of remittances, which, among other things, include income obtained within China by overseas entities (institutions or individuals) from various services, licenses, financing leases, real estate transfers, equity transfers, dividends, loan interests, salary income and reinvestment by a foreign investor using its lawful income obtained from direct investment in China.
- Exemptions. The Announcement exempts 15 types of remittances from the tax record-filing requirement which are broader in scope than the exemptions under the previous TCC. The 15 exemptions include overseas expenses incurred by Chinese enterprises (for travelling, meeting, exhibitions, etc.), operating expenses for overseas representative offices of Chinese enterprises, construction costs for overseas projects contracted by Chinese enterprises and international transportation fees received by overseas carriers for import, etc.
Reminders–Increased Tax Exposures
Under the original advance tax clearance certificate system, tax authorities relied upon the foreign exchange control to ensure that all taxes were paid and all tax disputes were resolved, if any, because the outbound payment could not be made without paying the tax in advance. As the new tax record-filing system has cut the link between the remittance and tax clearance, the remittance can take place right after the Chinese payer obtains the stamped tax Record-Filing Form and the tax can be paid either before or after the remittance. With the remittance procedures simplified, the tax authorities are expected to strengthen their scrutiny not only in their detailed post-remittance document examination but also in their normal tax collection and administration procedures.
- Detailed Post-Remittance Examination. According to the Announcement, the tax authority in charge will, within 15 working days after receipt of the record-filing documents, conduct detailed examination and review of the documents with a focus on the following three aspects.
- whether the submitted information is consistent with the actual payment;
- whether the taxes applicable to the outbound payment have been fully paid according to the applicable laws and regulations; and
- whether treaty benefits applied could be granted according to the applicable tax laws and regulations and tax treaties/arrangements.
If the tax authority, during its examination, finds that Chinese taxes have not been fully paid in accordance with the applicable tax laws and regulations, the tax authority will require the domestic payer or the foreign recipient to pay any amounts due and accordingly impose late payment surcharges and penalties.
- Normal Tax Collection and Administration Procedures Unchanged. The Announcement does not change the normal tax collection and administration procedures and the obligations of the parties involved under the Chinese tax laws remain the same as below:
- to conduct contract registration with the competent tax authority before the remittance (the tax authority is likely to request the contract registration number when applicable during the record-filing procedure and will mark it on the record-filing form);
- to apply to the tax authority for tax assessment before or after remittance and file the tax upon assessment; and
- to apply for treaty benefits where applicable in accordance with the applicable laws and regulations.
The tax authorities are likely to tighten up their administration in the tax process to ensure the collection of tax.
As a result of the changes noted above, Chinese payers and overseas recipients will face more challenges regarding tax filings and documentation while enjoying the benefits of simplified remittance procedures. Accordingly, several regional tax authorities have issued notices alerting the tax risks and exposures under the Announcement.