On November 10, 2008, the State Council released Order No. 540 to amend the Business Tax Provisional Regulations (“BT Regulations”), which became effective on January 1, 2009. On December 15, 2008, the MOF and the SAT issued the amended implementation rules of the BT Regulations (“BT Implementation Rules”), which basically rewrote the sourcing rules. Previously, only income from services performed within China was subject to business tax. Under Section 4(1) of the BT Implementation Rules, if either a services provider or recipient is located in China, income generated from those services will be subject to business tax.  

The new sourcing rules were highly controversial. In response, the MOF and the SAT issued Caishui [2009] No. 111 (“Circular 111”) to specify a list of non-taxable services on September 27, 2009 (please refer to our China Tax Bulletin October 2009 for more information about Circular 111). Under Article 4 of Circular 111, services completely rendered outside China by foreign services providers are not subject to business tax, even if the services recipients are domestic. The MOF and the SAT are supposed to define the exact scope of the non-taxable services. Then, Article 4 of Circular 111 only stated the following non-taxable services:  

  • Cultural & athletic services (other than television and broadcasting)  
  • Entertainment services  
  • Hotel and catering services  
  • Storage services  
  • Other services such as bathing and hairdressing

Circular 111 opened the door for future clarifications. On June 28, 2010, the SAT released Guoshuihan [2010] No. 300 (“Circular 300”) to further clarify that business tax does not apply to international communication services completely rendered outside China by foreign service providers to domestic recipients, including the following:  

  • International telephone services  
  • International mobile roaming services  
  • International mobile Internet services  
  • International text services  
  • International multimedia messaging services  

In addition, Circular 300 explains that income derived from leasing international communication networks situated outside China, which are categorized as real properties, such as offshore circuits, submarine cables and satellite transponders, are not subject to business tax. This explanation is in line with Section 4(4) of the BT Implementation Rules, under which business tax applies to income derived from leasing real properties located within China.  

It is highly likely that the MOF and the SAT will clarify further on the scope of the non-taxable services under the business tax regime. Since the effectiveness of the BT Regulations and its Implementation Rules on January 1, 2009, the MOF and the SAT have received practical feedback from industries and tax professionals. Such feedback would help enable the Chinese tax authorities to address the outstanding issues properly.