On 26 October 2019, the State Taxation Administration (STA) released the Announcement on Issues Concerning the Verification and Collection of the Enterprise Income Tax from Retail Export Enterprises in the Cross-border E-commerce Comprehensive Pilot Zones (Announcement 36) to facilitate the healthy development of cross-border e-commerce and promote the innovation of foreign trade models. According to Announcement 36, Enterprise Income Tax (EIT) will be levied on a qualified cross-border e-commerce retail export enterprise (Enterprise) registered in a cross-border e-commerce comprehensive pilot zone (Pilot Zone) upon verification. Announcement 36 will come into effect on 1 January 2020.

Announcement 36 was issued primarily to complement the Notice on Tax Collection Policies for Retail Export Goods in Cross-border E-commerce Comprehensive Pilot Zones (Notice 103) which was jointly released by the Ministry of Finance (MOF), the STA, the Ministry of Commence, and the General Administration of Customs in September 2018. Pursuant to Notice 103, goods of an Enterprise in the Pilot Zone which do not have a valid proof of purchase, shall be exempted from export value-added tax (VAT) and consumption tax if the following criteria are satisfied:

(1)

Enterprise shall register in a Pilot Zone, with the export date, goods name, measurement unit, quantity, unit price and amount registered on the cross-border e-commerce online comprehensive service platform at the place of registration.

(2)

The export goods shall go through the e-commerce export declaration procedures with the local customs at the Pilot Zone.

(3)

The export goods are not among the ones on which tax refund (exemption) has been explicitly cancelled by the MOF and the STA pursuant to the decision of the State Council.

Enterprises that comply with Notice 103 (that is, those Enterprises that enjoy the exemption from VAT and consumption tax for export goods), EIT will be assessed and levied with a taxable income rate of 4% in accordance with Announcement 36, on the basis of accurate accounting of the total revenue, namely:

EIT payable = total revenue x 4% x 25% = total revenue x 1%

Through this method, the actual EIT borne by an Enterprise as a common EIT payer can be reduced to 1% of the total revenue.

Further, if the income of an Enterprise falls within the scope of tax-free income as stipulated in Article 26 of the Enterprise Income Tax Law, the EIT on such income can be exempted. If the Enterprise meets the conditions of preferential policies for a small low-profit enterprise, it can enjoy the applicable preferential EIT policies on top of the aforementioned treatments. Therefore, the actual tax burden of some Enterprises may even be lower than 1% of their total revenue.

Comments

Following on from Circular 103, Announcement 36 is another major favourable tax policy applicable to the Enterprises in the Pilot Zones. Currently, there are 35 Pilot Zones throughout the nation. The existing Enterprises or those intending to invest in cross-border e-commerce may make necessary business arrangements in accordance with their circumstances and the conditions stipulated under the two documents so as to fully enjoy the relevant preferential tax treatments. However, Announcement 36 does not specify how the total revenue which serves as the basis of the calculation of EIT shall be calculated. The STA and/or the local tax authorities may release relevant implementation rules in this regard. The relevant parties should pay attention and follow-up.