The amended PRC Provisional Regulations on Business Tax (Provisional Regulations) and the PRC Implementation Rules for Provisional Regulations on Business Tax (Implementation Rules) both took effect on January 1, 2009. The implementation of these new rules will impact service providers located both inside and outside of China providing services to entities or persons located within China. Service providers involved in cross-border transactions with China should prepare withholding procedures to comply with the revised rules. The USCBC is currently soliciting comments in preparation for discussions with the Chinese authorities regarding these revised rules.
The PRC Business Tax (Business Tax) imposes a tax on the turnover of certain pre-defined business activities. Tax payable under Article 4 of the Provisional Regulations is equal to the amount of business turnover multiplied by the applicable tax rate. The amount of business turnover is calculated in Renminbi, which is the official currency of China. When calculating tax payable for providing services, the business turnover equals the fees paid by the recipient of the services located in China.
The key change in the revised rules that affects cross-border transactions the most is that the new language allows China to tax services rendered from outside of China to service recipients located in China. First, Article 1 of the Provisional Regulations defines taxable activities to include: (i) provision of services, (ii) transfer of intangible assets, and (iii) sales of immovable property “within the territories of the People’s Republic of China.” Then, Article 4 of the Implementation Rules further defines “within the territories of the People’s Republic of China” to mean that (i) the provider or the recipient of services is located in China, (ii) transfer of intangible assets (excluding land use rights) when the recipient is located in China, (iii) the land, of which the use rights are being sold or leased, is located in China, or (iv) the immovable properties being sold or leased are located in China.
The ramification of the expansive definition of “within China” is that the revised tax rules increase the cost of providing services to China. Under the new law, services provided to a person or an entity located in China are taxable, even when those services were rendered from outside of China. For example, when an international company located in North America provides a new product design to the company’s manufacturing facility in China, the provision of this service would be subject to the Business Tax under the new rules. Prior to January 1, 2009, services provided from outside of China to recipients in China were not subject to the Business Tax.
However, as a reference, a 10% income tax on the revenues derived from such services was, and still is, required to be withheld by the recipient on behalf of the government when the services fees are paid. Additionally, the Business Tax shall be withheld at the time of payment. According to Article 11 of the Provisional Regulations, the service provider’s establishment or its agent in China must withhold the tax payable. In situations where the service provider does not have an establishment or an agent in China, the recipient or the buyer in China shall serve as the withholding agent.
Currently, the US-China Business Council (USCBC) is preparing for a discussion with the Ministry of Finance and the State Administration of Taxation to advocate against the Business Tax expansion and also to seek clarification on certain provisions. As part of its preparation for discussions with the Chinese authorities, the USCBC is now seeking inputs from its members. Please send your comments, questions, and suggestions to:
Ian Billard, in Beijing, at firstname.lastname@example.org; 10-6592-0727
Godfrey Firth, in Shanghai, at email@example.com; 21-6288-3841
Julie Walton, in Washington, D.C., at firstname.lastname@example.org; 202-429-0340
USCBC would like to receive your inputs by February 20, 2009.