Chinese tax and business regulatory framework: evolving landscape and hot topics
The tax and regulatory environment in China is an ever evolving landscape. This article aims to highlight some key recent developments in China including:
- Value Added Tax (VAT) reform;
- Relaxation of foreign exchange procedures for certain payments to non-residents; and
- The new Shanghai Free Trade Pilot Area
Value Added Tax (VAT) reform
The VAT reform pilot program for transportation and modern services sectors has been rolled out nationwide[i] .from 1 August 2013,
The aim of the program was to eliminate the double taxation issues that arise under China’s current indirect tax system, which includes both a VAT levied on the supply of goods, the provision of repair, processing and replacement services, and on imports, and a Business Tax (BT) levied on the provision of other services and the transfer of intangibles and real property. Different rates are imposed under the VAT and BT regimes and, unlike VAT, an input tax credit is not available under the BT regime.
The reform will gradually replace the dual tax system with a single VAT system applying to the supply of both goods and services. Under the reform, certain services that were subject to the BT system will now be subject to the VAT system instead.
Services subject to the changes and their respective VAT rates are as follows:
- Transportation services (excluding railway transportation): 11%
- R&D and technology services, creative cultural services, IT services, logistics and ancillary services, and attestation and consulting services: 6%
- Leasing of moveable and tangible goods: 17%
- Radio and film production, broadcasting, and distribution sectors (newly added to the VAT reform programme): 6%
The national implementation of the VAT reform signifies a very important milestone in the development of the VAT reform in China.
Many New Zealand businesses having operations in China have already come across these changes in relation to R&D services, logistics and ancillary services, consulting services etc. Most of these services are now subject to VAT at 6%, compared to BT at 5% in the past. Although the tax rate might seem to have increased slightly, recipients will now be able to claim VAT input tax credits which should reduce the overall tax costs.
If these services are provided to customers in China, it is likely that the customers will welcome the change as they will now be able to claim the relevant VAT as input tax credits (previously BT would not be creditable).
This change may also be relevant if you are negotiating new contracts and pricing with your customers / suppliers as the relevant VAT/BT costs should be factored in and the overall cost may be able to be reduced.
Another interesting issue is whether services provided to non-residents of China (including New Zealand group companies) could be exempt from VAT. These services were previously subject to the non-recoverable 5% BT. Although it has been clear that an exemption will be available, we are still waiting for further guidance to clarify the criteria that must be satisfied to obtain the VAT exemption.
Relaxation of foreign exchange procedures on certain outbound payments
Foreign exchange controls in China have always been a difficult issue. The relevant rules are complex and the payment clearance procedures are lengthy, resulting in trapped cash, delayed payments and unexpected tax costs.
In a move to simplify the administrative burden for making payments offshore, China’s State Administration of Taxation (SAT) and the State Administration of Foreign Exchange (SAFE) jointly issued a bulletin in July 2013 (SAT/SAFE  No.40, (Bulletin 40)) that abolishes the tax clearance certificate requirement that applied for outbound payments exceeding USD 30,000 (or its equivalent) in relation to services and certain other items.
The new rules apply from 1 September 2013. The types of outbound payments that are subject to the new rules include most payments relating to income derived by a foreign organisation and individuals from China (other than those relating to trade in goods), including for example, income from services, salaries and wages, dividends and profits etc.
Under the old rules, domestic Chinese businesses and individuals (“Applicants”) wishing to make a payment offshore for services and other items exceeding USD 30,000 were required to obtain a tax clearance certificate from the competent state and local tax authorities before the payment can be made. The tax certificate must be provided to the relevant bank to make the payment.
Obtaining a tax clearance certificate was not always a straightforward process, particularly if the Applicant and the competent state and local tax authorities were unable to reach an agreement on the relevant tax treatment of the payment. In many cases, foreign recipients would negotiate and accept a certain level of tax to be deducted from the payments in order to receive the relevant payments.
The new rules eliminate the need for an advance “review” by the tax authorities before a payment exceeding USD 30,000 is to be made offshore. Under the new rules, Applicants that intend to make payments exceeding USD 50,000 (or its equivalent) will be required to submit a “Tax Filing Form” and relevant transaction documents to the competent state tax authorities (rather than state and local tax authorities) for each payment. The competent state tax authorities will stamp the Tax Filing Form and return one copy to the Applicant and deliver another copy to the competent local tax authorities. A copy of the Tax Filing Form will then be provided to the bank before an offshore payment can be made.
It is important to remember that although the tax certificate will no longer be required, payments will not be relieved from any of the relevant tax obligations, which we expect to remain the same. The new rules are mainly a change in administrative emphasis to enable domestic entities to make outbound payments in a timely manner. Deduction of a certain level of taxes from the payment will likely continue.
The new China (Shanghai) Free Trade Pilot Area
The China (Shanghai) Pilot Free Trade Zone was officially launched on 29 September 2013. Many are excited about the introduction of this Free Trade Pilot area and it was considered that the establishment of the China (Shanghai) Free Trade Pilot Area (“China (Shanghai) FTPA”) combining four customs supervision areas, is a big step towards the continued opening up of China’s economy. So what exactly is the China (Shanghai) FTPA? The closest comparison to the proposed pilot is a Free Trade Zone but with much wider implications and a different area of focus. A Free Trade Zone is generally a specific area under special Customs supervision that allows free trade in a country with preferential policies. China (Shanghai) FTPA is similar to a Free Trade Zone, but with more focus placed on policy reforms and less focus on preferential treatment.
Although China (Shanghai) FTPA is still a work in progress, the objectives and direction of the governing framework and rules are already clear. Key impacts of the pilot include:
- Finance including foreign exchange - the free conversion of RMB and foreign currencies, the removal of limitations over foreign participation in the financial industry and the offshore banking business.
- Tax system - a competitive preferential tax regime to attract businesses such as regional headquarters, offshore trading, shipping and logistics businesses, and financial leasing businesses.
- Investment controls and approvals - simplify and relax controls over investments which foreign investors are allowed to make, and operations they are allowed to conduct. In principle, all investments are allowed unless they are on the “Negative List.”
- Customs supervision - customs and port supervision procedures will be updated and simplified. Administration and supervision of both foreign and domestic trade will be relaxed, and development of international shipping will be promoted.
The main beneficiaries of the change are expected to be:
- Finance sector businesses
- Regional headquarters of multinational corporation
- Regional sales and procurement centers
- Shipping and logistics sector businesses
- Cultural, creative and media sector businesses
- Retail sector
This may be of particular interest if you are currently considering investing in China or looking to set up a trading presence in the region.
If you have any questions regarding any of the recent developments in China, please contact our Deloitte China service team or your normal Deloitte contact person.
[i] The VAT reform pilot program for the transportation and modern services sectors started in Shanghai on 1 January 2012 and was later rolled out to eight other cities/provinces during 2012.
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