The article was first published in Asian-Counsel magazine, issue September 2008 www.pbpress.com
In an effort to ease foreign exchange controls and expedite payments for services in foreign exchange, the State Administration of Foreign Exchange ("SAFE") and the State Administration of Taxation ("SAT") of the People's Republic of China jointly promulgated the "Circular on Relevant Issues Concerning the Trial Implementation of Tax Registration on Outbound Payments for Service Trade" (Circular Huifa [2008] No.8), effective as of 1 April 2008.
The SAT subsequently issued Circulars Guoshuihan [2008] Nos. 219 and 258 to provide more specific guidance concerning the implementation of Circular Huifa [2008] No.8.
Advance tax registration
Prior to 1 April 2008, an enterprise that made an outbound payment for services in excess of US$ 50,000 had to obtain a certificate demonstrating tax payment or tax exemption. The new rules allow enterprises registered in Tianjin, Shanghai, Jiangsu, Sichuan, Fujian or Hunan ("Trial Area") to make such payments without first paying taxes as long as they register the transaction in advance with the competent state taxation bureau ("STB"). The rules also require that payment be made by a designated bank located within the Trial Area.
The new rules do not apply to enterprises registered outside the Trial Area that make payment through banks located in the Trial Area or to enterprises registered in the Trial Area that make payment through banks outside the Trial Area.
Applicable services
- Transportation (excluding international marine shipping)
- Travel
- Communication
- Construction and installation
- Labour service contracting
- Insurance
- Financial services (including guaranties but excluding interest payments)
- Computer and information services
- Licensing of know-how and royalties
- Sports, culture and entertainment services
- Other commercial services and government services
Tax registration procedure and tax filing
Enterprises in the Trial Area can take advantage of the new rules by following the procedure described below:
- Complete and submit to the STB four copies of the "Tax Registration Form for Outbound Payment for Service Trade for Enterprises" ("Tax Registration Form") and two copies of the relevant contracts;
- Handle outbound payment formalities with a designated foreign exchange bank by presenting two copies of the Tax Registration Form affixed with the seal of the STB and other documents as required by SAFE;
- Submit a tax return or an explanation concerning the outbound payment to the STB and the local tax bureau within seven days after the advance tax registration.
Enterprises that make several payments in relation to a single contract must complete advance registration formalities for each payment; however, photocopies of the contract need only be submitted to the STB with the first payment.
In case an overseas service provider intends to apply for preferential treatment under a tax treaty, a Resident Identity Certificate issued by the relevant taxation authority of the overseas service provider shall also be submitted to the STB and/or local tax bureau when the tax returns are filed.
Impact and suggestion
The trial tax regime is intended to provide enterprises located in a limited number of Chinese jurisdictions a quicker and more convenient method of paying fees to overseas service providers. But such enterprises are still required to serve as tax withholding agents to withhold taxes for the overseas service providers shortly after making outward payments.
Adhering to the new regime requires enterprises to estimate the withholding taxes before paying the overseas service provider. In order to avoid unpleasant surprises when it comes time to pay the taxes, such enterprises should understand the position of the STB and local tax bureau on calculating the relevant withholding taxes before making the outbound payment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
