State Administration of Taxation Released “China Advance Pricing Arrangement Annual Report (2012)”

Posted by on September 2, 2013 under Uncategorized | Be the First to Comment

On Aug. 13, 2013, SAT officially announced “China Advance Pricing Arrangement Annual Report (2012)” in both Chinese and English. This is the fourth APA annual report released by the State Administration of Taxation (“SAT”). This report introduces China’s APA mechanisms, procedures and practices, and provides statistics for 2005 through 2012 accompanied by an analysis of the statistics.

一、 Introduction to APAs that China has signed

From 2005 to 2012, China has signed 56 unilateral APAs and 29 bilateral APAs, accounting for 66% and 34% of the total number of APAs in China respectively. So far China has not signed any multilateral APA. Below table summarizes the number of unilateral and bilateral APAs that the Chinese tax authorities signed during each of the 2005 to 2012 calendar years.

 

 In 2012, a total of 3 unilateral APAs and 9 bilateral APAs were signed, the number of bilateral APAs representing a new all year high. The time taken for completing the APAs signed in 2012 was shorter than those signed in 2011: all unilateral APAs were completed within 2 years, 67% of which took less than 1 year; 67% of all bilateral APAs signed in 2012 were also completed within one year. Of the 9 bilateral APAs signed in 2012, 5 were signed with Asian countries, 1 was signed with European countries, and 3 were signed with North American countries, marking an all year high in terms of the bilateral APAs signed with non-Asian countries. Most of the APAs signed in 2012 still involve the manufacturing industry but we see a further diversification in the types of industries covered.


二、 Period of APA program operation

By December 31, 2012, the SAT has 79 APA requests that are yet to be officially accepted, 6 unilateral and 73 bilateral.

Practically, application with below factors will merit the SAT’s prioritized attention: (1) Overall principle: first come, first served; (2) The quality of the request submission, e.g. all required documents have been submitted, the transfer pricing method applied is appropriate, and the calculation is correct. Applying taxpayers will be required to make additions or revisions to the submission when necessary; (3) The applying taxpayer is in a specific industry or located in a specific region that merits prioritized attention; (4) For a BAPA request, whether the BAPA partner country has the intention to accept the case and pursue a BAPA will also be an important factor for consideration. Among the four factors, the one the SAT values most is the quality of the submission. A submission that presents innovative application of TP methods or high quality quantitative analysis for intangibles, cost savings or market premiums will merit the SAT’s prioritized attention.

After the formal application, below exhibit illustrates the time taken for unilateral and bilateral APAs signed by China in 2012:

 As shown in the above exhibit, all unilateral APAs signed in 2012 were completed within 2 years, 67% of which took less than 1 year; 67% of all bilateral APAs signed in 2012 were also completed within one year.

三、 APA Process

The APA application and administration process involves the following six stages: (1) Pre-filing meeting; (2) Formal application; (3) Examination and evaluation; (4) Negotiation; (5) Signing; (6) Implementation and monitoring.
The following chart illustrates the process:

 四、 Tax benefits of APA

An APA is a voluntary agreement conducted on the basis of equality and mutual trust. It provides an effective way to enhance understanding, strengthen collaboration, and mitigate disputes between enterprises and tax authorities. APAs have the following benefits:

(1) Provide certainty for tax authorities and enterprises in regards to transfer pricing issues for future years, which will offer certainty with regard to taxpayers’ operations and relevant tax obligations and provide tax authorities with an expectation of stable revenue;

(2) Reduce tax authorities’ costs related to transfer pricing administration and audit as well as enterprises’ tax compliance costs by mitigating the risk of a transfer pricing audit; and

(3) Improve the tax compliance services provided by the tax authorities, facilitate the balanced development of administration and service, and assure taxpayers of the relevant rights and benefits.

Bilateral and multilateral APAs can also provide the following additional advantages:

(1) Facilitate communication and collaboration among the competent tax authorities of different jurisdictions; and

(2) Help enterprises avoid transfer pricing adjustments as well as double taxation risks in two (for bilateral APA) or more (for multilateral APA) tax jurisdictions.

Future Trends Indicated by Amendment on Tax Administration Law (Draft)

Posted by on July 11, 2013 under China Tax | Be the First to Comment

The socio-economic conditions and tax practices have taken great changes since Tax Administration Law was amended in 2001. In order to keep up with the latest developments in practice, Legislative Affairs Office of the State Council released Amendment on Tax Administration Law (Draft) (http://www.chinalaw.gov.cn/article/cazjgg/201306/20130600387820.shtml) to seek public opinions in late June.
The Amendment focused on adjustments on certain legal terms to coincide with other laws, and it also strengthened the tax authorities’ power to collect tax information and clarified certain procedural issues. Such amendments were in line with current tax administration demands and they also reflected future trends on tax administration to some extent.
Trend 1 Strengthen on Tax Administration
The amendment expanded the inquiry scope of tax authorities stipulated in the current tax administration law article 17 “the accounts of taxpayer” to “the accounts, transactions, cash flow, etc”. And it also added an article requiring government sectors providing tax information to tax authorities. Such amendment effectively solved the problem of information asymmetry between taxpayers and tax authorities and would play an important role in combating tax violations.
Seen from past experience, many significant special tax adjustment cases with respect to equity transfer that tax authorities dealt with had close links with information concerning shareholder changes provided by relevant business registration authorities. With information channel widening, we predicted that tax authorities would strengthen the tax enforcement and strictly dealing with tax violations. Therefore, Hwuason Lawyers suggest companies note about the tax administration trend and enhance the tax compliance in order to avoid potential tax risks.
Trend 2 Expand the Discretion of Tax Authorities
The amendment revised the range of tax preservation stipulated in the current tax administration law article 38 “tax authorities have grounds for deeming that a taxpayer engaged in production or business operations has evaded taxes” to “tax authorities have grounds for deeming that a taxpayer has possibilities to fail to fulfill tax obligation”. There was no doubt that such revision would result in unlimited discretion of tax authorities in reality, since tax authorities may depend on their own understanding to do such judgments. However, to any act conducted by taxpayer, tax authorities may think that the taxpayer has the possibilities to fail to fulfill tax obligation, and the only differences may lie in their degree. Therefore, tax authorities may abuse this article to advance the time of taxpayers’ liability at their own will, which is definitely unfavorable to the taxpayers.
Meanwhile, it may easily lead to legal uncertainties and inconsistencies, that is, under the same circumstances, some tax authorities think taxpayers have possibilities to fail to fulfill tax obligation, while other tax authorities do not think so.
Trend 3 Possible Monopoly Position of Certified Tax Agents
The amendment revised the current tax administration law article 89 “A taxpayer or withholding agent may appoint a tax agent to handle its tax matters on its behalf” to “A taxpayer or withholding agent has the right to appoint a certified tax agent to handle its tax matters on its behalf”. Since the concept of tax agent may include certified tax agent, lawyer and certified public accountant, such revision actually granted certified tax agent the privilege of rendering tax services. In fact, certified tax agent, lawyer and certified public accountant respectively hold certain portion in tax service market and their services have their own emphasis. However, the amendment only recognized the legal status of certified tax agent, and excluded lawyer and certified public accountant from the tax service market, which may result in the monopoly position of certified tax agent, lower the quality of tax services, and have negative influences on the development of tax service market.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Authorized Tax Collection: Analysis on its Potential Tax Risks and Possible Solutions

Posted by on June 4, 2013 under Corporate Tax Planning | Be the First to Comment

Authorized tax collection refers to the act that tax authorities authorize companies or individuals to collect taxes in certain situations. In fact, it could be seen in many areas, for instance, tax authorities authorize maritime administration authorities to collect vehicle and vessel tax, authorize banks to collect urban maintenance and construction tax, education surcharges and individual income tax of individual industrial and commercial households, authorize subdistrict offices to collect taxes relating to individual house rental, etc. It has no doubt that authorized tax collection plays an important role in strengthening tax administration and providing convenience for tax payment. However, it also faces many problems, such as the authorized party not remitting taxes promptly, not providing tax payment receipts to taxpayers, etc.
Recently State Administration of Taxation released the Administrative Measures for Authorized Tax Collection (Announcement of State Administration of Taxation [2013] No.24) to clarify certain aspects concerning scope of authorized tax collection, effect and termination of authorized tax collection agreement, especially to clarify the legal liabilities of the authorized party. In practice, some companies are not fully aware of potential tax risks when authorized to collect taxes and act against relevant regulations. With the promulgation of Announcement No.24, companies shall pay special attention on such tax risks and take steps to avoid risks.
1. Common Issues Met by Companies in Authorized Tax Collection
In most authorized tax collection cases, tax authorities do not gain enough tax information about the taxpayers and largely depend on authorized party to collect taxes since the taxpayers are much too scattered. Therefore, it may easily lead to the following issues.
(1) Fail to Remit Taxes Promptly
Lacking information about the taxpayers, tax authority could scarcely figure out the exact amount which the authorized party shall collect. What’s more, some authorized tax collection agreements may not contain a clause about the time periods to remit taxes. Therefore, it may easily occur that the authorized parties fail to remit taxes promptly. It is alleged that a real estate company was authorized to collect business tax and surcharges, individual income tax, enterprise income tax of construction companies. However, part of the collected taxes were not remitted but used by the real estate company for other purposes, such as repaying debts, etc.
(2) Decide to Collect Less Taxes without Permission
Most authorized parties are companies or individuals rather that tax authorities, and they are likely to collect taxes at their own wish, such as collecting less taxes or charging additional fees for issuing invoices, owing to their lacking awareness of tax law and the uncertainty of the authorized agreements. It was reported that three authorized companies once improperly issued invoices and collected less taxes by lowering the tax rate, of which the tax amount reached 124 million.
(3) Far Exceed the Authorized Scope
The authorized parties are authorized to collect taxes and they are not given the power to make administrative punishments. However, in order to gain more commissions, some authorized parties far exceed the authorized scope and required taxpayers to pay more taxes or even penalties. In practice, some authorized parties also detained properties of taxpayers which obviously did not comply with the tax law.
2. Potential Tax Risks and Possible Solutions
The newly issued Announcement No.24 targets at previous major violations in authorized tax collection and imposes strict legal liabilities on these violations respectively.
(1) Liquidated Damages of 0.05% per Day
According to Announcement No.24, provided that the authorized party failed to remit taxes, the tax authority shall order it to remit taxes within a certain time limit and may require it to pay liquidated damages of 0.05% per day. Provided that the authorized party did not collect or collect less taxes, the tax authority shall require the taxpayers to pay taxes and meanwhile may require the authorized party to pay liquidated damages of 0.05% per day. It is usually the case that the authorized party did not collect or collect less taxes for a relatively long period, it may accumulate to a significant amount under the condition of liquidated damages of 0.05% per day, though the original amount may be quite a small figure.
Therefore, Hwuason Lawyers suggest the company comply with the tax law and the agreement and fulfill its authorized tax collection obligations carefully in order to avoid the risks of paying liquidated damages.
(2) Early Termination of Authorized Tax Collection Agreements
According to the Announcement, the tax authority may terminate the authorized tax collection agreements in advance provided the authorized party frauds, fails to fulfill its obligations, or seriously violates the tax law or the agreement. So in the above mentioned case of failing to collect or collecting fewer taxes, except from the risk of liquidated damages of 0.05% per day, the authorized party may also bear the risk of early termination of the agreement.
(3) Compensation for Losses
According to Announcement No.24, provided with losses on tax receipts printed with fixed amount, the authorized party shall compensate for such losses according to their face value. Provided the authorized party not receiving, keeping, issuing tax receipts as required, tax authority may deduct its commission of collecting taxes. Therefore, the authorized party shall pay special attentions on the tax receipts administration to avoid unnecessary economic losses.
(4) Legal Liabilities Pursued Afterwards
According to Announcement No.24, any tax disputes caused by authorized tax collection are solved and born by tax authority, but tax authority has the right to pursue the legal liability of the authorized party afterwards. Therefore, the authorized party bears the risk of being holing liable afterwards, though it has no risk of tax disputes with taxpayers directly.
Therefore, Hwuason Lawyers suggest the company aware of the authorized scope and act within the authorized limits to avoid potential tax disputes with any taxpayers. Provide the taxpayer rejected to pay taxes, companies shall report it to the tax authority in time instead of any tax enforcement measures.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

VAT Pilot Program: Expanded to Nationwide on August 1st 2013

Posted by on May 21, 2013 under Corporate Tax Planning | Be the First to Comment

In early April this year, the State Council announced that the VAT pilot program will be expanded nationwide on August 1st 2013 in order to eliminate the differences on the tax systems between pilot areas and non-pilot areas and to further implement the structural tax reduction policy. Since Shanghai became the first pilot area on January 1st 2012, the VAT pilot program has already expanded to major cities and provinces in late 2012, such as Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang and Hubei. It is alleged that the VAT pilot program went smoothly in general and achieved desired outcomes. However, many problems still remains during this process, such as the increasing tax burden, the transition issues, etc.
Based on our expertise and experience accumulated in taxation, Hwuason Lawyers summarized the common problems met by pilot areas and offered brief analysis for your easy reference.
1. Aware of the Scope of Taxable Services
According to Caishui [2011] No. 111 and Caishui [2012] No. 71, the taxable services in pilot areas shall include land transport services, water transportation services, air transport services, pipeline transportation services, research and development (R&D) and technical services, information technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance and consulting services. As for services like financial and insurance services, construction and installation services are not included at present.
Owing to the complexity of economic activities, to precisely define whether a certain economic activity is a taxable service is not easy. For example, purification engineering design and construction services, the purification engineering design services belongs to design services and are within the scope of taxable services; but the purification engineering construction services belong to construction and installation services and are beyond the scope of taxable services.
2. Choice of Status of the Taxpayer
VAT taxpayers are divided into general taxpayers and small-scale taxpayers, which differ significantly with respect to methods for calculating tax payable, invoices, etc. The general taxpayer shall apply the general method for calculating tax payable and the tax payable shall be the balance of output tax for the current period subtracted by the input tax for current the period. The small-scale taxpayer shall apply the simplified method for calculating tax payable and the tax payable shall be the sales amount multiplied by the rate of levy. And it is not allowed to claim any input tax credits.
We find that more and more companies tend to do business with general taxpayers. Besides, since the small-scale taxpayer is not allowed to claim any input tax credits, the actual tax burden of a general taxpayer may not be higher that a small-scale taxpayer under the same circumstance provided with sufficient input tax credits. Therefore, eligible small-scale taxpayers may apply for general taxpayer status depending on their needs. Meanwhile, taxpayers shall pay special attentions on authenticity and legitimacy of certain transactions when filing VAT invoices. It is strictly forbidden to false filling out special VAT invoices otherwise the taxpayer may face severe legal consequences. In addition, taxpayers shall also exam the authenticity and legitimacy of VAT invoices when receiving such invoices so as to avoid economic losses due to deny of input tax credits.
3. Transition of the Two Tax Systems
Both Caishui [2011] No. 111 and Caishui [2012] No. 71 define clearly about the effective date of pilot program. Generally speaking, tax liabilities are closely related to taxable activities. Therefore, taxpayers are subject to VAT if they render taxable services after the starting date of pilot program, otherwise they are subject to business tax. With regard to an uncompleted lease contract signed before the starting date of pilot program, the taxpayer shall continue to pay the business tax before the expiration of the contract. In cases that taxpayers provided activities prior to the starting date of the pilot and such services are terminated or a discount is made on the services or there is any error in the invoices, but the invoices are disqualified for becoming invalid, the taxpayer shall issue red-letter ordinary invoices instead of red-letter special invoices; if the taxpayer needs to re-issue invoices, it shall issue ordinary invoices instead of special invoices. In cases that taxpayers provided activities prior to the starting date of the pilot and the turnover of such services is refunded, the taxpayer shall apply for the refund of the paid business tax. Therefore, Hwuason Lawyers suggest taxpayers concern about the tax treatment in case of discount, refund, etc. and transit from old tax system to new tax system smoothly.
4. Aware of the Treatment of Special Tax Issues
At the early stage of the pilot, it caused great dispute in respect to the cultural undertaking construction fee issue. Later on, Ministry of Finance and State Administration of Taxation jointly issued Notice on Issues Relating to the Collection of Cultural Undertaking Construction Fee in the Pilot Reform of Replacing Business Tax with Value-added Tax (Caizong [2012] No. 68). The Notice clearly stated that entities and individuals providing advertising services who are originally obliged to pay cultural undertaking construction fee according to Caishuizi [1997] No. 95, and entities and individuals providing advertising services at the pilot regions who are established after the pilot reform is launched in such regions, shall pay cultural undertaking construction fee after they are included in the scope of the VAT Reform. In addition, State Administration of Taxation issued another two announcements, namely Announcement [2012] No.50 and Announcement [2012] No.51, to further clarify certain issues regarding the collection of cultural undertaking construction fee.
State Administration of Taxation often timely issues notices in responding to controversial tax issues in practice. Therefore, taxpayers shall keep informed about the latest tax policies issued by SAT, especially tax policies explaining tax treatment of certain tax issues, to ensure the compliance of tax policies and avoid potential tax risks.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

An Overview of Hong Kong Tax System

Posted by on May 8, 2013 under Corporate Tax Planning | Be the First to Comment

Hong Kong, one of the world most famous financial and trade center, gathered a vast majority of headquarters or regional headquarters of multinational companies. Aside from its strategic location and convenient transportation, the reason why it is extremely welcomed by international investors is also closely related to its transparent and efficient tax system.
1. Major Taxes in Hong Kong
(1) Profits Tax
Profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong for that year. As for a corporate, its profit tax rate is 16.5%. And as for non-corporate, its profit tax rate is 15%. Compared with enterprise income tax in mainland, profits tax makes no distinguish between resident enterprise and non-resident enterprises. Therefore, oversea-gained profits by resident enterprise may not subject to profits tax, while profits gained from Hong Kong by non-resident enterprise may subject to profits tax.
(2) Salaries Tax
Salaries tax shall be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong by sources of any office or employment of profit or any pension. Whether income is aroused in or derived from Hong Kong depends on the work place of employment of such person. When calculating salaries tax, taxpayers may choose from the following two methods which are of the lower tax burden.
1. The net assessable income multiplied by the standard tax rate of 15%;
2. The total taxable income minus the deductable amount and exempt amount, then subject to progressive tax rate ranging from 2% to 17%.
(3) Property Tax
Property tax shall be charged on every person being the owner of any land or buildings or land and buildings wherever situate in Hong Kong and shall be computed at the standard rate of 15% on the net assessable value of such land or buildings or land and buildings for each year.
The assessable value of land or buildings shall be the consideration paid to the owner in respect of the right of use of that land or buildings, such as rents. And the net assessable value refers to the assessable value of land or buildings minus an allowance for repairs and outgoings of 20% of that assessable value after deduction of any rates where the owner agrees to pay.
2. Advantages of Hong Kong Tax System
(1) Source Principle of Taxation
Hong Kong applies source principle of taxation and only taxes income derived from its jurisdiction. To decide whether profits are derived from Hong Kong, it is up to the court to make the final decisions based on the principles established by prior cases and considerations on comprehensive factors.
Therefore, if a Hong Kong company has profits not derived from Hong Kong, it may fall out of the scope of profits tax pursuant to Inland Revenue Ordinance. However, it still needs to make the application and provides transaction process, contracts or other materials to the tax authority and properly answer the enquiries proposed by the tax authority when necessary.
(2) Schedular System
Hong Kong applies schedular system and has only limited categories of taxes. Generally speaking, it has both narrow tax base and low tax rate. To be more specific, it may be shown on the following aspects.
a. No tax on capital gains;
b. No turnover taxes, such as VAT or Business Tax;
c. No tax on dividends;
d. No withhold tax system and no withhold taxes;
e. Aside from tobacco, alcohol, cosmetics, automotive or fuel, most import goods are not subject to tariffs.
3. Tax Treaties of Hong Kong
So far, Hong Kong has signed many agreements with other countries or districts on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. And the Arrangement between the Mainland of China and the HKSAR for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion is among the most important ones. According to this agreement, the tax charged on dividends paid by a Mainland resident company to a resident of Hong Kong in the Mainland shall not exceed 5% of the gross amount of the dividends when certain requirements are satisfied. It is also an important factor why many foreign companies or individuals choose Hong Kong holding companies when considering investments in mainland.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.