Posted by Jiang Diwei on July 30, 2010 under China Tax | 
Guoshuihan [2010] No. 323 explicitly stipulates, tax authorities should compile statistics and analyze enterprises’ transfer pricing contemporaneous documentation preparing situations in their administrative regions. The circular emphasizes the key point from macro and micro-perspective when tax authorities execute the above mentioned task.
From macroscopical on look, tax authorities should explain what kind of sampling method they adopted; in whole sampled enterprises the respective percentage of those enterprises whose related party transactions amount regard to purchase/sale exceeding CNY 200,000,000 and other related party transactions amount over CNY 40,000,000; the respective percentage of enterprises in tracing managing period, with thin capital, with cost sharing agreement, and bearing loss with limited functions and risks. Besides, tax authorities should gather statistics on the enterprises’ various approaches to prepare contemporaneous documentation, mainly inspecting whether they relied on the aid of intermediary organ and which organs were entrusted. In particular, tax authorities should clarify the percentage on preparing contemporaneous documentation of Big Four, domestic firms, foreign firms and enterprises themselves respectively.
From micro-perspectives, according to five detailed requirements on contemporaneous documentation preparing in the special tax adjustment implementation regulation, tax authorities should evaluate the first four aspects from three ranks, in particularly as detailed description, incomplete information and no data; For the fifth aspect, the selection and using of transfer pricing methods, should be gathered statistics from the percentage of five frequently-used transfer pricing methods.
In concrete practice, tax authorities should evaluate the sampled enterprises’ contemporaneous documentation preparing situations from the four levels, including good, ordinary, poor and very poor. They also compile statistics in different ways on preparing contemporaneous documentation for enterprises in each level. Combined with certain analysis in macro-on look part, tax authorities can assess the quality of tax services by intermediary organs, as so to provide guidance for those enterprises who are intent to trust an intermediary organs when prepare contemporaneous documentation.
Posted by admin on July 27, 2010 under China Tax |
Guoshuihan No. 323 (2010)
To national tax bureaus and local tax bureaus in each province, autonomous region, municipality directly under the central government, municipality separately list on the state plan:
Serving the purpose of implementing the new Enterprise Income Tax Law and its enforcement regulations, enhancing the supervision on contemporaneous documentation, knowing the compliance situation and relative problems in enterprises’ preparing contemporaneous documentation, State Administration of Taxation decides to make a random inspection on contemporaneous documentation preparing nationwide. The following is the explicit detailed requirements:
Firstly, tax authorities in provinces organize the random inspection on contemporaneous documentation under their administration area, which should cover two tax year of 2008 and 2009.Each competent tax departments should according to enterprises’ related-parting reporting data, calculated the enterprises list which ought to prepare contemporaneous documentation in the province annually, strictly follow statistical sampling method to select samples(the quantity of selecting samples for each year should not be lower than 5% in the whole),and organize to inspect the situation of sample enterprises’ contemporaneous documentation. The department of big enterprises taxation managing in State Administration of Taxation will separately arrange the contemporaneous documentation inspection for those enterprises directly contacted with State Administration Taxation.
Second, each tax authority should fill in contemporaneous documentation preparing situation table annually on the basis of inspection. (See annex one), make an analysis report after aggregation. The aforesaid analysis report shall be reported to the State Administration of Taxation (International Taxation Department) through FTP before October 31 2010.
Annex:
1. ____ (year) contemporaneous documentation preparing situation table
2. ____ (year) sample report on situation analysis for contemporaneous documentation preparing situation.
Posted by admin on under China Tax |
Guoshuihan No. 290 (2010)
Administrative Measures on Non-residents Enjoying Treatments under Tax treaties (Trail) (hear after refers to as the Measures) has been published and put into effect since Notice of SAT on distributing Administrative Measures on Non-residents Enjoying Treatments under Tax treaties (Trail), Guoshuifa No.124 (2009). Now supplementary implementing measures are noticed as follows:
- State tax bureaus and local tax bureaus in Article 6 of the Measures include all tax authorities stated in Article 14 of Tax Collection and Management Law of People’s Republic of China.
- Tax Identity Certificates which should be provided by Taxpayers according to Subparagraph 3, Paragraph 1 of Article 9 or Subparagraph 2, Paragraph 1 of Article 12, include Tax Identity Certificates documented by authorities of the other side of Tax treaties in following forms:
a) Relevant contents filled in Blank 13, Appendix 1 or Blank 25, Appendix 2 under Guoshuifa No.124 (2009).
b) Special certificates documented independently.
III. Non-residents could be exempted of submitting materials which have already been submitted, only for materials submitted to the same tax authority. Non-residents who should propose for approval application and recordation report to different authorities should submit relevant materials respectively.
- When recording enjoyment of Agreement treatments before tax obligation declaration, according to Article 11 of the Measures, Blank 20 of “ Earning Amount or Taxable Income Amount” and Blank 21 of “Exemption and Reduction amount” of Recordation Report Form of Non-resident Enjoying Tax treaty Treatments shall be filled according to arrangements of the contract or estimated number; when declaring the recorded tax obligations by law, taxpayers or withholding agents should then fill Implementing Status Report of Non-resident Enjoying Tax treaty Treatments (see Appendix 3), to report the implementing status of recorded non residents’ Tax treaty enjoyments.
- Withholding incomes requiring recordation in Article 13, which refer to contents of Article 11, do not include incomes requiring approval according to Article 7 of the Measures, to which the withholding at source applies in conformity to laws and regulations within China.
When implementing Tax treaties treatments which need to be recorded, withholding agents should complete recordation process under Article 13 of the Measures no matter taxpayers have already submit relevant materials or not. If taxpayers refuse to provide relevant materials, withholding agents should not implement the Tax treaty treatments.
- “Working time limit referred to in Article 16 of the Measures” mentioned in Paragraph 2, Article 17 refers that prescribed by Subparagraph 1, Paragraph 1 of Article 16, that is, tax authorities in charge of reported cases under Article 17 should make their decision in 20 working days and inform approval authority directly / rank by rank, or complete the re-report process.
- Article 2 of Notice of SAT on Interpreting and Implementing Provisions of Arrangements for Avoidance of Double Taxation between Inland and HK SAR, Guoshuihan No.381 (1998), and Paragraph 3, Article 3 of Notice of SAT on Interpreting and Implementing Provisions of Arrangements for Avoidance of Double Taxation and prevention of fiscal evasion between Inland and HK SAR, Guoshuihan No.403 (2007), are rules based on Agreements of tax arrangements which formed by negotiation between SAT and Tax Bureau of HK SAR. According to Article 44 of the Measures, when conflict occurs, these 2 provisions should be complied.
- Concerned Income Types and their Codes in filling instruction of Appendix 1, 2 and 5 of Guoshuifa No.124 (2009) should be changed into: Business Profits-7, Dividends-10, Interests-11, Royalties-12, Property Incomes-13, Remuneration for Independent Service-14, Remuneration for Dependent Service-15, Incomes of Artists or Sportsmen-17, Retirement Allowance-18, Education or Training Fees paid to Students-20, Other Incomes-21. See modified Forms in Appendix 1, 2 and 3.
- “Seal or signature of tax authority or its delegator” in Blank 26, Appendix 2 of Guoshuifa No.124. (2009) should be changed into “Seal or signature of acceptance tax authority or its delegator”. “Acceptance tax authority” refers to the tax authority who receives approval applications of non-residents or who has the right to approve.
- “The recent one year” in Blank 15-21, Appendix 3 of Guoshuifa No.124, (2009) refers to the year before the applicant gains his incomes.
- Report Form for Approval and Implementing Results of Non-residents Enjoying Tax treaty Treatments of Appendix 5, and Summary Form for Non-residents Enjoying Tax treaty Treatments (by Country) of Appendix 6 in Guoshuifa No.124 (2009) shall be replaced by Report Form for Implementing Results of Non-residents Enjoying Tax treaty Treatments of Appendix 3, and Summary Form for Implementing results of Non-residents Enjoying Tax treaty Treatments of Appendix 4 in this Notice.
- All report forms under the Measures should be in duplicate, one retained by the applicant and the other for the tax authority.
- Local authorities shall conduct annual summary of implementing results of Tax treaties, fill the summary forms and submit to SAT before end of next March.
Posted by Jiang Diwei on July 23, 2010 under Laws and Regulations |
Recently, Company A, which registered in Barbados, transferred its holding equity, of which certain real estate company in Xuzhou, to Company B which registered in China at a premium. According to bilateral tax treaty between China and Barbados, income of the transfer should be levied by resident country. As a result, company A filed its applications to National Tax Bureau in Xuzhou on the purpose of enjoying the treatment of tax treaty. National Tax Bureau in Xuzhou considered company A was a conduit company through inspection, which was inconformity to the conditions of tax exemption by tax treaty. The tax bureau required company A to prove itself beneficial owner and having effective management according to circular 601 and Chinese new enterprise income tax law respectively. After rounds of negotiation, company A could not offer valid proof throughout, as a result, company B withheld non-resident enterprise income tax on the equity transfer for company A.
Xuzhou case is another sample which shows the tax authority’s determination in anti-avoidance since the issuing of circular 601. Regardless of the rationality of the circular, it is arguable that whether tax authority properly dealt with the case.
First of all, there was defective on application of law. According to the rules of validity of laws, when applying laws concerned tax, the validity of international treaty is usually ranked higher than the domestic regulation. Therefore, it should be followed bilateral tax treaty to decide that whether Company A can enjoy the tax treatment, rather than Chinese enterprise income tax law or any provisions in circular. In this case, tax authority applied general anti-avoidance standards according to domestic law in order to make judgment that company A could not be classified into the privileges beneficiary, which should be deemed as breaching rules of law application.
Secondly, whether company A can be defined as a resident enterprise in Barbados should be determined by bilateral treaty or domestic law in Barbados, rather than Chinese law. While the bilateral treaty stipulates that, residence of the contracting country means that according to the domestic laws of contracting country, someone who has the obligation for tax to contracting country, in consideration of the place of residence, dwelling, head office, effective management or other similar standards. Company A has already provided the proof for resident tax payer in Barbados, which has satisfied the conditions of being a tax privilege at least in formality. On some degree, it is with doubt that tax authority identifies company A as a non-residence enterprise in Barbados based on Chinese law is legal and rational.
After all, there are two issues needed to be paid attention to when observing Xuzhou case.
As first, when should the taxpayer identify as a beneficial owner? Circular 601 requires it at the time when residence enterprise of contracting country applies for enjoying the treatment in aspects of dividends, interests, loyalties and etc. While how to understand the word etc, and whether it should include property entitlements, both of which have not yet been final concluded. More or less, observing from the attitudes when tax authority deals with relative issues, circular 601 should apply to property entitlements and other incomes.
In additional, circular 601 objectively exempts the tax authority’s proving obligation, which is equivalent to conversion of burden of proof. As stipulated in circular 601, when tax payers apply to enjoy the treatment of tax treaty, they should prove themselves beneficial owners. On these grounds, tax authorities actually shift their proving obligations to taxpayers, and make it harder for taxpayers to apply for the privileges.
Posted by Shi Zhiqun on July 13, 2010 under Uncategorized |
On 18 May, 173 million RMB of non resident enterprise income tax which was declared by certain transnational investment group had been put in storage in Jiangdu National Tax Bureau in Jiangsu Province. This is another case concerning tax issues of indirect equity transfer after 2008 Chongqing case, and also the first case after the Circular 2009 No. 698 (hereafter referred to as “the Circular”) came into force. Meanwhile, to date, the sum of tax payment is definitely the largest one. More than that, it means, ever since the issuing of the Circular, China tax authority put taxing on indirect equity transfer into the practice stage.
CASE
Hereafter is the details of the meaningful case.
In January 2010, a certain transnational investment group (hereinafter referred to as C) indirectly transferred the equity of a China joint venture company (49%) by disposing its shares (100%) in a Hong Kong intermediate holding company.
Jiangdu National Tax Bureau paid every attention to the whole progress. Soon afterwards, using the first hand materials obtained by negotiation with company C, Jiangdu National Tax Bureau made an elementary judge that company B was a kind of company aiming at special purpose, while without any employees, assets, liabilities, investment other than 49% interest in the Chinese cimpany,or real operating activities.. Under the guide of superior tax authority, Jiangdu National Bureau began rounds and rounds tough negotiation with company C and its agents. Finally, company C agreed to contribute non resident enterprise income tax on amount of equity transfer.
COMMENTS
The legal basis of the above case is the Circular, which was issued on Dec 10th, 2009 and coming into effect on the date 1st Jan 2008. The Circular clarifies the relevant tax issues on non resident equity transfer income, and provides that under certain conditions, overseas investors who indirectly transfer the equities of domestic resident company shall submit materials to China tax authority as an obligation. Under the examining and verifying by SAT, indirect transfer can be re-determined according to economic substance, and the overseas intermediate company can be denied as an existence for tax arrangement. This shows the China tax authority’s determination in preventing overseas enterprise avoiding tax obligation in China by indirect equity transfer. The Circular provides policy basis for taxing on indirect equity transfer, and it should be followed in similar cases in the future.
