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.
Posted by Shi Zhiqun on April 27, 2010 under Anti-Avoidance, Corporate Tax Planning |
In 2009 the State Administration of Taxation (SAT) undertook significant steps in relation to clamping down on anti-avoidance practices. Yet, recent indications suggest that the SAT considers that there is a significant way to go. Officials have been repeatedly indicating that in 2010, China will step up efforts to counter tax evasion, with a particular focus on transfer pricing in the pharmaceutical and automotive industries, the use of intangible assets and share transfers, and cross-border related business transactions.
The SAT spent considerable recourses in 2009 developing a sound system for its anti-avoidance investigation practices and it is expected that in 3020 this will continue to be fine-tuned. An official from the SAT’s International Tax Department recently commented that up until “present investigations focused more on anti-avoidance in respect of the purchase and sale of tangible assets, cost sharing by controlled foreign companies and thin capitalization”. However, from this year, the SAT will look beyond these more simplistic anti-avoidance practices and will examine the issues on a more complex level, including exploring rational pricing of intangible assets and equity. In addition, outbound investment will receive special attention, particularly the transfer pricing practices employed by Chinese companies investing abroad and controlled foreign company management.
The SATs efforts to combat anti-avoidance in 2009 garnered significant results – the work of the national anti-avoidance team resulted in adjustments to taxable income totally 16.09 billion yuan and 2.09 billion yuan in back taxes.
Promisingly, the SAT official also indicated that the SAT will seek to encourage bilateral Advance Pricing Agreements (APAs). Bilateral APAs allow multinational companies to achieve greater certainty in terms of their transfer pricing practices. There has been some doubt in the past about the difficulties in obtaining bilateral APAs and accordingly it is encouraging to see commitment to them by the SAT. Since 2005 China has entered into 12 bilateral APAs and it is expected that this number will rise as multinationals become more familiar with China’s approach and the attitude of tax officials to them.
Posted by Shi Zhiqun on January 28, 2010 under Tax Controversy |
Here are some selected recent tax disputes in China.
- Guangxi Jiayuan Real Estate Company fined RMB 1.44 million for failure to declare income from sale of shares – In a very simple case of tax avoidance the taxpayer failed to disclose its income from an equity transfer and accordingly was required to pay the full amount of tax on RMB 1.51 million plus a late fee surcharge of RMB 430,000 in addition to the above penalty.
- Fujian foreign invested enterprise receives transfer pricing adjustment – In a case decided late last year in Fujian, the local authorities investigated a FIE’s transfer pricing practices over a 6 year period. In reliance on the new anti-avoidance provision in the Enterprise Income Tax Law, the authorities re-adjusted the taxable income of the company and increased it by RMB272.9 million. Reports indicate that the company was relatively content with the result, suggesting that it’s potential exposure was significantly higher. The fine was the result of a negotiated settlement between the authorities and the taxpayer.
- VAT Invoice forger sentenced to 15 years in prison – Ye Mou Biao has been sentenced to 15 years in prison by the Zhuhai Intermediate People’s Court and fined RMB500,000 after creating RMB400 million worth of fake VAT invoices. Ye Mou Biao’s conduct resulted in a loss of tax revenue in the amount of RMB12.463 million
Posted by Shi Zhiqun on under Corporate Tax Planning, Individual Income Tax, Tax Incentives |
On 17 January 2010 the State Administration of Taxation issued Guoshuihan [2010] 9 providing clarification on the VAT tax rebate for R&D enterprises.
From 1 July 2009 to 31 December 2010, domestic and foreign-funded R & D institutions or centres will be entitled to a full refund on value-added tax when purchasing Chinese manufactured equipments. Whether a particular transactions falls within the timeframe will depend upon the timing of the VAT invoice.
This is China’s latest round of tax concessions aimed to encourage and promote scientific and technological development. This is favorable news to foreign-funded R & D institutions or centres. Other tax concessions encouraging technological development include the enterprise income tax concessions for high tech enterprises and the business tax exemption on technology transfers.
Posted by Shi Zhiqun on January 27, 2010 under China Law |
China continues to utilise tax policy in its drive to address the country’s environmental problems. Under the proposed scheme, purchasing a higher output car will result in the imposition of higher tax. It is not yet clear as to when the tax will be introduced and if it will apply nationally.
