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.

Qianhai: Opportunities for Innovation and Development in Financial Sector

Posted by on April 25, 2013 under Corporate Tax Planning, Tax Incentives | Be the First to Comment

In early March, the National Development and Reform Commission issued the Permitted Industry Catalogue for Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Fa Gai Chan Ye [2013] No. 468), which further clarifies the scope of encouraged industries enjoying the preferential enterprise income tax rate of 15%. Since Qianhai was positioned as Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in 2010, a series of preferential policies have been formulated from both central and local government level, which create perfect environment for innovation and development in modern service industries. It is reported that the total number of registered enterprises has increased to 236 and the total amount of registered capital has reached 248 million in Qianhai by the end of February. In view of Qianhai’s strategic position in the new round of China’s economic transformation and development, Hwuason Lawyers summarized the relevant documents and offered brief analysis on preferential fiscal policies for the reference of enterprises seeking opportunities in Qianhai.
Generally speaking, the preferential tax policies mainly concern enterprise income tax, individual income tax, business tax and so on, which are further explained as follows:
1. Enterprise Income Tax
According to Guo Han [2012] No.58, qualified enterprises shall be eligible for a preferential enterprise income tax rate of 15% in Qiuanhai. And according to Fa Gai Chan Ye [2013] No. 468, the permitted industry catalogue covers six industry sectors including financial services, modern logistics, information services, technology services, professional services and public services. The detailed industrial segments listed below the six industries could amount to 112. Observing the current tax system, the 15% enterprise income tax rate is largely applied in western region. Therefore, Qianhai is among the few areas in eastern region which could enjoy such tax incentives.
2. Individual Income Tax
According to Shen Fu [2012] No. 143, overseas talents and professionals in short supply working in Qianhai will receive financial subsidies concerning the part exceeding 15% from the Shenzhen municipal government and such rebates shall be exempt from individual income tax. It may actually reduce their tax burden to a flat tax rate of 15% and avoid the highest tax bracket of 45% under the progressive tax rates. Therefore, Hwuason Lawyers suggest the company pay special attentions on the qualifications and application process in relation to overseas talents and professionals in short supply and try to obtain such financial subsidies. However, it is worth noting that such financial subsidies are merely subject to income from wages and salaries. Other categories of individual income are excluded from the scope of financial subsidies, such as income from remuneration for personal services, income from the transfer of property, incidental income, etc.
3. Business Tax
According to Guo Han [2012] No. 58, qualified logistics companies that registered in Qianhai are allowed to apply a net basis for business tax. Furthermore, according to the Ordinance of Shenzhen Special Economic Zone on Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, incomes derived from international transportation insurance services provided to enterprises registered in Qianhai Cooperation Zone by insurance enterprises registered in Shenzhen are exempted from business tax. And incomes derived from offshore outsourcing services by enterprises registered in Qianhai are exempted from business tax. The exemption policies of business tax will definitely reduce the tax burden of the relevant industries like modern logistics and promote the development of these industries.
In addition, enterprise may apply for special funds to Qianhai Administration Bureau pursuant to Shen Cai Jian [2013] No. 28 and Shen Qian Hai [2013] No.55 if they have some projects requiring government support. The special fund will give priorities to projects applying core technology or innovative business models, equipped with significant social and economic benefits, available to integrate resources, etc.

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.

Tax Treatment and Risks of Nominal Share-holding

Posted by on April 19, 2013 under Corporate Tax Planning | Be the First to Comment

Recently, the maximum income tax on equity transfer in Wuhan had been collected smoothly. The transfer income came to 140 million Yuan and the income tax hit 3.473 million Yuan. In this case, a hotel held 1.63% shares of a security company as a nominal shareholder while the actual shareholder was an investment corporation. As the security company going public, the hotel sold these shares in batches after destabilization of non-tradable shares with net income of 160 million. Actually, this trade involved in share transfer, nominal share-holding contract, sale and other processes, which was rather complicated regarding tax treatment. Through investigation and analyses, Wuhan tax authority confirmed the hotel as the taxpayer, and collected enterprise income tax on basis of trade price. No income tax shall be collected when the rest of income was diverted from the hotel (the nominal shareholder) to the investment corporation (the actual shareholder).
Nominal share-holding here refers to a situation that the actual shareholder reaches an agreement with the nominal shareholder, in which case the nominal shareholder could enjoy investment rights and obligations belonging to the actual shareholder, in its own name. It often happens in real life. However, the actual shareholder often gets troubled by tax issues when he plans to terminate the agreement. Normally, the actual shareholder cannot get approval from tax authority without enough evidence, and is often required to pay income tax on the base of fair value. It’s unfair for the actual shareholder because no share transfer happens and no transfer income is acquired actually. Therefore, Hwuason Law Firm will offer brief legal analysis for taxpayers on this issue.
i. The normal tax treatment of nominal share -holding by tax authority
Tax issues involved in the situation that an enterprise acts as the nominal shareholder for individual actual shareholder are made clear by Notice 2011 No. 39th by The State Administration of Taxation. Specifically, an enterprise nominally holds shares actually belonging to individual shareholder due to split-share reform, and income taxation will be levied on the enterprise when shares are transferred. When the income is diverted to individual actual shareholder, no tax needs to be paid. The former case in Wuhan just referred to the regulations.
What should be noticed is that the fore-mentioned notice shall be applied merely in certain situations. Double taxation risks still exist in other forms of nominal share-holdings.
Nominal share-holding between individuals is very common in reality. According to Notice 2010 No. 27th by The State Administration of Taxation, when shares are transferred to spouse, parents, children, brothers and sisters, grandparents, maternal grandparents, grandchildren, maternal grandchildren and other immediate relatives whom a person raises, support or is raised or supported by, the transferor is entitled to be exempt from verification collection even if the transfer price is unreasonably low. Hence, the actual shareholder shall choose nominal shareholder confining to the aforementioned range to minimize involved tax burden.
ii. The tax treatment under substantive principles of taxation
Substantive principles of taxation refers that tax should be imposed on the basis of the substance of business activities rather than the appearance. According to the Third Provisions of the Supreme People’s Court on issues concerning the application of Corporate Law, when the actual shareholder has disputes on investment rights and interests with the nominal shareholder, the people’s court shall uphold the claim of the actual shareholder. If the nominal shareholder claims rights for the appearance by shareholders register, the people’s court shall not support the claim. In conclusion, the actual shareholder enjoys investment rights and interests. Under substantive principles of taxation, the alternation registration from the nominal shareholder to the actual shareholder is not share transfer essentially. No income tax should be imposed without transfer income.
However, it’s hard for the taxpayers to prove the legal relations of nominal share-holding to the taxation authority due to lack of evidence in practice, thus they have to pay tax based on fair value. In view of this, we suggest that the actual shareholder shall emphasize on collection of relevant evidences (such as the financial contribution certificates, involved resolutions of the meeting of shareholders, certificate of profit distribution and so on) and communication with tax authority. Besides, it would be helpful to get the verdict confirming the shareholder’s right in order to safeguard the legitimate tax-related rights.
iii. Risk tips
Based on substantive principles of taxation, the alternation registration from the nominal shareholder to the actual shareholder is formal change, which should not be levied taxes. Things go contrary in practice due to lack of evidence to demonstrate the legal relations of nominal share-holding. Risks of double taxation do exist in such circumstance.
Furthermore, seen from corporate law and property law, the third party acting in good faith can get the shareholder’s rights according to bona fide acquisition system if the nominal shareholder sells the shares to them. The status as the actual shareholder cannot be used against the third party acting in good faith. On this case there still exist risks of losing shareholder’s rights.
To sum up, we suggest that taxpayer should see the risks of nominal share-holding clearly. If it is necessary, the framework should be simplified to the maximum and the actual shareholder should be chose prudently to avoid the underlying risks. Besides, proper attention should be paid on the involved evidence to get favorable tax treatment.

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.