Posted by Jane Peng on April 27, 2010 under Transactional Taxes | 
United States Senator Charles Schumer has proposed that a 30% tax be placed on Chinese goods to fight the low prices on such goods that he argues derives from the Chinese governments practice of keeping its currency artificially low.
It is not controversial that China’s currency is presently undervalued. However, Mr Schumer’s response is somewhat misguided on two levels. Firstly, to impose a tariff on Chinese goods would be contrary to the principles of free trade that US government policy espouses. If the US genuinely wishes to encourage a culture of free trade, then such a move would hinder its development. Secondly, China’s under valued currency is just one reason why Chinese goods are ultra-competitive. Just as influential, if not more, is the low labor costs in China. Now the US is entitled to match the Chinese minimum wage but of course that is unlikely to happen. The reality is that in a modern global marketplace, the cheapest goods will be produced where wages are low.
Regardless, such a proposal is unlikely ever to be implemented. Why? Because the rest of the community would need to pay higher prices for goods and that would not be such a popular political move – China can breathe easy.
Posted by Li Wei on under Transactional Taxes |
For the past 6 months the Chinese government has been pondering the introduction of a property tax – an annual tax imposed on owners of property – to cool down the perceived the real estate “bubble”. Four trial cities have now been indicated – Beijing, Chongqing, Shanghai and Shenzhen. The tax will apply to residential properties. It is not clear yet whether the tax will be applied on all homes or merely properties that are not the owner’s principal residence. The policy reasons behind the tax would suggest that the tax should only be applied to investment properties.
Posted by Matthew on under Corporate Tax Planning |
Changes begin – first reported decision
As we mentioned in the March edition of Hwuason Insights, significant changes have been implemented in the manner in which representative offices (ROs) are taxed in China (see Circular 18). The first quarter (the reportable tax period for ROs) ended on 31 March 2010 and accordingly we are now beginning to see the interpretation of the new rules by the local tax authorities.
In early April the Shajing Local Taxation Office in Shenzhen province re-assessed 15 ROs and increased the payable tax by almost RMB700,000. As part of the new tax environment for ROs, the Shajing Local Tax Office examined these ROs and discovered that the ROs had only paid their income tax to the state tax bureau but had not met their taxation obligations with the local tax bureau. The chief representatives of the RO were required, as part of these investigations to have discussions with the local tax officials in relation to the nature of their business.
The tax officials also examined and compared the materials provided by the ROs. As part of this process, the ROs indicated that there were some ambiguous aspects to the new policies. As transitional concessional arrangement, the local tax officials provide some guidance of the new policy to the ROs. However, it cannot be expected that the officials will take such a conciliatory approach in the future. These turn of events reflect the general cynicism of tax officials towards ROs in China. It can be expected that a continued tough line will be adopted by tax authorities in China in relation to the tax practices of such structures.
Actual income confusion
There has been some confusion recently relating to the SAT’s treatment of ROs (in Circular 18) and the treatment of them by the State Administration for Industry and Commerce (SAIC in that the SAIC rules provide that ROs could not undertake direct business in China, yet the Circular 18 indicates ROs may be taxable on actual income. A question has arisen, from some, as to how an RO can have actual income if it is not able to undertake direct business. What this question misunderstands is that representative office are assessed and required to pay enterprise income tax on its attributable income. The term “attributable income” has a very specific meaning in international tax – it is commonly used in terms of taxing companies in respect of “permanent establishments” they have in a foreign country. Income could be attributable to a source (such as an RO) without that source actually directly earning the income. In other words, the parent company of an RO will often earn income that could be attributable to the RO without the RO engaging in direct business. This is actually the classic model of an RO. In such circumstances, Circular 18 is saying that China will tax the RO on that income and in order for the foreign investor to avoid either of the two deemed methods, accurate accounting records need to be maintained to reflect what income is attributable to the RO.
Regardless, it should be noted that the SAT has no legal authority to indicate what business activities are lawful for an RO to operate. At the same time, the SAT will treat legal and illegal income equally – it will tax them. A drug dealer cannot resist tax on the basis that his/her income derives from the proceeds of a criminal act. Such an argument that the “inconsistency” between Circular 18 and the SAIC Notice requires clarification is therefore misguided.
Posted by Shi Zhiqun on 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 Jane Peng on under Anti-Avoidance, Tax Controversy |
The new Rules for the Tax Administrative Review (Order of SAT [2010] No. 21) (hereinafter the “New Rules”), issued by the State Administration of Taxation (“SAT”), have superseded the Interim Rules for the Tax Administrative Review (Order of SAT No. 8). One of the aims of the New Rules is, arguably, to increase protection of the legal rights of taxpayers and other interested parties. It is also evidence that one purpose is to ensure supervision of the tax authorities so that they lawfully exercise their authority. The New Rules introduce several major modifications to the tax administrative review system, such as the scope of administrative review, rules on admissible evidence and the method of hearings.
However, probably the most significant change is the introduction of a compromise and conciliation system in accordance with Articles 40 and 50 of the New Rules. Whilst negotiation with the tax authorities in China, both prior to commending litigation and during litigation, is already a common practice there were long standing concerns about the legality of such practices and whether agreements that had been reached were, in fact, enforceable. The New Rules seek to provide a stronger legal basis for such practices.
Compromise Agreements
The New Rules outline the requirements for a binding compromise agreement. It is first noted that the content of a compromise agreement shall not damage the interests of the public and/or individuals. Once a compromise agreement has been approved by the relevant administrative review organ, an applicant is not permitted to apply for review on basis of the same fact and reason. However, apart from this, the New Rules do not specifically detail the legal effect of a compromise agreement. There are still concerns as to the extent to which a compromise agreement can be enforced. It is also not clear whether the applicants can revoke a compromise agreement and reapply for review should new evidence come to light. Finally, the New Rules do not outline that the action that can be taken when one party does not meet their obligations under the compromise agreement.
The new Rules represent a significant attempt by the SAT to bring legitimacy and transparency to the tax administrative review system in China. Whether they achieve such an aim is yet to be seen.
