China Tax Center. China Tax & Investment Express. Tax circulars

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1 Issue No May 2015 China Tax Center China Tax & Investment Express (CTIE) * brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a weblink that leads you to the full content of the announcement (in Chinese). Please feel free to contact your Ernst & Young client service professionals for further assistance if you find the announcements have an impact on your business operations. This CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in-depth analyses of tax and business developments in China. * If you wish to access these previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars Notice regarding the amendments to the Administrative Measures for the Collection of Corporate Income Tax (CIT) on a Deemed Basis for Non-Resident Companies, the Administrative Measures of CIT for Chinese-controlled Foreign Companies Recognized as Resident Companies in accordance with Effective Management Criteria and the Application of Special Tax Treatments for Non-residents Equity Transfer (SAT Announcement [2015] No. 22) On 24 February 2015, the State Council cancelled the approval requirements for the following items through Guofa [2015] No. 11 ( Circular 11, i.e., Notice regarding the cancellation of administrative approval and adjustment of approval authority for certain administrative approval items) (please refer to CTIE for details of Circular 11): No. Items cancelled Circular reference 1 Approval requirements for industries and profit rates applicable to non-resident companies by tax authorities in charge Guoshuifa [2010] No. 19 ( Circular 19 ), i.e., Administrative Measures for the CIT Collection on a Deemed Basis for Non-Resident Companies (please refer to China Tax & Investment News Issue No for details of Circular 19) 2 Approval requirements for the choosing of in-charge tax authorities by Chinese-controlled foreign companies (CFCs) established overseas recognized as resident companies (hereinafter referred to as Overseas-registered Tax Residents ) 3 Approval requirements for the change of tax authorities in charge of Overseas-registered Tax Residents SAT Announcement [2011] No. 45 ( Announcement 45 ), i.e., Administrative Measures of CIT for Overseas-registered Tax Residents in accordance with Effective Management Criteria (Trial) (please refer to CTIE for details of Announcement 45)

2 On 28 January 2014, the State Council released Guofa [2014] No. 5 ( Circular 5, i.e., Notice regarding the cancellation of administrative approval procedures and the delegation of approval authority for certain administrative approval items), which cancelled the approval requirements for applying special tax treatments to equity transactions by non-residents. The approval procedure for this item has indeed been replaced by a record filing system according to SAT Announcement [2013] No. 72 ( Announcement 72, i.e., Notice regarding several issues related to the application of special tax treatments for non-residents equity transfers) (please refer to CTIE and CTIE for details of Circular 5 and Announcement 72). In response to the requirements of the above circulars and in order to strengthen the follow-up administration, the State Administration of Taxation (SAT) released SAT Announcement [2015] No. 22 ( Announcement 22 ) on 17 April 2015 making amendments to certain articles of Circular 19 and Announcements 45 and 72. Announcement 22 will become effective on 1 June Circular/article being amended Article 9 of Circular 19 Article 5 of Announcement 45 Amendment made by Announcement 22 Tax authorities in charge should send non-resident companies a form for assessment of CIT calculation methods () (hereinafter referred to as assessment form ) on a timely basis. The nonresident companies should complete the assessment form and submit it to their tax authorities in charge within 10 working days upon receipt of the form. The tax authorities in charge should complete the assessment of CIT calculation method within 20 working days upon acceptance of the form. The in-charge tax authority as defined in Announcement 45 refers to the incharge tax authority of the jurisdiction where the major investor of the Overseas-registered Tax Resident is registered. Analysis of the amendment CIT collection on a deemed basis for non-resident companies is based on Article 35 of the Tax Collection and Administration Law which stipulates that tax authorities are empowered to assess tax payable of taxpayers when their CIT payable cannot be computed based on an actual basis. Application submitted by taxpayers would not serve as a prerequisite for the CIT collection on a deemed basis. To avoid ambiguity and to implement Circular 11, Announcement 22 revised Article 9 of Circular 19 and changed the procedures and requirements for CIT collection on a deemed basis, clarified the handling timeline, removed the approval requirements for applicable industries and profit rates as well as modified the assessment form. As the criteria for determining the effective management of a CFC and its location may not be clear enough in prevailing tax laws and regulations, there are always disputes over the judgment of its tax authority in charge. This will increase uncertainty and administrative costs for both tax authorities and taxpayers if the tax authorities in charge of the Overseas-registered Tax Residents were not given enough clarification in advance. Therefore, the SAT released SAT Announcement [2014] No. 9 ( Announcement 9, i.e., Notice regarding issues related to the implementation of resident companies recognition according to the effective management criteria) which stipulates that a CFC established overseas qualifying for a resident company status should apply for recognition as Overseas-registered Tax Resident with the incharge tax authority of the jurisdiction where its major investor is registered. Based on this stipulation, Announcement 22 further clarified that the tax authority in charge of the Overseasregistered Tax Resident shall be the in-charge tax authority of the jurisdiction where its major investor is registered and removed the approval requirements for the choosing and changing of the tax authority in charge of Overseasregistered Tax Residents. (Please refer to CTIE for details of Announcement 9.) 2

3 Circular/article Amendment made by Announcement Analysis of the amendment being amended 22 On 28 January 2014, the State Council released Guofa [2014] No. 5 ( Circular 5, i.e., Notice regarding the Article 7 of Announcement 72 General tax treatments shall be applicable to non-residents equity transfers if the results of an investigation and verification after the record filing for special tax treatments reveal that the transfer is not qualified for special tax treatments. In such a case, CIT would become payable. If the record filing for special tax treatments for non-residents equity transfers is not filed, the tax authorities should inform the applicants to go through the record filing formalities according to Articles 2 and 3 of Announcement 72. Relevant taxpayers and their investors should be aware of the changes brought about by Announcement 22 and comply with new requirements when making relevant applications. If in doubt, assistance from tax professionals would be helpful. You can click this link to access the full content of Announcement 22 You can click this link to access the full content of the Interpretation of Announcement 22 from the SAT: You can click this link to access the full content of Circular 11: You can click this link to access the full content of Circular 5: You can click this link to access the full content of Circular 19: You can click this link to access the full content of Announcement 45 You can click this link to access the full content of Announcement 72 Under Announcement 72, the approval for special tax treatments to equity transactions by non-resident has been replaced by a record filing arrangement. Announcement 72 requires that, for special tax treatments for non-residents equity transfers failed to be filed for record, general tax treatments shall apply and CIT would become payable. However, in practice, this provision would lead to the imposition of approval requirements. Thus, Announcement 22 removed this improper provision and required tax authorities to inform the applicants to go through the record filing formalities according to relevant rules instead of to directly apply general tax treatments to non-residents equity transfers in the cases where the record filing is not completed. You can click this link to access the full content of Announcement 9 Notice regarding certain matters related to the adjustments of Value-Added Tax (VAT) filing (SAT Announcement [2015] No. 23) In order to manage the VAT preferential treatments enjoyed by taxpayers accurately, on 20 April 2015, the SAT released SAT Announcement [2015] No. 23 ( Announcement 23 ) to specify the following adjustments related to the VAT filing: General VAT taxpayers and small-scale VAT taxpayers enjoying VAT preferential treatments are required to file detailed statements of VAT exemption and reduction (hereinafter referred to as the statements, i.e., Attachment I of Announcement 23) when filing their VAT returns. However, small-scale VAT taxpayers that only enjoy the VAT exemption for their monthly sales not exceeding RMB30,000 (quarterly sales not exceeding RMB90,000) or their sales not exceeding the upper limit of the VAT threshold are not required to file the statements when filing their VAT returns. 3

4 Announcement 23 shall become effective on 1 July You can click this link to access the full content of Announcement 23: You can click this link to access the full content of the Interpretation of Announcement 23 from the SAT: Notice regarding the CIT deduction of loan losses incurred by financial institutions on loans provided to the agricultural industry and small-and-medium-sized enterprises (SAT Announcement [2015] No. 25) According to CIT Law, its implementation rules, Caishui [2009] No. 57 ( Circular 57, i.e., Notice regarding the deduction of asset losses for CIT purposes) and SAT Announcement [2011] No. 25 ( 2011 Announcement 25, i.e., Administrative Measures regarding the Deduction of Asset Losses for CIT Purposes), the SAT released SAT Announcement [2015] No. 25 ( Announcement 25 ) on 27 April 2015 to specify issues related to the CIT deduction of loan losses incurred by financial institutions on loans provided to the agricultural industry and small-and-medium-sized enterprises (please refer to CTIE and China Tax & Investment News Issue No for details of Circular 57 and 2011 Announcement 25). Announcement 25 clarifies the documentation requirements for CIT deduction of unrecoverable loan losses incurred by financial institutions on loans provided to the agricultural industry and small-and-medium-sized enterprises (hereinafter referred to as loan losses ) which are due for one year or above based on their balances of the loans provided to the respective debtors. Balance of loan Balance of loan provided to a single debtor RMB3 million Documents required for the CIT deduction The financial institutions may provide one of the following original records related to the debt recovery actions against the debtor and guarantor signed by both the handler and responsible person to substantiate the CIT deductions: Records for legal debt recovery actions Records for telephone debt recovery actions Records for mailing debt recovery actions RMB3 million < Balance of loan provided to a single debtor RMB10 million Balance of loan provided to a single debtor > RMB10 million Records for on-site visit debt recovery actions The financial institutions should provide original records related to legal debt recovery actions against the debtor and guarantor signed by both the handler and responsible person to substantiate the CIT deductions. Deductible losses shall be calculated and claimed according to 2011 Announcement 25. Financial institutions should establish a competent internal control scheme to manage the verification and write-off of loan losses and properly maintain relevant documents that substantiate the losses. Classifications of loans provided to the agricultural industry and small-and-medium-sized enterprises shall refer to Caishui [2015] No. 3 ( Circular 3, i.e., Notice regarding CIT policies related to the deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small-and-mediumsized enterprises) (please refer to CTIE for details of Circular 3). Announcement 25 applies to CIT deductions of loan losses incurred in the year 2014 and onwards. 4

5 Our observations In order to encourage financial institutions to provide loans to the agricultural industry and small-and-mediumsized enterprises, Announcement 25 was issued to simplify the complex supporting documentation requirements for the CIT deduction of loan losses as prescribed in 2011 Announcement 25. In this respect, Announcement 25 simplifies the supporting documentation requirements for loan losses not exceeding RMB10 million to a single debtor. However, for loan losses to a single debtor exceeding RMB10 million, the CIT deduction for such loan losses should still subject to the more complex documentation requirement as prescribed in 2011 Announcement 25. Relevant financial institutions should read Announcement 25 carefully and ensure they maintain proper documents for the deductions of loan losses, if any, for CIT purposes. You can click this link to access the full content of Announcement 25: You can click this link to access the full content of the Interpretation of Announcement 25 from the SAT: You can click this link to access the full content of Circular 57: You can click this link to access the full content of 2011 Announcement 25: You can click this link to access the full content of Circular 3: Business circular Decision on the amendments to seven laws including the Law of People s Republic of China (PRC) on Ports and Law of the PRC on Tax Collection and Administration (Chairman Order [2015] No. 23) On 24 April 2015, the Standing Committee of the National People s Congress passed and announced the decision on the amendments to seven laws including the Law of the PRC on Tax Collection and Administration (hereinafter referred to as the Decision ). According to the Decision, Article 33 of the Law of the PRC on Tax Collection and Administration is revised as follows: Taxpayers may apply for tax reductions and exemptions according to the prevailing laws and administrative regulations. Any decisions on tax reductions and exemptions against the provisions of laws and administrative regulations, which are made by local governments at all levels, in-charge government authorities, entities or individuals, are invalid. Tax authorities shall not implement those decisions and should report them to the upper tax authorities. The Decision also revises a few clauses of the Law of the PRC on Ports, Law of the PRC on the Prevention and Control of Environmental Pollution by Solid Waste, Law of the PRC on the Control of Firearms, Law of the PRC on Flood Control, Law of the PRC on Security Investment Funds, and the Law of the PRC on Urban and Rural Development. The seven laws shall be revised and re-announced accordingly. The Decision took effect on its announcement date, i.e., 24 April You can click this link to access the full content of the Decision: 5

6 Customs circulars Notice regarding certain matters related to determining dutiable values of imported goods by using formulae (GAC Announcement [2015] No. 15) Pursuant to the PRC Regulations on Import and Export Duties released through State Council Order [2003] No. 392 ( Order 392 ) and PRC Customs Valuation Measures for Determining the Dutiable Value of Imported and Exported Goods released through GAC Order [2013] No. 213 ( Order 213 ), the General Administration of Customs (GAC) released GAC Announcement [2015] No. 15 ( Announcement 15 ) on 28 April 2015 to specify certain matters related to determining dutiable values for imported goods by using formulae (please refer to CTIE for details of Orders 213). Scope of Announcement 15 Announcement 15 applies to import sales contracts in which the settlement prices are to be calculated according to agreed formulae specifying in the contracts instead of agreed contract prices. However, Announcement 15 does not apply to import sales contracts with imported goods prices undetermined due to changes of imported volumes or component contents. For imported goods that meet the following criteria, the Customs in charge shall determine the dutiable values based on the formulae agreed between the buyers and sellers: The formulae were specified in writing before the goods arrived in the PRC. The determination of settlement prices is subject to objective conditions and factors that would not be influenced by the buyers and sellers. The settlement prices are able to be determined according to the formulae within 6 months upon the customs declaration. The settlement prices meet the criteria stipulated in Order 213. Record filings and customs declarations For imported goods with settlement prices to be determined according to formulae, taxpayers should complete record filings with the Customs in charge before the first installment of goods importation. The Customs in charge shall complete the record filings within 5 working days upon receiving the relevant application documents. Upon completion of the record filings, taxpayers shall fill in the record filing numbers in the customs declaration forms (according to Attachment II of Announcement 15) and submit documents relevant to the determination of dutiable values of imported goods to the Customs in charge. Taxpayers should provide documents related to the settlement prices of imported goods to the Customs in charge within 10 working days once the settlement prices are determined. Where the settlement prices cannot be determined within 6 months upon the completion of customs declaration (or 9 months subject to approval by the Customs in charge), the dutiable values shall be determined according to Order 213. Tax settlement After the contracts are fully executed, the Customs in charge shall verify the entire amounts of goods that are physically imported and the amounts of imported goods as per the filed contracts. In the case where unreasonable differences incurred between the amounts of goods that are physically imported and the amounts of imported goods as per the contracts filed, the Customs in charge shall reexamine the relevant terms in the contracts according to Order 213 and may re-determine the dutiable values. Effectiveness of Announcement 15 Announcement 15 took effect on 1 May 2015 and revoked GAC Announcement [2006] No. 11 ( Announcement 11, i.e., Notice regarding the determination of dutiable values of imported goods with settlement prices to be determined with formulae) at the same time. 6

7 However, according to Announcement 15, for cases that the record filings were already completed according to Announcement 11 before the effective date of Announcement 15, taxpayers should reapply for record filings before the effective date of Announcement 15 for determining the dutiable values of imported goods based on Announcement 15. Relevant taxpayers should contact their Customs in charge and complete the record filing as soon as possible. You can click this link to access the full content of Announcement 15: You can click this link to access the full content of Order 392: You can click this link to access the full content of Order 213: You can click this link to access the full content of Announcement 11: Notice regarding cancelling printing the customs declaration forms for exported goods (GAC Announcement [2015] No. 14) As agreed with the SAT, the GAC released GAC Announcement [2015] No. 14 ( Announcement 14 ) on 22 April 2015 which aims to strengthen the reform of online customs clearance, reduce the circulation of paper documents and reduce enterprises burden. Pursuant to Announcement 14, the GAC decided not to issue the receipt of paper certification of customs declaration form (for export tax refund purpose) (), hereinafter referred to as export tax refund receipt ) for goods exported on or after 1 May The GAC ceased to send electronic data of the export tax refund receipt to the SAT, instead it sends electronic customs clearance data of the customs declaration form of the exported goods. For goods exported on or before 30 April 2015, Announcement 14 required relevant enterprises to apply for the printing of paper export tax refund receipts with the Customs in May 2015 (i.e., between 1 May 2015 and 31 May 2015) and announced that the original system for issuance of paper export tax refund receipt will cease to operate from 1 June 2015 onwards. For exported goods eligible for export tax refund on ports of shipment, Customs shall continue to print paper export tax refund receipts for the time being according to the prevailing rules. You can click this link to access the full content of Announcement 14: Other business and customs related circulars recently announced by central government authorities: Notice regarding cleaning-up and regulating the agency services related to administrative approvals requested by departments under the State Council (Guobanfa [2015] No. 31) Notice regarding cleaning-up and regulating the governmental charges related to enterprises (Caishui [2015] No. 45) Notice regarding the issuance/abolishment of certain decisions for commodity classification (GAC Announcement [2015] No. 13) 7

8 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Henry Chan (Beijing) henry.chan@cn.ey.com Alan Lan (Tianjin) alan.lan@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Vickie Tan (Shanghai/Wuhan) vickie.tan@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Rio Chan (Guangzhou/Xiamen) rio.chan@cn.ey.com Lawrence Cheung (Shenzhen) lawrence-f.cheung@cn.ey.com Clement Yuen (China South) clement.yuen@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Service Line Tax Leaders Andrew Choy (International Tax & Transfer Pricing) andrew.choy@cn.ey.com Paul Wen (Human Capital) paul.wen@hk.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Robert Smith (Indirect Tax) robert.smith@cn.ey.com Greater China Tax Leader Walter Tong walter.tong@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com 8

9 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young, China All Rights Reserved. APAC No ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/china