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

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1 Issue No February 2016 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 Key Tasks of Taxation Work in 2016 (Shuizongfa [2016] No. 15) On 20 January 2016, the State Administration of Taxation (SAT) released Shuizongfa [2016] No. 15 ( Circular 15 ) setting out tax works that will be the priorities of tax authorities in 2016, including: Promoting rules of laws in tax administration Promote tax legislation, including amendments to the Tax Collection and Administration Law and its implementation, drafting and deliberation of its implementation regulations, legislation of the environmental protection tax Strengthen the reform of simplifying administration and delegating powers to lower levels and improving tax services, e.g., clean up tax administrative approval items implemented by local tax authorities (whose approval authorities are authorized by the central government) Establish and improve the mechanism for promoting tax payments acted in good faith, e.g., improve the tax credit management measures, implementation measures for tax credit ratings and related information system by the end of March Strengthen the system of tax law execution, e.g., promote the tax law execution authority list and responsibility list which will be announced to the public

2 Promoting the reform of the tax system Continue to promote Value-added Tax (VAT) pilot arrangements by including the life-related service, finance, construction and real estate industries in the VAT pilot scope Promote the Consumption Tax (CT) reform by improving the CT system and adjusting CT-related policies Promote the Resource Tax (RT) reform, e.g., turn RT into an ad valorem tax and launch the pilot run of changing the water resource fee to RT on water Promote the reform of other taxes including the environmental protection tax and an Individual Income Tax (IIT) system featured as combining an integrated IIT basis and classified IIT basis ( 综合与分类相结合的个人所得税制 ) Improving and implementing tax policies Increase tax support for venture capital investments and innovation Implement tax policies for disposing dormant companies and supporting merger and restructuring Improve preferential tax policies for supporting the development of emerging industries such as energy conservation, environmental protection, information technology, biological technology, advanced equipment and new energy Implement preferential tax policies for small displacement vehicles and new energy vehicles Study the expansion of scope for export services eligible for zero VAT rate, improve tax policies for supporting the importation of advanced equipment and related key components, and reduce import-level tax rates for certain consumables Transforming the mode of tax collection and administration Implement the Plan on Deepening the Reform of State and Local Tax Collection and Administration Systems (hereinafter referred to as the Plan ) (please refer to CTIE for details of the Plan) Implement the mode of classification and grading management ( 分类分级管理 ), e.g., formulate the measures for classification and grading management of taxpayers by the end of June, carry out industrial risk analysis and risk analysis on large enterprises and high-income and high-net-worth individuals led by the SAT and tax bureaus at the provincial level within 2016 Strengthen the tax audit reform, e.g., formulate the plan for tax audit reform, establish and improve the system for random inspection and management of tax case sources by the end of March, formulate tax audit system targeting high-risk taxpayers by the end of June, and implement the targeted tax audit system in the second half of 2016 Participating in the international tax collaboration projects Participate in the formulation of international tax rules, e.g., implement the G20 tax reform deliverables, and participate in the amendments to the OECD Model Tax Convention, OECD Transfer Pricing Guidelines, United Nations Model Double Tax Convention and United Nations Practical Manual on Transfer Pricing for Developing Countries Promote international tax cooperation and coordination, e.g., implement the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and strengthen international tax information exchange Crack down international tax evasion and avoidance, e.g., participate in the follow-on work related to action plans on Base Erosion and Profit Shifting (BEPS) and establish a coordination system for international anti-avoidance You can click this link to access the full content of Circular 15: You can click this link to access the full content of the Plan: 2

3 Notice regarding adjustment of Deed Tax (DT) and Business Tax (BT) policies on residential properties transferred by individuals (Caishui [2016] No. 23) Pursuant to the decision of the State Council, on 17 February 2016, the Ministry of Finance (MOF), SAT and Ministry of Housing and Urban-Rural Development jointly released [2016] No. 23 ( Circular 23 ) adjusting preferential DT and BT policies on real estate transactions. The new policies aim to increase individuals ability to purchase residential properties by reducing their tax burden and promote the development and stability of real estate markets. Circular 23 became effective from 22 February DT policies Preferential DT rates Type of transactions Purchase of sole family-owned residential property by individuals Purchase of the second family-owned improved residential property by individuals Area of residential property purchased Applicable DT rate 90m 2 Reduced to 1% > 90m 2 Reduced to 1.5% 90m 2 Reduced to 1% > 90m 2 Reduced to 2% The second family-owned improved residential property refers to the second family-owned residential property purchased by a family which has owned one family-owned residential property. Application for the above preferential DT treatments Supervising real estate authorities where the purchased residential properties located should, subject to the application or authorization of taxpayers who apply for the above preferential DT treatments, issue written query results regarding the status of family-owned real properties of the taxpayers, and transmit the query results and relevant residential property information to tax authorities on a timely basis. Where the above query or query results are not available, taxpayers should provide tax authorities with written creditable commitments as to the real number of family-owned residential properties. Fake commitments would lead to false tax filings which shall be handled according to the Tax Collection and Administration Law; such bad faith records will be included in the credit system for individuals. BT policies BT treatments on sales of residential properties by individuals Holding period of the residential property sold BT treatments < two years Gross income derived from the sales shall be subject to BT. two years Sales of residential properties shall be exempt from BT. Circular reference for related administrative procedures Detailed application procedures for BT exemption, determination of purchase time, issuance of invoices, acquisition (not through purchase) of residential properties, as well as other related tax administrative matters shall be handled according to the following circulars (please click the circular no. below to access the full content of the respective circular): Guobanfa [2005] No. 26, i.e., Notice to stabilize prices of residential properties Guoshuifa [2005] No. 89,, i.e., Notice regarding reinforcement of tax administration on the real estate industry Guoshuifa [2005] No. 172, i.e., Notice regarding several specific issues related to tax policies on the real estate industry 3

4 Applicable scope of Circular 23 The abovementioned preferential DT policies (i.e., DT policies for purchase of the second family-owned improved residential property by individuals) and BT policies shall not be applied in Beijing, Shanghai, Guangzhou and Shenzhen on a provisional basis. BT policies on individuals transfers of residential properties in these cities shall be implemented in accordance with Caishui [2015] No. 39 ( Circular 39, i.e., Notice regarding the adjustments of BT policies on residential properties transferred by individuals) (please refer to CTIE for details of Circular 39.) BT policies stipulated in Circular 39 include: Type of transactions Holding period of the residential property sold Tax basis for BT Sales of residential properties by individuals < two years Gross amount Sales of non-ordinary residential properties by individuals Sales of ordinary residential properties by individuals two years two years Net gain (i.e., sales revenue less original acquisition cost) Exemption All DT and BT policies stipulated in Circular 23 shall apply to all locations in China except for the abovementioned four cities. You can click this link to access the full content of Circular 23: You can click this link to access the full content of 39: Notice regarding certain issues related to improving the administration of taxpayers credit rating (SAT Announcement [2016] No. 9) Further to SAT Announcement [2014] No. 40 ( Announcement 40, i.e., the Administrative Measures for Taxpayers Credit Rating (Trial) ) and SAT Announcement [2014] No. 48 ( Announcement 48, i.e., the Indexes and Methods for the Evaluation of Tax Credit (Trial) ), the SAT released SAT Announcement [2016] No. 9 ( Announcement 9 ) on 16 February 2016 to further improve and adjust certain contents regarding the administration of taxpayers credit rating to promote tax compliance of taxpayers. (Please refer to CTIE and CTIE for details of Announcements 40 and 48.) Key features of Announcement 9 are as follows: Methods and procedures for the dynamic adjustment mechanism 1 on evaluation of credit rating Where a supervising tax authority finds that a taxpayer had committed significant tax violations in the previous year(s) that they should be evaluated as credit rating D, the supervising tax authority should adjust the credit rating for this taxpayer for the affected year(s) and record the same in the dynamic adjustment form, i.e., Attachment I of Announcement 9. The D rating adjusted in the previous year(s) shall not be kept in the year following. Where the supervising tax authority finds that a taxpayer had committed tax violations in the previous year(s) that would result in reduction of its credit ratings (i.e., reduce to rating higher than D), the supervising tax authorities shall not adjust the credit rating results and records for the respective years for the time being. The supervising tax authorities shall carry out the work of dynamic adjustment for taxpayers credit rating on a monthly basis. The supervising state/local tax authorities should communicate in time to convey the relevant information and allow taxpayers to check their current credit ratings for themselves. Once the dynamic adjustment is done, the supervising tax authorities should report the same to the upper tax authorities at the provincial level within 5 working days of the following month and make public notices regarding the changes of taxpayers with credit rating A. The tax authorities at the provincial level shall update the credit rating public announcements made in their official websites before summarizing and reporting the same to the SAT. 4

5 Where a supervising tax authority finds that adjustments should be made to a taxpayer s credit rating under the dynamic adjustment prior to the announcement of annual credit rating, the relevant adjustments should be made before releasing the credit rating result. Notices to taxpayers for their changes of tax credit rating Where a taxpayer s credit rating is reduced to a lower rating, the supervising tax authority shall inform the taxpayer via s, text messages, or wechat, etc. Adjustments for the Indexes and Methods for the Evaluation of Tax Credit Certain contents regarding the descriptions and standards for the Indexes and Methods for the Evaluation of Tax Credit are revised and announced as Attachment II of Announcement 9. In case of any inconsistency between Attachment II and any previous provisions, the stipulations in Attachment II shall prevail. Announcement 9 will become effective on 1 March According to Announcement 40, under the dynamic adjustment mechanism, tax authorities may adjust taxpayers credit rating for the previous years or that of the current year after verification based on changes of information related to the credit rating. You can click this link to access full content of Announcement 9: You can click this link to access full content of Announcement 40: You can click this link to access full content of Announcement 48: Notice regarding certain issues related to cancellation of the requirement of VAT invoice certification for taxpayers with credit rating A (SAT Announcement [2016] No. 7) To further improve the quality of tax services and facilitate taxpayers with good faith, the SAT released SAT Announcement [2016] No. 7 ( Announcement 7 ) on 4 February 2016 to cancel the requirement of VAT invoice certification for taxpayers with credit rating A (hereinafter referred to as the taxpayers ). Announcement 7 specifies the following issues: Taxpayers that obtain VAT invoices (including VAT special invoices, VAT special cargo invoices and unified invoices of sales of motor vehicle) issued by sellers via the VAT control system are no longer required to scan the VAT invoices for certification. Taxpayers may log in to the provincial VAT query system to check or select the relevant information of the VAT invoices for input VAT credits or export tax refunds. Where the information of the VAT invoices obtained by taxpayers cannot be located via the provincial VAT query system, the taxpayers may still scan such VAT invoices for certification. Input VAT credits reported by the taxpayers are still to be filled in the second row of the Appendix II of VAT return ( 增值税纳税申报表附列资料 ( 二 ) ) as the amount of certified input VAT credits to be reported in the current period ( 其中 : 本期认证相符且本期申报抵扣 ). Announcement 7 will become effective on 1 March You can click this link to access full content of Announcement 7: 5

6 Notice regarding VAT issues on sale of veterinary biological products by veterinary pharmaceutical trading enterprises (SAT Announcement [2016] No. 8) On 4 February 2016, the SAT released SAT Announcement [2016] No. 8 ( Announcement 8 ) to specify that, veterinary pharmaceutical trading enterprises with the general VAT taxpayer status may choose to apply the simplified calculation method and file their VAT at a VAT collection rate of 3% based on their sales of veterinary biological products. Once the simplified calculation method is chosen, the taxpayers cannot change their VAT taxation method within 36 months. Announcement 8 will become effective on 1 April You can click this link to access the full content of Announcement 8: You can click this link to access the full content of the interpretation of Announcement 8 from the SAT: Notice regarding the pilot run of tax classification and coding for commodities and services (Shuizonghan [2016] No. 56) On 15 February 2016, the SAT released Shuizonghan [2016] No. 56 ( Circular 56 ) to launch a pilot run of tax classification and coding for commodities and services in Shanghai, Jiangsu and Guangdong (hereinafter referred to as the pilot areas ). The pilot run was launched from 19 February According to Circular 56, from 19 February 2016, newly registered VAT taxpayers in the pilot areas shall use updated VAT control system with coding function to issue updated version of VAT invoices (including VAT special invoices, VAT normal invoices, VAT special cargo invoices and unified invoices of sales of motor vehicle). Also, updates of the VAT control systems for existing VAT taxpayers in the pilot areas shall be provided in batches. The classification and coding for commodities and services are announced as an attachment of Circular 56. You can click this link to access the full content of Circular 56: Business circulars Notice regarding opinions on strengthening the services and administration related to permanent residence of foreign nationals in China To serve China s economic and social development, on 18 February 2016, the General Offices of the State Council and the Central Committee of the Communist Party of China jointly set out opinions on strengthening the services and administration related to permanent residence of foreign nationals in China (hereinafter referred to as Opinions ), which include: Setting flexible and practical application criteria for permanent residence in China Support government initiatives to attract high-level overseas talents to make their homes in China Promote the establishment of market-oriented application criteria for permanent residence of overseas talents in China Improve the mechanism for converting work residence into permanent residence Adjust the application criteria for permanent residence of foreign nationals investing in China Facilitate foreign nationals (with outstanding contributions) in applying for permanent residence in China Respond to the reasonable demand for permanent residence of foreign nationals family reunion in China 6

7 Regulating and optimizing acceptance and approval procedures for permanent residence in China Establish a unified mechanism for information publicity Optimize relevant acceptance and approval processes Improve relevant verification measures Specifying and implementing the qualifications and treatments of permanent residence in China Specify the functions of the Permanent Residence Certificate for Foreigners (PRCF), which serves as the identification certificate of foreign nationals residing in China and can be used separately. Foreign nationals can use their PRCFs to handle various matters in China such as finance, education, medical treatment, transportation, communication, employment, social insurance, property registration and lawsuit. There is no limit to the duration of residence in China for PRCF holders who can enter into and exit from China by presenting their passports and PFCFs. Improve work and life related treatments of foreign nationals with People s Republic of China (PRC) permanent residency. These foreign nationals are exempt from work permit applications when working in China and can take examinations for technical position qualifications and vocational qualifications in China. They can enjoy the same rights as those of Chinese citizens in various aspects, e.g., purchase of real properties, application for driving licenses, children admission to schools and accommodation registration. Implement qualification treatments. Relevant authorities are required to specify the scope of matters (within the scope of their duties) involving national treatments enjoyed by foreign nationals with a PRC permanent residency. The scope shall be made public. It is expected that relevant government authorities will release ministerial and departmental circulars to implement the measures proposed in the Opinions. We will bring you the news on any further developments. You can click this link to access the full content of the Opinions: Guiding opinions on accelerating the development of growth enterprise space to promote the transformation and upgrade of real economy (Guobanfa [2016] No. 7) To promote the transformation of scientific and technological achievements into practical productive forces, the State Council released Guobanfa [2016] No. 7 ( Circular 7 ) on 14 February 2016 to express certain guiding opinions for the development of growth enterprise space ( 众创空间 ). Circular 7 emphasizes the needs to develop growth enterprise space in the fields of electronic and information, biotechnology, modern agriculture, new energy resources, new materials, energy conservation and environmental protection, medical and health care, cultural creativity as well as the modern service industry, etc. Circular 7 also lays out supporting policies from various aspects, including awards and subsidies, tax policies, financial supports, as well as policies to encourage and support scientific and technical personnel to start their businesses via growth enterprise spaces, etc. From a tax perspective, Circular 7 specifically mentions the needs for the proper implementation of the following tax policies: Qualifying instruments and equipment used for research & development (R&D) purposes by the spaces should be eligible for the accelerated depreciation policies. Qualifying instruments and equipment imported by the spaces should be eligible for preferential policies for import-level taxes. Qualifying R&D expenses incurred by the spaces, or those incurred by the spaces for R&D activities commissioned by other enterprises or institutes of advanced education, as well as R&D expenses incurred by small and micro-sized enterprises for their R&D activities or R&D activities commissioned by other parties are eligible for the CIT preferential policy of R&D expenses super deduction. Tax policies for technological enterprise incubators shall be further improved to cover qualifying growth enterprise spaces. 7

8 It is anticipated that the relevant government authorities shall soon release implementation rules to respond to Circular 7. Please stay tuned and we will bring you the most updated news in this regard. You can click this link to access the full content of Circular 7: Customs circular Notice regarding the Customs Tariff of Import and Export Commodities of the PRC Explanatory Notes to National Subheadings (Newly Added and Adjusted in 2016) (GAC Announcement [2016] No. 10) In order to facilitate the accurate customs declaration of consignees, consignors and their agents and implementation of Customs Tariff, on 4 February 2016, the General Administration of Customs (GAC) released the Customs Tariff of Import and Export Commodities of the PRC Explanatory Notes to National Subheadings (Newly Added and Adjusted in 2016) (hereinafter referred to as the 2016 Explanatory Notes ) through GAC Announcement [2016] No. 10 ( Announcement 10 ). The 2016 Explanatory Notes add and adjust the notes to National subheadings according to updates of relevant standards and technological developments. The 2016 Explanatory Notes will become effective on 1 March You can click this link to access full content of Announcement 10: Another customs related circular recently announced by the central government authority: Notice regarding the Tonnage Tax preferential rate applicable to Liberia ships (GAC Announcement [2016] No. 9) 8

9 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 Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com Tracy Ho (Hong Kong) tracy.ho@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax & Transfer Pricing) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Henry Chan (Financial Services) henry.chan@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government& Public Sector) raymond.zhu@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 9

10 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