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

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1 Issue No Dec 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 Supplementary announcement for the Administrative Measures on Tax Refund/Exemption for Taxable Services subject to Zero Value-Added Tax (VAT) Rate (SAT Announcement [2015] No. 88 ) To implement the decision of the State Council on supporting export services and pursuant to Caishui [2015] No. 118 ( Circular 118, i.e., Notice regarding the Zero VAT Rate applicable to certain export services), the State Administration of Taxation (SAT) released SAT Announcement [2015] No. 88 ( Announcement 88 ) on 14 December 2015 to supplement and improve SAT Announcement [2014] No. 11 ( Announcement 11, i.e., Administrative Measures on Tax Refund/Exemption for Taxable Services subject to Zero VAT Rate). The supplements made in Announcement 88 have been finalized via consultation with and agreed upon by the Ministry of Finance (MOF). (Please refer to CTIE and CTIE for details of Circular 118 and Announcement 11.) Key points of Announcement 88 include: Clarification of the scope of export services eligible for zero VAT rate Announcement 88 clarifies that the following export services eligible for zero VAT rate shall be determined with reference to the Explanatory Note on the Scope of VAT-taxable Services as attached in Caishui [2013] No. 106 ( Circular 106, i.e., Notice regarding the launch of VAT pilot arrangements applicable to the railway transportation and postal service industries). (Please refer to CTIE for details of Circular 106.) Production and distribution of radio, film and television (TV) programs. Technology transfer services, software services, circuit design and testing services, information system services, business process management services as well as contract energy management services for subjects located overseas.

2 Announcement 88 also clarifies that the scope of offshore service outsourcing businesses eligible for zero VAT rate shall be determined with reference to Appendix 1 of Announcement 88. The detailed scope of the services set out in Appendix I of Announcement 88 is actually the same as that in Appendix 3 of Circular 106. Announcement 88 sets out the scope of VAT-taxable services not eligible for zero VAT rate, i.e., VATtaxable services provided to units or individuals located in domestic special customs supervisory areas or premises by domestic units and individuals. Record filing ( 备案 ) and filing ( 申报 ) requirements for export VAT refund/exemption Pursuant to Announcement 88, taxpayers providing the above services (newly added in the scope of VATtaxable services eligible for zero VAT rate) should file a record for export VAT refund/exemption according to prevailing rules when filing tax refund/exemption. Taxpayers eligible for zero VAT rate may perform a VAT refund (exemption) filing with their supervising state tax authorities in the respective VAT filing periods starting from the month following the recognition of relevant sales income (for accounting purposes) to the month ended 30 April of the following year, upon collection of complete documents. VAT refund (exemption) (i.e., VAT Exempt, Credit and Refund and VAT Exempt, Refund ) shall not be available if taxpayers fail to perform filing within the above time limit; VAT exemption shall apply instead. If such VAT exemption is not filed according to prescribed provisions, VAT will become payable. Documentation requirements Announcement 88 sets out detailed documentation requirements for VAT refund (exemption) filings for provision of research & development (R&D) and design services as well as services newly added in the scope of VAT-taxable services eligible for zero VAT rate to overseas entities. Details include: Requirements for contracts The contracts should be the ones signed with overseas entities; the VAT-taxable services eligible for zero VAT rate covered in the contracts shall correspond to the VAT refund (exemption) application filed. Relevant contracts should be verified by the Ministry of Commerce (MOFCOM) through the information system for management of service outsourcing and software export or the management system for trade in culture. Requirements for relevant certificates Taxpayers providing overseas entities with film and TV drama production/distribution services are required to submit valid licenses for production/distribution of film and TV programs issued by supervising industry authorities. Taxpayers providing overseas entities with R&D, design and technology transfer services are required to submit registration certificates for technology export contracts corresponding to the above services eligible for zero VAT rate. Requirements for foreign exchange income vouchers The foreign exchange income vouchers should be documents substantiating the receipts of sales income from overseas entities which are backed by signed contracts for acceptance of taxable service eligible for zero VAT rate. The requirements for income vouchers to be submitted by member companies of multinational corporations (which implement centralized foreign exchange fund management approved by foreign exchange authorities or implement centralized payment and receipt of cross-border RMB under current accounts as approved by the People s Bank of China (PBOC)) are also specified in Announcement 88. 2

3 Verification requirements for VAT refund (exemption) filings Pursuant to Announcement 88, the applicability of zero VAT rate to the filed taxable services, the overseas status of contracting parties and payment units indicated on income vouchers shall be subject to key examination and verification by supervising state tax authorities. For export of services, tax authorities should also verify whether the invoices for input VAT credits and taxable services eligible for zero VAT rate are consistent. Announcement 88 also sets out detailed criteria for examination and verification to facilitate tax authorities implementation and taxpayers compliance. According to Announcement 88, supervising state tax authorities are required to handle VAT refund (exemption) filings on a timely basis if the filings comply with relevant provisions. For VAT refund (exemption) filings in doubt, tax authorities should suspend the VAT refund (exemption). Such filings shall be handled once the doubts are eliminated. Effective date Announcement 88 took effect on 1 December 2015 and superseded relevant provisions in Announcement 11. The applicability of Announcement 88 shall be determined according to the date of provision of relevant taxable services eligible for zero VAT rate as well as the date of recognition of relevant sales income for accounting purposes. Taxpayers providing taxable services eligible for zero VAT rate should study Announcement 88 carefully and comply with the requirements for export VAT refund (exemption) filings and record filings together with related documentation. They are also advised to get familiar with the contents (related to the filed taxable services eligible for zero VAT rate) subject to examination and verification of supervising state tax authorities to avoid tax risks. If in doubt, it is advisable to seek assistance from tax professionals. You can click this link to access the full content of Announcement 88: You can click this link to access the full content of the Interpretation of Announcement 88 from the SAT: You can click this link to access the full content of Circular 118: You can click this link to access the full content of Circular 106: You can click this link to access the full content of Announcement 11: China Advance Pricing Arrangement Annual Report (2014) On 18 December 2015, the SAT published the China Advance Pricing Arrangement ( APA ) Annual Report (2014) ( 2014 Report ). The publication of the 2014 Report is in line with the SAT s commitment to achieve systematic administration of APAs and increase the transparency of the APA process. Further, the 2014 Report illustrates certain new concepts and information which the Chinese tax officials are actively advocating in the APA negotiation process. The 2014 Report, covering statistical data and analysis for the period , follows the content and framework of the previous year s report ( 2013 Report ). The 2014 Report describes the current mechanism, procedures, implementation procedures and practical development of China s APAs. Standardized forms for APA application and communication purposes are presented as appendices to the 2014 Report. In comparison with the 2013 Report, the 2014 Report reiterates the principles adopted by the Chinese tax authorities in determining the acceptance of an APA request and expresses concern about the transaction information throughout the entire value chain or supply chain. In addition, for the first time, an APA Report clearly expresses that the Chinese tax authorities encourage using Profit Split Method in APA negotiation process. 3

4 We will release a new issue of Transfer Pricing Headlines to summarize key points and our observations with regard to the 2014 APA Report. Please stay tuned. You can click this link to access the full content of the 2014 Report (English version): You can click this link to access the full content of the 2014 Report (Chinese version): Notice regarding tax policies related to Mainland-Hong Kong mutual recognition of funds (MRF) (Caishui [2015] No. 125) Further to the Memorandum of Regulatory Cooperation on Mainland-Hong Kong Mutual Recognition of Funds (MRFs) entered into by the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission of Hong Kong (SFC), which allows eligible Mainland and Hong Kong funds to be launched in each other s markets through a streamlined vetting process from 1 July 2015 (hereinafter referred to as the MRF scheme ), the CSRC released the Provisional Rules on Hong Kong MRF (hereinafter referred to as the Provisional Rules ) through CSRC Announcement [2015] No. 12. This sets out criteria of eligible Hong Kong MRFs. Later on, the PBOC and the State Administration of Foreign Exchange (SAFE) jointly released the Procedure Guidelines for the Administration of Cross-border Issuance and Sales of Securities Investment Funds between Mainland China and Hong Kong (hereinafter referred to as the Procedure Guidelines ) through PBOC/SAFE Announcement [2015] No. 36 to clarify issues related to issuance and sales of MRFs. (Please refer to CTIE for details of the Procedure Guidelines.) On 14 December 2015, the MOF, SAT and CSRC jointly released Caishui [2015] No. 125 ( Circular 125 ) to clarify the China tax issues in this regard: Income Taxes for Mainland investors For Mainland individual investors, their gains realized from trading of Hong Kong securities investment funds via the MRF scheme are temporarily exempt from Individual Income Tax (IIT) for three years, i.e., from 18 December 2015 to 17 December For Mainland corporate investors, their gains derived from trading of Hong Kong securities investment funds via the MRF scheme are subject to Corporate Income Tax (CIT) according to the prevailing CIT law. Mainland individual investors are subject to IIT at 20% with respect to distributions received from Hong Kong securities investment funds via the MRF scheme. The IIT shall be withheld by qualifying agents as prescribed in Circular 125. Distributions received by Mainland corporate investors from Hong Kong securities investment funds via the MRF scheme are subject to CIT according to the prevailing CIT law. Income Taxes for Hong Kong investors For Hong Kong investors (corporates and individuals), their gains realized from trading of Mainland securities investment funds via the MRF scheme are temporarily exempt from China Income Taxes. Distributions received by Hong Kong investors (corporates and individuals) from securities investment funds via the MRF scheme are subject to withholding tax: For dividends and distributions from shares of Mainland listed companies, Hong Kong investors shall be subject to withholding tax at 10%; For interests from bonds, Hong Kong investors shall be subject to withholding tax at 7%. The abovementioned withholding tax shall be withheld by the Mainland listed companies distributing the dividends or the Mainland companies issuing the bonds while the dividends or interests are distributed to the Mainland securities investment funds. 4

5 Business Tax (BT) for Mainland/Hong Kong investors For Hong Kong investors (corporates and individuals), their gains realized from trading of Mainland securities investment funds via the MRF scheme are temporarily exempt from BT. For Mainland individual investors, their gains realized from trading of Hong Kong securities investment funds via the MRF scheme are temporarily exempt from BT according to the prevailing tax rules. For Mainland corporate investors, their gains realized from trading of Hong Kong securities investment funds via the MRF scheme shall be subject to BT according to the prevailing tax rules. Stamp Duty (SD) for Mainland/Hong Kong investors Trading, inheritance and donation of Mainland securities investment funds via the MRF scheme by Hong Kong investors are temporarily exempt from SD according to the prevailing tax rules. Trading, inheritance and donation of Hong Kong securities investment funds via the MRF scheme by Mainland investors shall be subject to SD according to the rules of the Hong Kong Special Administrative Region. Circular 125 became effective from 18 December You can click this link to access the full content of Circular 125: You can click this link to access the full content of the Procedures Guidelines: You can click this link to access the full content of the Provisional rules: Notice regarding issues related to input VAT credits for improper VAT invoices (Shuizongfa [2015] No. 148) On 10 December 2015, the SAT released Shuizongfa [2015] No. 148 ( Circular 148 ) to address issues related to input VAT credits for improper VAT invoices: While the supervising tax authority finds that a general VAT taxpayer has purchased items distinctively not related to its sales (or provision of services) or has fraudulent items on VAT returns, the supervising tax authority should make appointments with the taxpayer to discuss these issues. If the taxpayers cannot be reached due to false information or failure to attend the meetings with the supervising tax authority for more than one appointment, the supervising tax authority may suspend the taxpayer from issuing VAT invoices via the VAT invoice control system. In addition, VAT invoices obtained and issued by the taxpayer shall be determined as improper VAT invoices and subject to further verification. During further verification, the supervising tax authority shall reject improper VAT invoices not yet claimed for input VAT credits until they are proven to be in accordance with the prevailing VAT rules. For improper VAT invoices that were already claimed for input VAT credits, once they are proved to be not in accordance with the prevailing VAT rules, the relevant input VAT shall be transferred out. Circular 148 became effective on its promulgation date, i.e., 10 December You can click this link to access the full content of Circular 148: 5

6 Plan on Deepening the Reform of State and Local Tax Collection and Administration Systems On 24 December 2015, the General Offices of the State Council and the Central Committee of the Communist Party of China jointly released the Plan on Deepening the Reform of State and Local Tax Collection and Administration Systems (hereinafter referred to as the Plan ). According to the Plan, the State and Local Tax Systems shall further capitalize their own advantages, promote the integration of services, improve the enforcement of law and syndication of information, in order to solve the major and deep-seated problems in the current tax collection and administration system. The Plan is intended to continuously enhance the system and build the capacity of the tax administration, with an aim to reinforce the role of tax revenue in supporting and protecting the society. In this respect, the Plan proposes 31 items related to the reform which mainly covers six aspects, i.e., streamlining the allocation of responsibilities for tax collection and administration, innovation of the tax services system, transformation of the mode of tax collection and administration, pro-actively participating in international co-operation on tax matters, optimization of the organization structure of tax authorities, and establishment of shared governance in respect of tax administration. Among these, it is worth noting that one of the important requirements addressed in the Plan is to establish a tax administration system for individuals, given the fact that the proportion of direct tax and the number of individual taxpayers have increased gradually these years. The Plan calls for establishing a tax administration system to facilitate the management of individual taxpayers, especially individual taxpayers with high income. In addition, the SAT and tax authorities at the provincial level will launch a centralized tax risk analysis for individual taxpayers with high levels of income. You can click this link to access the full content of the Plan: Notice regarding guidance on tax risk analysis/measures for six industries and four tax-related items (Shuizongqibianhan [2015] No. 71) In response to Shuizonghan [2015] No. 477 ( Circular 477, i.e., Notice regarding the pilot run of carrying out tax services and supervision on big scale enterprises with big data), the SAT released Shuizongqibianhan [2015] No. 71 ( Circular 71 ) on 10 October 2015 to guide tax authorities at the local level in carrying out the pilot investigations according to Circular 477 on targeted head offices of selected groups of enterprises and key affiliated companies. (Content of Circular 477 has not been announced to the public.) Circular 71 specifies the scope of key industries and tax-related items of the pilot investigations as follows and provides the measures to tax authorities at the local level regarding how to identify and response to the respective tax risks during the pilot investigations. Industries Banking Insurance Securities Automobile Electricity Construction 6

7 Tax-related items Related party transactions Cross-border investments Share transfer Financial subsidies Although the detailed measures (i.e., Attachments of Circular 71) have only been passed to the tax authorities at the local level internally without announcing the updates to the public as yet, it is recommended that large scale enterprises, (especially those engaging in the abovementioned industries or involved with the abovementioned transactions), should perform overall self-assessment to avoid potential tax risks. A tax health check for the group may also be a good choice to minimize potential tax risks from possible noncompliance. In any case, consultations from tax professionals are always recommended. We will keep close watch for any further developments in this regard, so, please stay tuned. You can click this link to access the full content of Circular 71: Business circular Notice regarding certain opinions on accelerating the implementation of strategies for free trade zones (FTZs) (Guofa [2015] No. 69) On 6 December 2015, the State Council released Guofa [2015] No. 69 ( Circular 69 ) setting out certain opinions on accelerating the implementation of FTZ strategies. Optimize the construction layout of FTZs by accelerating the joint construction of FTZs with neighboring countries/regions, promoting FTZ construction along One Belt, One Road and establishing a global FTZ network Accelerate the construction of high quality FTZs by enhancing the opening up of commodity trade, expanding the opening up of the service industry, relaxing market access requirements for foreign investments, promoting the negotiation of various rules (related to intellectual property protection, environmental protection, e-commerce, competition policies and government procurement), enhancing trade facilitation, facilitating immigration formalities and strengthening economic and technological cooperation Improve the support system by strengthening the pilot FTZ scheme, refining laws and regulations related to foreign investments as well as the fundamental system for interim and post event supervision and implementing trade remedy measures, etc. The issuance of Circular 69 aims to achieve further liberalization of existing FTZs, and actively promote the establishment of free trade zones linking with neighboring countries, in order to build up a network to connect majority of neighbor countries, countries involved with the One Belt, One Road strategy and oriented to the world. We will pay close attention to the follow-up actions to be taken by the relevant government authorities and issue further updates accordingly, so, please stay tuned. You can click this link to access the full content of Circular 69: 7

8 Other business, customs and tax related circulars recently announced by central government authorities: Notice regarding the launch of Quick Response Code system for tax-related matters (Shuizonghan [2015] No. 678) Notice regarding the issuance of codes for export services and the upgrade package for export VAT refund rate database (2015A Version) (Shuizonghan [2015] No. 677) Notice regarding the Administrative Measures on Tax Exemption for the Export of Goods under the Market Procurement Mode of Trade (Trial) (SAT Announcement [2015] No. 89) Notice regarding special tax audit related to the VAT Pilot Arrangements (Shuizongjibianhan [2015] No. 174) Notice regarding the public opinion solicitation on the Administrative Measures for Stock Incentive Plans of Listed Companies (Discussion Draft) Notice regarding administrative measures on the place of origin of import and export goods under the Free Trade Agreement (FTA) between the Government of the People's Republic of China (PRC) and the Government of Australia (GAC Order [2015] No. 228) Notice regarding matters related to the implementation of the FTA between the Government of the PRC and the Government of Australia (GAC Announcement [2015] No. 61) Notice regarding special rules of origin for products under the FTA between the Government of the PRC and the Government of Australia (GAC Announcement [2015] No. 62) Notice regarding implementation of special agricultural products safeguard measures under the FTA between the Government of the PRC and the Government of Australia (GAC Announcement [2015] No. 66) Notice regarding administrative measures on the place of origin of import and export goods under the FTA between the Government of the PRC and the Government of the Republic of Korea (GAC Order [2015] No. 229) Notice regarding matters related to the implementation of the FTA between the Government of the PRC and the Government of the Republic of Korea (GAC Announcement [2015] No. 63) Notice regarding special rules of origin for products under the FTA between the Government of the PRC and the Government of the Republic of Korea (GAC Announcement [2015] No. 64) Notice regarding a list of special goods under the FTA between the Government of the PRC and the Government of the Republic of Korea (GAC Announcement [2015] No. 65) Notice regarding the expansion of customs supervision measures and approaches for the market procurement mode of trade (GAC Announcement [2015] No. 67) Notice regarding the 2015 import volume and the 2016 annual import volume trigger level for certain agricultural products imported from New Zealand (GAC Announcement [2015] No. 68) 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

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