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

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1 Issue No Sept 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 Implementation Measures for Promoting the Random Tax Audit Mechanism (Shuizongfa [2015] No. 104) To implement Guobanfa [2015] No. 58 ( Circular 58, i.e., Notice regarding promoting the random inspection mechanism and regulating the interim and ex post supervision), the State Administration of Taxation (SAT) announced the Implementation Measures for Promoting the Random Tax Audit Mechanism (hereinafter referred to as the Measures ) on 25 August 2015 through Shuizongfa [2015] No Key features of the Measures include: Tax audit departments executing the random tax audits Random tax audits shall be carried out by tax audit departments at each level. The Auditing Bureau of the SAT is responsible for the organization and coordination of random tax audits on a nationwide basis. Tax audit bureaus at the provincial/municipal/county levels are responsible for the implementation of random tax audits within their respective jurisdictions. Contents of random tax audits The status of the fulfillment of tax obligations and other compliance matters of taxpayers, withholding agents and other parties concerned (hereinafter collectively referred to tax audit targets ) shall be subject to the random tax audits. The tax audit targets shall be drawn by lot from the classified tax audit target directory database and the abnormal tax audit target directory database except for those that should be subject to direct investigation and prosecution due to tax violations.

2 Tax bureaus at each level shall establish classified tax audit target directory databases where information related to taxpayers registrations, operation scales, tax payments, tax inspections, tax penalties and taxrelated criminal responsibilities of the past three years shall be included. The databases shall be fully in place by 31 December Tax bureaus at the provincial/municipal/county levels shall establish tax audit target directory databases to record and document any irregular information shown within various tax audit cases. Enterprises with long-term abnormal tax filings, high tax risks, low tax credit ratings and multiple reported tax violations and enterprises jointly penalized for illegal acts or in bad faith shall be included. Tax registration information and clues to tax violations of the above abnormal enterprises shall be entered into the databases. The databases shall be fully in place by 31 March Modes of random tax audits Random tax audits include targeted random tax audits (selected randomly by lot based on specific factors, e.g., industries, operation scale, income, tax payments, profit rates and tax credit ratings) and nontargeted random tax audits (selected randomly by lot without preset conditions). For tax audit targets selected, tax audit departments can conduct tax inspection directly, or require them to conduct self-inspection before key inspections of tax authorities, or in parallel. Chances and frequency of being audited Enterprises of key tax sources at the national, provincial and municipal level shall be subject to targeted and non-targeted random tax audits on a combined basis. Their chances of being audited every year shall be around 20%. In principle, these enterprises shall be subject to tax audits every five years. Enterprises of non-key tax sources shall be subject to targeted random tax audits (serve as a primary) and non-targeted random tax audits (serve as a supplement to the former). Their chances of being audited every year shall not exceed 3%. Non-corporate taxpayers shall be subject to non-targeted random tax audits. Their chances of being audited every year shall not exceed 1%. Random tax audits on enterprises listed in the abnormal tax audit target directory databases shall be strengthened. Chances and frequency of audit of these enterprises shall be increasing. Tax audit targets that were audited within three years shall not fall within the scope of random tax audits. Random tax audits jointly conducted by state and local tax authorities State and local tax authorities shall establish joint random tax audit mechanisms, and jointly formulate and implement the audit plans. Connection of random tax audit results and social credibility system Random tax audit results shall be included in the tax and social credit records and posted on the national credit information sharing and exchange platform as well as the national enterprise credit information publicity system platform to enhance information sharing among various departments. Enterprises with severe tax violations shall be listed in the blacklist and subject to joint penalization. Public supervision The list of various items (e.g., basis, subjects, contents and modes) related to random tax audits shall be made public. The audit results shall be announced to the public and subject to social supervision. Reporting requirements The Measures require tax authorities at the provincial level to make detailed plans for implementing Circular 58 and the Measures and report the plans to the Auditing Bureau of the SAT by 15 September The progress of the follow-on work and key achievements shall be reported to the SAT respectively by 1 July and 31 December of each year. 2

3 Our observations Random tax audit targets stipulated in the Measures bring about the following changes as compared to the previous rules: Tax audit targets are determined by lot for the first time. Both tax audit targets and tax auditors are selected by lot. Chances and the frequency of audit are specified. State and local tax authorities shall conduct joint random tax audits. Random tax audit results shall be widely applied and publicized. The result of the random tax audit could bring about severe financial consequences and potential damage to reputations. Taxpayers should therefore consider getting themselves ready for potential challenges. To prepare for the challenges, taxpayers should even consider preforming a tax compliance health check and rectify before the tax authorities come. In any case, taxpayers are advised to study the Measures and stay tuned to any detailed implementation plans to be formulated by local tax authorities. You can click this link to access the full content of the Measures: You can click this link to access the full content of Circular 58: Notice regarding the extension of Value-Added Tax (VAT) and Business Tax (BT) policies for small and micro-sized enterprises (SMEs) (Caishui [2015] No. 96) To provide more tax support for SMEs, the Ministry of Finance (MOF) and the SAT jointly released Caishui [2014] No. 71 ( Circular 71, Notice regarding VAT and BT policies to promote the development of SMEs) on 25 September 2014 stipulating the following preferential VAT and BT policies which are effective from 1 October 2014 to 31 December 2015 (please refer to CTIE for details of Circular 71): Small-scale VAT taxpayers, who derive monthly VAT-taxable turnover between RMB20,000 (inclusive) and RMB30,000 (not inclusive), shall be exempt from VAT. BT taxpayers, who derive monthly BT-taxable turnover between RMB20,000 (inclusive) and RMB30,000 (not inclusive), shall be exempt from BT. To further support the development of SMEs and promote entrepreneurship and employment, as approved by the State Council, the MOF and SAT jointly released Caishui [2015] No. 96 ( Circular 96 ) on 27 August 2015 extending the deadline of the above preferential policies stipulated in Circular 71 by two years, i.e., by 31 December You can click this link to access the full content of Circular 96: You can click this link to access the full content of Circular 71: Supplementary notice regarding the resumption of VAT collection on fertilizers (Caishui [2015] No. 97) On 10 August 2015, the MOF, SAT and General Administration of Customs (GAC) jointly released Caishui [2015] No. 90 ( Circular 90, i.e., Notice regarding the resumption of VAT collection on fertilizers) which stipulates that, from 1 September 2015, sales/importation of fertilizers shall be subject to VAT/import-level VAT at 13%. Refund-upon-collection ( 先征后返 ) arrangement for potash fertilizer shall also be ceased at the same time. (Please refer to CTIE for details of Circular 90.) 3

4 To address VAT issues related to the inventory of fertilizers purchased/manufactured prior to the enforcement of Circular 90, on 28 August 2015, the MOF and SAT jointly released Caishui [2015] No. 97 ( Circular 97 ) making the following supplements to Circular 90: From 1 September 2015 to 30 June 2016, general VAT taxpayers who sell their inventory of fertilizers are allowed to opt to calculate and pay VAT at a collection rate of 3% based on a simplified method. The export of fertilizers shall be treated as domestic sales and subject to VAT according to Caishui [2012] No. 39 ( Circular 39, i.e., Notice regarding VAT and Consumption Tax (CT) policies for the export of goods and services) as fertilizers are goods that no longer have any export tax refund/exemption treatments. The above VAT policies (i.e., opt to be subject to VAT based on a simplified method) shall also be applicable to the export of the inventory of fertilizers. (Please refer to CTIE for details of Circular 39.) Taxpayers shall account for their sales of fertilizer inventory separately, otherwise the simplified VAT calculation method shall not apply. The inventory of fertilizers stipulated in Circular 97 refers to fertilizers that have been manufactured/purchased but yet to be sold on or before 31 August Provisions related to fertilizers stipulated in Article 3 of Caishui [2008] No. 81 ( Circular 81, i.e., Notice regarding tax policies related to farmers cooperatives) shall cease to be enforceable from 1 September You can click this link to access the full content of Circular 97: You can click this link to access the full content of Circular 90: You can click this link to access the full content of Circular 39: You can click this link to access the full content of Circular 81: Notice regarding the extension of preferential Urban Land Usage Tax (ULUT) policies for the land used for bulk commodity storage facilities by logistics enterprises (Caishui [2015] No. 98) To promote the health development of the logistics industry, the MOF and SAT jointly released Caishui [2012] No. 13 ( Circular 13, Notice regarding ULUT policies for the land used for bulk commodity storage facilities by logistics enterprises) on 20 January Circular 13 provided for 50% reduction of applicable ULUT unit rates on the land used for bulk commodity storage facilities by logistics enterprises for three years from 1 January 2012 to 31 December To further support the development of logistics enterprises, as approved by the State Council, the MOF and SAT jointly released Caishui [2015] No. 98 ( Circular 98 ) on 31 August 2015 extending the term of the above preferential ULUT policies by two years till 31 December Circular 98 also clarifies the definitions of logistics enterprises and bulk commodity storage facilities. Circular 98 requires qualifying logistics enterprises to go through record filing formalities with their supervising tax authorities by presenting relevant documents. You can click this link to access the full content of Circular 98: You can click this link to access the full content of Circular 13: 4

5 Business circulars Notice regarding opinions on supporting the innovative development of Pilot Free Trade Zones (PFTZs) (Shangzifa [2015] No. 313) To promote the innovative development of the PFTZs, the Ministry of Commerce (MOFCOM) released Shangzifa [2015] No. 313 ( Circular 313 ) on 25 August 2015 which presents the following opinions, aiming to: Promote transformation and upgrade of the foreign trade Support the establishment of procurement, distribution and settlement centers for processing trade businesses in the PFTZs and encourage multinational corporations to carry out offshore settlement businesses Encourage enterprises in the PFTZs to carry out high-tech and high value-added testing and maintenance businesses (e.g., aviation maintenance) Support the development of cross-border e-commerce businesses in the PFTZs, replicate and apply the policies (e.g., customs supervision, import and export tax and foreign exchange settlement) of China (Hangzhou) Cross-border E-commerce Comprehensive Pilot Area in the PFTZs Promote the development of foreign trade comprehensive service enterprises and provide qualifying enterprises with fast customs clearance, simplified tax refund and financial support Promote the application of online customs clearance for the importation of goods under automatic import license administration Examine the application of supporting policies of service outsourcing model cities in the PFTZs Support the network construction of Asia-Pacific model electronic ports in the Shanghai PFTZ Support the establishment of the green supply chain network Tianjin model center of Asia-Pacific Economic Cooperation in the Tianjin PFTZ Encourage the Fujian PFTZ to explore innovative administration and supervision modes to promote trade transactions between Mainland and Taiwan under petty trading arrangements Relax market access restrictions Relax the restrictions on qualifying conditions for foreign investment enterprises engaging in direct sales businesses in the PFTZs and remove the requirements for foreign investors having three-year overseas direct sales experience Support the pilot run of commercial factoring businesses in the PFTZs Allow foreign investors to establish pawn businesses in the PFTZs Promote innovation in finance lease businesses in the PFTZs and allow qualifying finance lease enterprises to establish specialized subsidiaries Allow foreign investors to establish wholly foreign-owned enterprises engaging in the construction and operation of gas stations Examine the removal and relaxation of market access restrictions (e.g., qualification requirements, shareholding ratio and operation scope) on Hong Kong and Macao investors to support the development of the Guangzhou PFTZ under the framework of Mainland and Hong Kong/Macao Closer Economic Partnership Arrangements Improve competitive market environment Support the parallel imports 1 of automobiles in the PFTZs and allow pilot enterprises to apply for automatic import licenses for automobile products with the MOFCOM Provide guidance for the PFTZs for launching a pilot run of bulk commodity spot transactions Implement the reform of administration on finance lease businesses in the PFTZs and adopt a unified administration mode for domestic and foreign investment finance lease enterprises 5

6 Relevant investors and enterprises are strongly recommended to study Circular 313. They should also be alerted on ministerial circulars related to the detailed implementation of Circular 313 that are expected to be released by relevant government authorities in the near future. If in doubt, it is advisable to seek assistance from professionals. 1 Under the parallel import arrangement, in addition to sole distributors, other importers can directly import goods from their country of origin. Such importation channel parallels the distribution channel authorized domestically. You can click this link to access the full content of Circular 313: Notice regarding the adjustment of certain policies related to the admission and administration of foreign investment in real estate market (Jianfang [2015] No. 122) To promote the smooth and healthy development of the real estate market, as agreed by the State Council, six central government authorities (i.e., Ministry of Housing and Urban-Rural Development, MOFCOM, National Development and Reform Commission, People s Bank of China, State Administration for Industry and Commerce and State Administration of Foreign Exchange) jointly released Jianfang [2015] No. 122 ( Circular 122 ) on 19 August 2015 making adjustments to certain policies (related to foreign invested real estate enterprises and overseas entities/individuals purchasing housings in China) stipulated in Jianzhufang [2006] No. 171 ( Circular 171, i.e., Opinions on regulating the admission and administration of foreign investment in real estate market). Key points of Circular 122 are as follows: The requirements for the ratios of registered capital to total investments for foreign invested real estate enterprises (FIREEs) should be referenced to Gongshangqizi [1987] No. 38 ( Circular 38, i.e., Provisional rules for the ratios of registered capital to total investments of Sino-foreign joint ventures). According to Circular 38, restrictions on ratios of registered capital to total investments for foreign investment enterprises are as follows: Total Investments Minimum Registered Capital USD3 million or below 70% of total investment USD10 million or below, but more than USD3 million Higher of 50% of total investment or USD2.1 million USD30 million or below, but more than USD10 million Higher of 40% of total investment or USD5 million Over USD30 million Higher of 1/3 of total investment or USD12 million Where FIREEs apply for domestic loans, overseas loans and settlement of foreign exchange loans, the requirement for 100% registered capital contributions is removed. Branches and representative offices established by overseas entities in China (except for enterprises that are approved to engage in real estate businesses) and overseas individuals working or studying in China can purchase housings for self-use purposes to meet their actual needs. For cities where housing purchase restrictions are imposed, overseas individuals purchasing housings shall comply with relevant local policies. From the promulgation date of Circular 122, FIREEs can directly apply for foreign exchange registration under the foreign direct investment item with the banks according to relevant foreign exchange rules. Except for the above policies adjusted, Circular 171 shall continue to be valid. Our observations Relevant FIREEs and overseas entities/individuals having an interest in purchasing housing in China should be aware of the changes brought about by Circular 122: Circular 122 removes the restriction on the ratio of registered capital to total investment of a FIREE stipulated in Circular 171, i.e., the ratio shall not be less than 50% if the total investment of a FIREE is USD10 million or above. 6

7 Circular 104 removes the requirement for 100% contributions of registered capital of FIREEs when applying for loans and settlement of foreign exchange loans. However, according to Huifa [2013] No. 19 ( Circular 19, i.e., Administrative Measures for Foreign Exchange Registration), which is still effective, FIREEs that obtained approval certificates from supervising commerce departments and completed record filing formalities with the MOFCOM before 1 June 2007 can follow the same debt-to-equity ratios as that for other foreign investment enterprises, whereas other FIREEs are not allowed to apply for the registration of signed contracts on foreign debts, i.e., they are not allowed to raise overseas loans. The removal provision under Circular 104 may only benefit FIREEs that had obtained approval certificates and completed record filing formalities before 1 June (Please refer to CTIE for details of Circular 19.) Circular 122 relaxes the restrictions on the purchase of self-use housing by overseas individuals working and studying in China for less than one year. Circular 122 simplifies the foreign exchange registration procedures for FIREEs. You can click this link to access the full content of Circular 122: You can click this link to access the full content of Circular 171 : You can click this link to access the full content of Circular 38: You can click this link to access the full content of Circular 19: Notice on encouraging listed companies Merger & Acquisition (M&A), restructuring, cash dividend distribution and share repurchase (Zhengjianfa [2015] No. 61) To improve quality and investment value of listed companies, establish a mechanism for investor returns and promote the smooth and healthy development of the capital market, on 31 August 2015, four central government authorities (i.e., China Securities Regulatory Commission, MOF, State-owned Assets Supervision and Administration Commission of the State Council and China Banking Regulatory Commission) jointly released Zhengjianfa [2015] No. 61 ( Circular 61 ) setting out the following details, showing their intention to: Promote M&A and restructuring of listed companies Further streamline administrative approvals and delegate approval authority to lower levels, expand the scope of items for which administrative approval requirements are cancelled, simplify approval procedures, and optimize relevant market pricing mechanism Encourage innovation of payment instruments and financing modes Encourage state-owned holding listed companies to strengthen resource integration supported by the capital market Provide more financial support Encourage cash dividend distribution of listed companies Require qualifying listed companies to distribute profits through cash dividends Encourage listed companies to increase the ratio of cash dividends to profit distribution and increase the frequency of dividend distribution Improve tax policies related to entities/individuals holding stocks of listed companies for a long time Support share repurchase of listed companies Circular 61 came into effect on its promulgation date. You can click this link to access the full content of Circular

8 Notice regarding matters related to the recognition of animation and comics enterprises in 2015 (Banchanhan [2015] No. 429) To improve the recognition of animation and comics enterprises ( AC enterprises ) and implement preferential tax policies for AC enterprises, pursuant to Wenshifa [2008] No. 51 (i.e., Administrative Measures (Trail) for Recognition of AC enterprises (hereinafter referred to as Recognition Measures ) and Wenchanfa [2009] No. 18 ( Circular 18, i.e., Notice regarding the implementation of the Recognition Measures), the General Office of the Ministry of Culture (MOC) released Banchanhan [2015] No. 429 ( Circular 429 ) on 5 August 2015 to set out matters related to recognition of AC enterprises for the year 2015 to be performed by local culture authorities. (Please refer to CTIE for details of Circular 18.) Recognition of qualifying AC enterprises Local culture, finance and tax authorities at the same level shall jointly organize the 2015 application lodged by local AC enterprises and perform verifications on application documents to ensure their authenticity and completeness. Recognition authorities that are constituted by culture, tax and finance authorities at the provincial level (hereinafter referred to as provincial recognition authorities ) shall issue initial approval opinions for qualifying AC enterprises. Application documents of AC enterprises that have passed initial approval process shall be submitted to the National Library of China (NLC) on or before 30 September Circular 429 indicates that the recognition of key AC products and AC enterprises would not be implemented in 2015 on a provisional basis. Annual examination Provincial recognition authorities shall conduct the annual examination, routine supervision and inspection for qualifying AC enterprises in accordance with the Recognition Measures and relevant rules. Where an AC enterprise fails to pass the annual examination, its AC enterprise certificate will be withdrawn by provincial recognition authorities. Relevant finance and tax authorities shall be notified of such a withdrawal. An enterprise that qualifies for AC enterprise status for over three years, i.e., once its AC enterprise certificate expires, its certificate shall be withdrawn and renewed by provincial recognition authorities. Annual examination of qualifying key AC enterprises shall be subject to initial approval of provincial recognition authorities and subsequent final approval of the MOC. Relevant documents in relation to the annual examination of these enterprises shall be submitted to the NLC on or before 30 September Enterprises engaging in the AC industry should study Circular 429 carefully to ensure full compliance during the recognition and annual examination. If in doubt, consultations with professionals are always recommended. You can click this link to access the full content of Circular 429: You can click this link to access the full content of the Recognition Measures: You can click this link to access the full content of Circular 18: Another business related circular recently announced by central government authorities: Decision on the modification of the Law of the People s Republic of China on Commercial Banks (Chairman Order [2015] No. 34) 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 (Human Capital) 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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