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

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1 Issue No Dec 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 link that leads you to the full content of the announcement (in Chinese). Please feel free to contact your EY client service professionals for further assistance if you find the announcements have an impact on your business operations. 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 the previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars Public notice (PN) regarding certain issues related to the administration and collection of Land Appreciation Tax (LAT) upon the final stage of Value-added Tax (VAT) pilot arrangements (SAT PN [2016] No. 70) To facilitate the administration and collection of LAT upon the final stage of VAT pilot arrangements, according to the prevailing LAT rules and the earlier released Caishui [2016] No. 43 ( Circular 43, i.e., Notice regarding issues related to the calculation basis for Deed Tax, Real Estate Tax, LAT and Individual Income Tax (IIT) after the launch of the VAT pilot arrangements), the State Administration of Taxation (SAT) released SAT PN [2016] No. 70 ( PN 70 ) on 10 November 2016 to detail the relevant matters. (Please refer to CTIE for details of Circular 43.) Recognition of LAT taxable income Upon the final stage of VAT pilot arrangements, taxable income derived from transfer of real estate properties that is subject to LAT should not include VAT. Taxpayers adopting the general calculation method for the calculation of VAT, their LAT-taxable income should be the income derived from transfer of real estate properties excluding output VAT. Taxpayers adopting the simplified calculation method for the calculation of VAT, their LAT-taxable income should be the VAT-exclusive income derived from transfer of real estate properties. To facilitate taxpayers with this process and simplify the calculation of provisional LAT payable, real estate developing enterprises that sell self-developed real estate properties on an advanced payment method may calculate the basis for provisional LAT payable as follows: Taxable income for provisional LAT payable = Advanced payment received Provisional VAT payable

2 Recognition of LAT taxable income due to deemed sales Where the ownerships of self-developed real estate properties of taxpayers are changed as that are used as employees welfare, bonus, external investments, repayment of debt, exchange for non-monetary assets with others, or as distribution to shareholders/investors, the deemed income should be subject to LAT according to Article 3 of Guoshuifa [2006] No. 187 ( Circular 187, i.e., Notice regarding issues related to the administration of LAT settlement for enterprises engaging in real estate development). For real estate properties used to resettle original residents, the taxable income and allowable deductions should be determined according to Article 6 of Guoshuihan [2010] No. 220 ( Circular 220, i.e., Notice regarding certain issues related to LAT settlement). (Please refer to CTIE for details of Circular 220.) Deduction of taxes related to transfer of real estate properties Upon the VAT pilot arrangements, the scope of deductible taxes related to transfer of real estate properties covered in the allowable deductions for LAT calculation does not include VAT. Upon the VAT pilot arrangements, the actual amount of City Construction Tax (CCT) and Education Surcharge (ES) paid by a real estate developing company should be deductible for LAT calculation purposes provided that CCT and ES actually paid can be accurately applied to the project under LAT settlement. Otherwise, the deductible CCT and ES shall be limited to the actual CCT and ES paid during the provisional VAT filing for the project. Deduction of CCT and ES for other activities subject to LAT shall refer to the abovementioned stipulations as well. Settlement of LAT prior and upon the VAT pilot arrangements Where a real estate developing enterprise performs LAT settlement on a real estate project, the relevant amounts should be determined as follows: Taxable income subject to LAT = Income derived from transfer of real estate properties prior to the VAT pilot arrangements + VAT-exclusive income derived from transfer of real estate properties upon the VAT pilot arrangements Taxes related to the transfer of real estate properties = Business Tax (BT), CCT and ES actually paid prior to the VAT pilot arrangements + allowable CCT and ES paid upon the VAT pilot arrangements Tax invoices for construction and installation fee incurred upon the VAT pilot arrangements Upon the VAT pilot arrangements, where a LAT taxpayer obtained a VAT invoice for purchasing construction and installation services, the remark column of the invoice must indicate the location of the project field (i.e., name of the county (city/district)) and name of the project according to SAT PN [2016] No. 23 ( PN 23, i.e., PN regarding tax collection and administration matters related to the final stage of VAT pilot arrangements), otherwise the amount of the service fee is not deductible for LAT calculation purposes. (Please refer to CTIE for details of PN 23.) Deduction of old buildings Upon the VAT pilot arrangements, where a LAT taxpayer transfers old buildings without assessed value but can provide purchase invoices, the deductible items for LAT calculation purposes as prescribed in Items 1 and 3 under Article 6 of the Provisional Regulations on LAT should be determined as follows: Where the invoice provided by the taxpayer is a BT invoice obtained prior to the VAT pilot arrangements, the deductible amount should be: Amount indicated on the BT invoice (BT inclusive) x (1+ Number of years from purchase to transfer x 5%) Where the invoice provided by the taxpayer is a normal VAT invoice obtained upon the VAT pilot arrangements, the deductible amount should be: (Amount of price + VAT indicated on the invoice) x (1+ Number of years from purchase to transfer x 5%) 2

3 Where the invoice provided by the taxpayer is a special VAT invoice obtained upon the VAT pilot arrangements, the deductible amount should be: (The VAT-exclusive amount + total of non-deductible input VAT) x (1+ Number of years from purchase to transfer x 5%) PN 70 became effective on its promulgation date, i.e., 10 November Our observations The issuance of PN 70 mainly clarifies several LAT related issues from practice perspectives: PN 70 clarifies that the income derived from transfer of real estate properties that is subject to LAT (as well as taxable income for provisional LAT filing) should be the VAT-exclusive income. PN 70 clarifies that LAT triggered by deemed sales (using the properties for employees welfare, bonus, external investments, repayment of debt, exchanging of non-monetary assets with others, or distribution to shareholders/investors) should be calculated in accordance with Article 3 of Circular 187. In this respect, the deemed sales income subject to LAT should be determined in the following order: Determined according to the average price of real estate properties of the same type that are sold in the same region for the same year Determined by the supervising tax authorities with reference to the market price or appraisal price of real estate properties of the same type in the same region for the same year. PN 70 confirms that for real estate properties used to resettle original residents, the taxable income and allowable deductions should be determined according to Article 6 of Circular 220, i.e., self-developed properties used for compensating original residents should be considered as deemed sales according to Article 3.1 of Circular 187 (as mentioned above) and the amount of deemed income should also be treated as the cost of compensation for removal. The expenses paid by the real estate developing enterprise to the original residents for compensation can be treated as compensation cost for demolition, with any amount paid by the residents to the real estate developing enterprises for making up the difference between the property price and compensation they entitled should be treated as a reduction to the compensation cost for demolition. If the self-developed properties used are located in a different location, the real estate developing enterprise should record the compensation cost according to the pricing method stipulated in Circular 187. According to the prevailing LAT rules, the deductible taxes related the transfer of real estate properties included in the allowable deductions for LAT calculation refer to BT, CCT, SD as well as ES that are actually paid due to the transfer of real estate properties. PN 70 further clarifies that the scope of deductible taxes related to real estate property transfers does not include VAT as per the VAT pilot arrangements. Furthermore, PN 70 states that the deductible CCT and ES that are calculated based on VAT payable should be deductible provided that the paid CCT and ES can be accurately applied to the real estate project under LAT settlement. If not, the deductible CCT and ES would be limited to the amount actually paid during the VAT provisional filing for the project. PN 70 stipulates that the deductible construction/installation service fees should be supported by valid tax invoices with proper remarks of the project name and location. Otherwise, such expenses shall be excluded from the allowable deductions for LAT calculation. Enterprises engaging in real estate development should read PN 70 carefully to ensure tax compliance. If in doubt, it is advisable to seek assistance from tax professionals. You can click this link to access the full content of PN 70: You can click this link to access the full content of PN 23: You can click this link to access the full content of Circular 187: You can click this link to access the full content of Circular 220: 3

4 Notice regarding the Corporate Income Tax (CIT) deduction on provisions made by insurance companies (Caishui [2016] No. 114) On 2 November 2016, the Ministry of Finance (MOF) and SAT jointly released Caishui [2016] No. 114 ( Circular 114 ) detailing the CIT deduction rules on provisions made by insurance companies. Circular 114 shall be effective from 1 January 2016 to 31 December Insurance security fund According to Circular 114, the insurance security fund paid by insurance companies according to the ratios stated below is deductible for CIT purposes: For non-investment property insurance business, the deductible insurance security fund is up to 0.8% of the premium income. For investment property insurance business with return guarantees, the deductible insurance security fund is up to 0.08% of the operating income while the deductible insurance security fund for investment property insurance business without return guarantees is up to 0.05% of the operating income. For life insurance business with return guarantees, the deductible insurance security fund is up to 0.15% of the operating income. For life insurance business without return guarantees, the deductible insurance security fund is up to 0.05% of the operating income. For short-term health insurance business, the deductible insurance security fund is up to 0.8% of the premium income. For long-term health insurance business, the deductible insurance security fund is up to 0.15% of the premium income. For non-investment casualty insurance business, the deductible insurance security fund is up to 0.8% of the premium income. For investment casualty insurance business with return guarantees, the deductible insurance security fund is up to 0.08% of the operating income while deductible insurance security fund for investment casualty insurance business without return guarantees is up to 0.05% of the operating income. However, if an insurance company falls under one of the following situations, its insurance security fund paid shall be non-deductible for CIT purposes: The balance of the insurance security fund of a property insurance company has reached 6% of its total assets. The balance of the insurance security fund of a life insurance company has reached 1% of its total assets. Various provisions Circular 114 prescribes that the unearned premium reserve, life insurance reserve, long-term health insurance reserve are deductible for CIT purposes subject to the amounts provided by qualified actuaries or indicated in the special audit reports issued by qualified agencies. On the other hand, incurred and reported outstanding claim reserves are deductible for CIT purposes up to 100% of the insurance claims proposed for the current period while incurred but not reported outstanding claim reserves are deductible for CIT purposes with the limit at 8% of the actual payment of insurance claims for the current year. Circular 114 also states that insurance claims and payments should be offset against the reserves first and the excess amount can be deductible in the year in which they are incurred. Catastrophe reserves Circular 114 prescribes that catastrophe reserves made by an insurance company for agricultural insurance with financial subsidies as defined in Circular 114 shall be deductible for CIT purposes and the allowable deduction should be calculated as follows: Catastrophe reserves deductible in the year = Annual premium x Ratio as prescribed 1 Balance of catastrophe reserves that were deducted in the preceding year 4

5 If the calculation of the above formula resulted in a negative figure, the amount should be added back for CIT purposes. Circular 114 generally extends the rules that were stipulated in Caishui [2012] No. 45 ( Circular 45, i.e., Notice regarding the issues related to the deduction of various provisions made by insurance companies for CIT purposes) which was implemented from 1 January 2011 to 31 December 2015 with one newly added rule regarding the CIT deduction for catastrophe reserves. Insurance companies should read Circular 114 carefully for the preparation of the 2016 annual CIT filing. If in doubt, consultations with tax professionals are strongly recommended. 1 The ratio is prescribed in Caijin [2013] No. 129 ( Circular 129, i.e., Administrative Measures on Catastrophe Reserves for Agricultural Insurance) You can click this link to access the full content of Circular 114: 4a7d-a16b-8de9bf3913a0 You can click this link to access the full content of Circular 129: You can click this link to access the full content of Circular 45: Notice regarding the extension of VAT policies related to the purchase of equipment by research and development (R&D) institutions (Caishui [2016] No. 121) To promote the development of R&D, upon approval from the State Council, the MOF, SAT and the Ministry of Commerce jointly released Caishui [2016] No. 121 ( Circular 121 ) on 16 November 2016 to extent VAT policies related to the purchase of equipment by R&D institutions implemented from 1 January 2011 to 31 December 2015 via Caishui [2011] No. 88 ( Circular 88, i.e., Notice regarding the extension of tax policies related to the purchase of equipment by R&D institutions). Listed equipment manufactured domestically that are purchased by qualifying domestic/foreign invested R&D institutions as prescribed in Circular 121 shall be eligible for full refund of VAT for the period from 1 January 2016 to 31 December Qualifying R&D institutions shall be eligible for the VAT refund from the following month upon recognition by the relevant government authorities. Circular 121 became effective on 1 January 2016 and revoked Circular 88 at the same time. The relevant entities should note that Circular 121 only extends the VAT refund policy as prescribed in Circular 88 but does not mention the import taxes exemption for importation of equipment. You can click this link to access the full content of Circular 121: You can click this link to access the full content of Circular 88: 5

6 PN on performing classified management on VAT invoices based on taxpayers credit rating (SAT PN [2016] No. 71) On 17 November 2016, the SAT released SAT PN [2016] No. 71 ( PN 71 ) to clarify certain matters related to the launch of classified management on VAT invoices based on taxpayers credit rating. Key features of PN 71 are as follows: Simplification and reduction of frequencies regarding the application and usage of VAT invoices PN 71 specifies that general VAT taxpayers with different credit ratings are subject to the classified management with respect to the application and usage of VAT invoices: Taxpayers with credit rating A can collect VAT invoices of not exceeding the quantum for three-month use in one go; and Taxpayers with credit rating B can collect VAT invoices of not exceeding the quantum for two-month use in one go. According to PN 71, if taxpayers state of operation changes and need to adjust their VAT invoice quantum, tax authorities shall immediately attend to taxpayers applications provided that application documents are complete. Expanded scope of taxpayers for whom the requirement for VAT invoice verification is cancelled The SAT has cancelled the requirement of supplying VAT invoices (including special VAT invoices, special VAT invoices for the freight transport industry and uniform invoices for sales of motor vehicles) as verification for general VAT taxpayers with credit rating A through SAT PN [2016] No. 7 ( PN 7 ) and for those with credit rating B through SAT PN [2016] No. 23 ( PN 23 ), which took effect from 1 March 2016 and 1 May 2016 respectively. PN 71 further expanded the scope to cover general VAT taxpayers with credit rating C. (Please refer to CTIE for details of PN 7 and CTIE for details of PN 23.) Transitional treatments for taxpayers newly included in the scope of VAT pilot arrangements For general VAT taxpayers that are newly included in the scope of VAT pilot arrangements and have not yet conducted tax credit rating from 1 May 2016, the VAT invoice verification is not required prior to 30 April The inquiry and selection of relevant information of the VAT invoices used for input VAT credits and export tax refunds for these taxpayers during the above period are the same as that for general VAT taxpayers with credit ratings A, B and C. Effective date PN 71 became effective on 1 December With the implementation of PN 71, tax-related services will now be further optimized and with no doubt a sense that the relevant taxpayers will be able to enjoy the convenience and efficiency offered under PN 71. The relevant taxpayers should read PN 71 carefully so as to fully enjoy the relevant treatments. You can click this link to access the full content of PN 71: You can click this link to access the full content of PN 7: You can click this link to access the full content of PN 23: 6

7 Notice regarding improvement of tax services under the cooperation between the state tax authorities and local tax authorities (Shuizonghan [2016] No. 399) On 10 August 2016, the SAT released Shuizonghan [2016] No. 399 ( Circular 399 ) to call for further improvement of tax services under the cooperation between state and local tax authorities. Circular 399 reiterates that state and local tax authorities at the local level should set up tax service counters in each others tax service hall or establish joint tax service centers in the local government affair halls to handle tax related matters, including additional information filing for tax registration, tax filing, application for tax preferential treatments, plus issuance of tax clearance certifications. In addition, according to Circular 399, the state and local tax authorities at the local level are required to establish a convergence system for first asking about the duty system between amongst themselves, improve basic facilities for provision of tax services in the tax service halls and establish regular data sharing systems between state and local tax authorities. Circular 399 also mentions matters related to tax collection by state and local tax authorities on each others behalf. State tax authorities should collect CCT, ES, local education surcharges, IIT (except for those withheld by withholding agents) and CIT for cross-region construction enterprises on behalf of local tax authorities while they issue VAT invoices on behalf of small-scale VAT taxpayers or individuals. If state tax authorities cannot collect the above-mentioned taxes on behalf of local tax authorities, the local tax authorities should establish tax service counters in the tax service hall of state tax authorities to do so. On the other hand, local tax authorities should also collect VAT on behalf of state tax authorities for transfer of second-handed real estate properties or rental of real estate properties by individuals. The above requirements of the SAT are anticipated to further facilitate taxpayers when dealing with the supervising tax authorities regarding tax related matters. Taxpayers should stay alert to local practices of the supervising state and local tax authorities. You can click this link to access the full content of Circular 399: Business circular Notice regarding the inclusion of social security contributions and statistic related information in the annual reports to be submitted by enterprises (Gongshangqijianzi [2016] No. 226) According to Guobanfa [2016] No. 53 ( Circular 53, i.e., Notice regarding the promotion of Integration of Business License, Unified Code Certificate, Tax Registration Certificate, Social Security Registration Certificate and Statistics Registration Certificate and One Business License, One Social Credit Code registration reform), regular verification and renewal of social security registration certificate and statistics registration certificate are no longer required. In this respect, the State Administration for Industry and Commerce, Ministry of Human Resources and Social Security and National Bureau of Statistics jointly released Gongshangqijianzi [2016] No. 226 ( Circular 226 ) on 17 November 2016 regarding the inclusion of social security contributions and statistic related information in the 2016 annual reports to be submitted by enterprises. (Please refer to CTIE for details of Circular 53.) 7

8 According to Circular 226, starting from the 2016 annual reports which are to be submitted in 2017, enterprises are required to file the following information in addition to those prescribed in the State Council Order [2014] No. 654 ( Order 654, i.e., the Interim Regulations on Enterprise Information Publicity) (Please refer to CTIE for details of Circular 654): Information related to social security contributions Types of social security contributed Number of employees participated in social security scheme Base for social insurance contributions Actual social security contributed in the current period Accumulated overdue social security contributions Information related to statistics Major business activities Number of female employees Shareholding status (not applicable for branches) Unified social credit code of head office (applicable for branches only) The current company credibility system would be updated accordingly. Enterprises that failed to complete the annual reports via the company credibility system for prior years are not required to include the above social security contributions and statistic related information for the backlog filing of prior years annual reports. You can click this link to access the full content of Circular 226: You can click this link to access the full content of Circular 53: You can click this link to access the full content of Order 654: Other business and tax related circulars recently announced by central government authorities: Notice regarding the CIT exemption policies on enterprises engaging in the management and installation of specialized supplies for disabled persons (Caishui [2016] No. 111) Notice regarding the launch of export tax refund rate database (2016 E Version) (Shuizonghan [2016] No. 587) Notice regarding the implementation of stock options and incentive plans of central sci-tech enterprises (Guozifafenpei [2016] No. 274) PN regarding the expansion of customs supervision measures and approaches for the market procurement trade (GAC PN [2016] No. 63) PN regarding the Customs Tariff of Import and Export Commodities of the People s Republic of China - Explanatory Notes to National Subheadings (Newly Added and Adjusted in 2016 II) (GAC PN [2016] No. 65) 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) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Travis Qiu (Transfer Pricing) travis.qiu@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 Henry Chan henry.chan@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com 9

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