The amended PRC Provisional Regulations on Business Tax
(Provisional Regulations) and the PRC Implementation Rules for
Provisional Regulations on Business Tax (Implementation Rules) both
took effect on January 1, 2009. The implementation of these new
rules will impact service providers located both inside and outside
of China providing services to entities or persons located within
China. Service providers involved in cross-border transactions with
China should prepare withholding procedures to comply with the
revised rules. The USCBC is currently soliciting comments in
preparation for discussions with the Chinese authorities regarding
these revised rules.
The PRC Business Tax (Business Tax) imposes a tax on the turnover
of certain pre-defined business activities. Tax payable under
Article 4 of the Provisional Regulations is equal to the amount of
business turnover multiplied by the applicable tax rate. The amount
of business turnover is calculated in Renminbi, which is the
official currency of China. When calculating tax payable for
providing services, the business turnover equals the fees paid by
the recipient of the services located in China.
The key change in the revised rules that affects cross-border
transactions the most is that the new language allows China to tax
services rendered from outside of China to service recipients
located in China. First, Article 1 of the Provisional Regulations
defines taxable activities to include: (i) provision of services,
(ii) transfer of intangible assets, and (iii) sales of immovable
property "within the territories of the People's Republic
of China." Then, Article 4 of the Implementation Rules further
defines "within the territories of the People's Republic
of China" to mean that (i) the provider or the recipient of
services is located in China, (ii) transfer of intangible assets
(excluding land use rights) when the recipient is located in China,
(iii) the land, of which the use rights are being sold or leased,
is located in China, or (iv) the immovable properties being sold or
leased are located in China.
The ramification of the expansive definition of "within
China" is that the revised tax rules increase the cost of
providing services to China. Under the new law, services provided
to a person or an entity located in China are taxable, even when
those services were rendered from outside of China. For example,
when an international company located in North America provides a
new product design to the company's manufacturing facility in
China, the provision of this service would be subject to the
Business Tax under the new rules. Prior to January 1, 2009,
services provided from outside of China to recipients in China were
not subject to the Business Tax.
However, as a reference, a 10% income tax on the revenues derived
from such services was, and still is, required to be withheld by
the recipient on behalf of the government when the services fees
are paid. Additionally, the Business Tax shall be withheld at the
time of payment. According to Article 11 of the Provisional
Regulations, the service provider's establishment or its agent
in China must withhold the tax payable. In situations where the
service provider does not have an establishment or an agent in
China, the recipient or the buyer in China shall serve as the
withholding agent.
Currently, the US-China Business Council (USCBC) is preparing for
a discussion with the Ministry of Finance and the State
Administration of Taxation to advocate against the Business Tax
expansion and also to seek clarification on certain provisions. As
part of its preparation for discussions with the Chinese
authorities, the USCBC is now seeking inputs from its members.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
