Come September 1st 2013 China will have a new tax law in relation to overseas remittances. The new law is named “Announcement on Issues Concerning the tax-recording-filing for Foreign Payments under Service Trade”, otherwise known as Announcement 40. Announcement 40 was issued jointly be the State Administration of Taxation (SAT) and the State Administration of Foreign Exchange (SAFE) on the 9th of July 2013. It is seen by many parties, especially MNC’s operating in China, as a positive move which will see a lot of the concerns from the current system eradicated.
Concerns and Difference
So, “what were these concerns?” you may ask. To answer that, I will explain the current and soon-to-be-former way of carrying out overseas remittances. Before any company in China could make an overseas remittance it would have to gain approval or tax clearance for any payment that exceeds USD 30,000 in line with the TCC requirements. The important thing to remember about this system was that you need tax clearance before making the payment. The new system which comes into action in less than a month will not require tax clearance prior to the overseas remittance, and the payment will have to exceed USD 50,000 to be subjected to the new recording-filing system (discussed below). So the main concern was that the time it was taking to gain approval for the payment was delaying them quiet significantly.
In 2008 some steps were taken to combat this with the introduction of Circular 64 which was again issued by SAT and SAFE and which allowed certain items to be exempt from the tax clearance requirements. These were known as the ‘carve-outs’. The new law, Announcement 40, has also got 15 items that are exempt from tax-recording-filing, most of them being similar to the ‘carve outs’ from circular 64. These 15 items include things such as intangible licensing, finance lease, real estate transfer and more.
The second difference is that instead of the old tax approval-filling system currently in place, Announcement 40 will bring in a tax recording-filling system for foreign payments under service trade. It is widely accepted that the new system will speed up the process of sending remittance overseas and it will mean improved cash flow for overseas recipients of their Chinese income. Overall it is seen that the Chinese tax authorities are continuing to relax China’s exchange system in recent times.
New Remittance Process
This new system will require those paying the remittance to submit 3 copies of a tax recordal filing form (available in ISTB offices or its government website homepage) to the ISTB as soon as possible following the sending of the remittance. Having done that, one copy will be kept for their own records, one kept by the ISTB and the other sent to the local tax bureau. Each of the forms will be stamped by the company chop and given a serial number so they can be traced. In order to carry out the remittance the company must present their stamped form to a designated bank and then the transaction will be carried out. In the previous system the ISTB would review the tax position in relation to the remittance during the process of the recordal filing but now they do not consider this and it will hopefully accelerate the whole activity. The new system of recordal filing does not look to provide the ISTB with the tax position of the remittance but just to give them notice of it.
Some people may see this as an easing of one’s duty to pay their Chinese taxes but this is certainly not the case. The words ‘increased risk’ in regards to compliance with tax have been mentioned in discussing this new law so it is vital that care must be taken and rules are obeyed. At some stage in the 15 days following the stamping of the recordal-filing forms by the ISTB, the ISTB examine the reporting package submitted as part of the recordal filing and any supporting documentation. If all is not as it should be and the Chinese taxes have not been fully paid, punishments can follow. They can impose a financial penalty and also an extra late charge may be added to the tax the company owes according to the relevant Chinese law. The ISTB still follows up on each remittance and so a company in China and also overseas must be careful that everything is done by the book.
Other questions have arisen in regards to the treaty benefit available to overseas recipients. Some thought that the abolishment of the old TCC way would signal an opportunity for all to enjoy treaty benefits, but this is not the case. Treaty benefits which fall under Guoshuila No.124 must be considered separately to the TCC system. For companies to be entitled to treaty benefits they must still, as in the past, comply with the regulations set by Guoshuila No.124. One area in which the entitlement to treaty benefit is in question however is shipping. With Announcement No.40 coming in it will abolish 8 circulars in relation to outwards remittances and two of these give guidelines on how overseas shipping companies can receive treaty benefits. So at the moment it is unclear for shipping companies how to comply in order to receive these benefits.
In summary Announcement No.40 can be seen as changing the procedure of tax administration in China. In abolishing the TCC requirements the SAT and SAFE are proposing a move from a pre-remittance examination model to a model based on daily tax administration and post-remittance tax audits. For companies involved in overseas remittance, they can view the new law as something that will provide them with benefits in their cash flows, but with the increased risk in their filing positions compared with the old TCC way, they must be careful. This means that, should no challenge arise following the ISTB examination, the procedure for sending overseas remittances is simplified and, especially, accelerated. Overall the introduction of Announcement No.40 by SAT and SAFE seems to be a step in the right direction and a welcomed move by many. Hopefully it will be as successful as many hope.