OUR INSIGHTS

• New Value-added Tax Regime in China — Impact on Representative Offices


TAX

• Updates to Reporting and Administrative Requirements


CORPORATE ADVISORY

• Promulgation of Asset Evaluation Law

• SAIC Issues Opinions on Reformation of Trademark Registration


HUMAN RESOURCES

• New Retirement Postponement Policy

• Government Rates Enterprises’ Labour Security Compliance Records



 

 OUR INSIGHTS

New Value-added Tax Regime in China — Impact on Representative Offices

Representative offices (ROs) are normally set up in China under three circumstances:
1. A foreign company sets up an RO to promote its products and services overseas and establish networking relationships with Chinese businesses.
2. Law firms — An RO is the only business entity form in which a law firm is allowed to adopt in China
3. Non-profit organisations — An RO is the only business entity form in which a non-profit organisation is allowed to adopt in China

According to current laws, circulars and regulations for ROs, there are three methods to calculate tax liabilities (“RO Taxation Method”), depending on how capable the RO is in  maintaining its financial records as explained below:

Actual Basis Method
This method is adopted when the RO is capable of establishing accounting books in accordance with relevant laws and regulations, keeping those records based on legitimate and valid vouchers and accurately reporting its revenue, expenses and costs.

Taxable Income Made On Total Income Method
This method is applicable when the RO is able to accurately report its revenues but not its expenses and costs. Taxable income is calculated as follows:
Taxable Income = Actual Revenue x Deemed Profit Rate (No less than 15%)

Converting Appropriation Expenditures Into Income Method
It is applicable for ROs that are able to accurately report their expenditures but unable to accurately report their income. Taxable income is calculated as follows:
Step 1: Deemed Revenue = Current Appropriation Expenditure / (1 – Deemed Profit Rate)
Step 2: Taxable Income = Deemed Revenue x Deemed Profit Rate (No less than 15%)

According to the Caishui [2016] No. 36 circular, value-added tax (“VAT”) has replaced the business tax (“BT”) in all sectors — including real estate & construction, financial services & insurance, lifestyle and other services — with effect from 1 May 2016.

The table below compares the tax burdens under the previous BT and new VAT regimes. 

Assumptions:

  • Margin rate is 15%;
  • Business tax rate is 5%;
  • Surtax rate is 13%;
  • VAT rate for small-scale VAT taxpayer is 3%, while that for general VAT taxpayer is 6%;
  • Input VAT not deducted for general VAT taxpayer; and
  • Corporate income tax rate is 25%
RO Taxation Method  Actual Basis Method   Taxable Income Made On Total Income Method  Converting Appropriation Expenditures Into Income Method 
Tax Category      
Business Tax Formula Taxable Income = Actual Revenue – Actual Expenditures  Taxable Income = Actual Revenue x Deemed Profit Rate (No less than 15%)  Step 1:
Deemed Revenue = Current Appropriation Expenditure / (1 – Deemed Profit Rate – Business Tax Rate)

Step 2: 
Taxable Income = Deemed Revenue x Deemed Profit Rate (No less than 15%)
 Revenue  RMB125 RMB125 RMB125 
 Expenditures  RMB100 RMB100 RMB100
 Total tax burden based on expenditures  11.75% 11.75% 11.75%
VAT
(Small-
scale VAT Taxpayer)    
 Formula Taxable Income = Actual Revenue – Actual Expenditures Taxable Income = Actual Revenue x Deemed Profit Rate  Step 1:
Deemed Revenue =  Current Appropriation Expenditure / (1 – Deemed Profit Rate)

Step 2: 
Taxable Income = Deemed Revenue x Deemed Profit Rate (No less than 15%)
 
Revenue RMB117.65  RMB117.65 RMB117.65
Expenditures  RMB100 RMB100 RMB100
Total tax burden based on expenditures  8.4% 8.4% 8.4%
VAT (General VAT Taxpayer)    Formula Taxable Income = Actual Revenue – Actual Expenditures Taxable Income = Actual Revenue x Deemed Profit Rate Step 1:
Deemed Revenue =  Current Appropriation Expenditure / (1 – Deemed Profit Rate)

Step 2: 
Taxable Income = Deemed Revenue x Deemed Profit Rate (No less than 15%)
Revenue RMB117.65 RMB117.65 RMB117.65
Expenditures RMB100 RMB100 RMB100
Total tax burden  based on expenditures  ≤12.39% ≤12.39% ≤12.39%


From the table above, the effects of the change to the new VAT regime from the previous BT system are as follows:
1. If the RO generates an annual revenue of no more than RMB5 million, it is now considered a small-scale VAT taxpayer. For whatever taxation method is applied by the RO, the total tax burden based on expenditures is decreased from 11.75% under the previous BT system to 8.4% under the new VAT regime.

Under the new VAT regime, such an RO would therefore have a lower total tax burden based on expenditures.

2. If the RO generates an annual revenue of over RMB5 million, it is now considered a general VAT taxpayer, in which case, the tax calculation is much more complicated. For whatever taxation method is applied by the RO, the total tax burden based on expenditures (including VAT, surtax and corporate income tax) is not at a fixed rate but less than or equal to 12.39%. Compared with the tax burden of 11.75% under the previous BT regime, the tax burden now for such ROs under the new VAT system may be higher or lower. It depends a lot on the purchase price negotiated with the contractors and whether the RO is able to obtain a special input VAT invoice. Although other invoice types other than the special input VAT invoice are also accepted as original accounting vouchers, only the special input VAT invoice may be used to claim output VAT.


 TAX

Updates to Reporting and Administrative Requirements

On 29 June 2016, the State Administration of Taxation (“SAT”) announced updates to requirements for the reporting of related party transactions and administration of contemporaneous documentation (SAT Announcement [2016] No. 42, or “Announcement 42”). Announcement 42 refines the existing transfer pricing compliance requirements in China, including those relating to annual reporting forms for related party transactions (“RPT Forms”), country-by-country reporting, and transfer pricing documentation.

Announcement 42 replaces some provisions of the SAT Circular on Implementation Measures for Special Tax Adjustments (Guoshuifa [2009] No. 2) and applies to fiscal years beginning from 1 January 2016 onwards. The salient points of Announcement 42 are as follows:

  • Sets out the requirements for preparation of the Master File, Local File and country-by-country reporting
  • Requires preparation of additional documentation for cost sharing arrangements and thinly capitalised companies
  • Expands the related party transaction category to include transfers of financial assets
  • Extends the deadline for the preparation of required documentation
  • Increases the number of RPT Forms from 9 to 22

A Master File is required when:

  • The annual related party transactions exceed RMB1 billion, or
  • There are cross-border related party transactions and the company’s ultimate parent company has already prepared a Master File.

The master file must be prepared within 12 months after the close of the ultimate parent company’s financial year.

A Local File is required when:

  • Annual related party transactions of physical goods exceed RMB200 million (for toll manufacturing, the value is based on the import and export customs declared value),
  • Annual related party transactions for transfers of financial assets exceed RMB100 million,
  • Annual related party transactions for transfers of intangible assets exceed RMB100 million, or
  • All other related party transactions exceed RMB40 million in total annually.

The local file must be ready by June 30 of each year following the close of the company’s financial year.

Country-by-country reporting is required when:

  • The Chinese company is the ultimate holding company of the group whose consolidated revenue exceeds RMB5.5 billion, or
  • The Chinese company has been nominated as the country-by-country reporting entity.

Separately, taxpayers will be required to provide more information on their transfer pricing documentation such as value chain analysis, location-specific advantages and disclosure of outbound investments and related party equity transfers.

Companies that do not transact with overseas related parties are exempt from preparing contemporaneous documentation.


 CORPORATE ADVISORY

Promulgation of Asset Evaluation Law

The Asset Evaluation Law of the People’s Republic of China (the “Law”) was adopted by the Standing Committee of the 12th National People’s Congress and shall take effect from 1 December 2016.

The Law lowers the minimum professional qualifications required for conducting asset evaluation, regulates the activities of evaluators and increases the severity of punishments for violations. It states that professional evaluators are entitled, but not limited to, requiring the client to provide related certificates of ownership, financial and accounting information and other materials, as well as assistance necessary for implementing fair evaluation. The Law also stipulates that a professional evaluator shall be barred from evaluation for life should he or she violate the Law.

SAIC Issues Opinions on Reformation of Trademark Registration

The State Administration for Industry and Commerce (“SAIC”) recently issued opinions on the reformation of trademark registration (the “Opinions”).

The Opinions propose a more convenient trademark registration process for the applicant by increasing the number of application channels, such as launching online application, simplifying trademark registration formalities, enhancing the efficiency of the trademark examination mechanism, and strengthening trademark supervision. They specify that local authorities should be authorised to accept applications for trademark registration and online application services should be launched. The Opinions also state that notice of the trademark application’s outcome should be given within three months instead of the current period of six months.


 HUMAN RESOURCES

New Retirement Postponement Policy

A retirement postponement policy is expected to be implemented in China soon. The government has stated several times that the new policy will be implemented this year, and the specific details are currently in the process of finalisation before they will be announced to the public.

Late last month, 12 articles on retirement postponement were published on the Ministry of Human Resources and Social Security’s official website over three consecutive days. In these articles, several experts analysed the necessity of retirement postponement and most said that a policy for this is appropriate given China’s current socio-economic situation.

The experts’ comments focus on the following aspects:

Necessity of postponing retirement
Currently, Chinese citizens retire at a relatively young average age of about 54 years old. This means the duration for most citizens to accumulate social insurance contributions is short, while life expectancies and years of education continue to increase. Consequently, pension entitlement years are long by comparison.

In the future, it is estimated that pension funds would not be adequate to cover high pension burdens unless retirement is postponed to ensure sustainable pension policies.

Difference between male and female citizens’ mandatory retirement ages
The difference between male and female citizens’ mandatory retirement ages ranges from five to 10 years, with women retiring earlier than men. The new retirement postponement policy would therefore need to treat both groups separately and be implemented step by step.

Negligible impact of retirement postponement on employment status of young people
Postponing retirement may affect employment of young people to a certain extent, but the effect is expected to be negligible. This is because many enterprises in China already often prefer to rehire retired employees, which would be similar to postponing retirement.

In addition, new emerging industries will continue to create job opportunities for young people, particularly in high-tech sectors.

Postponing retirement to increase pension funds
Postponing retirement would increase the number of working years, thereby increasing the duration for citizens to accumulate pension funds. As the citizen’s average salary over the course of his or her career is expected to increase, the pension entitlement — part of which is calculated according to the average salary — should also be higher if retirement is postponed.

Government Rates Enterprises’ Labour Security Compliance Records

The Ministry of Human Resources and Social Security recently announced measures for rating enterprises’ labour security compliance records, which will take effect from 1 January 2017.

A key measure is the rating of an enterprise’s labour security compliance record based on its performance in this area the previous year. This takes into account information obtained from labour security monitoring and other related work, such as routine daily inspections, written reviews, complaint reports, investigations and management, and special inspections.

The ministry will also rate an enterprise based on its performance in nine categories, including the conclusion of labour contracts with employees. There are three ratings, namely, Grade A, Grade B and Grade C, and an enterprise that “has been investigated and penalised more than three times due to labour security violations” in any category would be rated Grade C. Enterprises rated Grade C would be subject to more intense daily labour security inspections than those rated Grade A or B.


 ABOUT US


SBA Stone Forest (SBASF) is a corporate advisory and public accounting group headquartered in Shanghai with offices in Beijing, Suzhou, Shenzhen, Chengdu and Hangzhou. We help foreign businesses set up in China and thereafter support them in navigating China’s regulatory and business environment, having carved a niche serving those from the Americas, Europe, as well as North and South East Asia since we started in 2001.

Our parent company — Stone Forest — is the largest accounting and business advisory group outside the Big 4 in Singapore, with a 30-year history. Discerning international businesses appreciate our Singapore heritage, as it epitomises excellence, integrity and trust. We share the same systems, high standards, international best practices and service culture of our Singapore parent.

Together with our partner-owned public accounting practice, we offer intimate local knowledge and one-stop, seamless solutions in business assurance, accounting & advisory, payroll & HR advisory, tax compliance and advisory, risk management, corporate advisory and eDiscovery.

We are also well-positioned to help Chinese enterprises internationalise, given our Singapore parentage in a top financial and business hub in Asia, and our memberships in the Allinial Global and World Services Group international networks.


 CONTACT US


Website: www.SBASF.com

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Tan Lee Lee (Ms), Director
T +86 21 6186 7602
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Yeo Lee Soon (Mr), Director
T +86 10 8591 1900
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Rita Boyle, Director
T +86 21 6186 7692
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