Impact of Public Notice on Certain Corporate Income Tax Matters
Released in March 2015, State Administration of Taxation (SAT) Public Notice  No.16 (“Public Notice 16”) is expected to change the way foreign enterprises repatriate profits out of China. It is obvious that the SAT aims to strengthen tax administration of outbound payments to related parties overseas. The opinions of taxpayers and tax authorities regarding the deduction of an outbound payment to related parties overseas may also differ. Therefore, we suggest enterprises should consider the following actions to monitor the tax risks of outbound payments:
For historical outbound payments:
- Conduct health checks to identify the status and potential risks; and
- Prepare necessary supporting documents to substantiate and justify the payments (e.g., intercompany agreements, transfer pricing documentation/benchmarking) to address any challenges by the tax authority regarding such transactions.
For future outbound payments:
- Explore opportunities to optimise profit repatriation channels to ensure business sustainability and tax compliance; and
- Build up an effective monitoring system for outbound payments in daily operations and conduct adjustments when necessary.
Recap on details of Public Notice 16
Public Notice 16 states that enterprises should comply with the arm’s length principle when making payments to their related parties overseas. Taxpayers shall provide relevant documentation upon request, such as intercompany agreements, and documentation that verifies the authenticity as well as the arm’s length nature of the transactions.
Public Notice 16 clarifies that four types of expenses cannot be deducted for the purpose of corporate income tax (“CIT”) assessment:
Unqualified Related Parties Overseas
If the enterprise disburses expenses to its related parties overseas that fail to perform their functions or bear risks and have no substantial operating activities, such expenses shall not be deducted when the taxable income of the enterprise is calculated.
Unqualified Service Fee
If the enterprise pays for services rendered by related parties overseas, these services shall enable the enterprise to obtain direct or indirect economic benefits. Otherwise, the payments for non-beneficial services shall not be deducted for the purpose of CIT assessment. More specifically, non-beneficial services include:
Royalties paid to a related party overseas that only owns the legal rights of the intangible asset but does not contribute to its value creation and comply with the arm’s length principle
Royalties paid to a related party overseas as compensation for incidental benefits arising from financing or listing activities
Administrative Measures for Non-resident Taxpayers Claiming Tax Treaty Benefits
State Administration of Taxation (SAT) Public Notice  No.60 has introduced a new mechanism of self-assessment on the eligibility for tax treaty benefits (reduced taxation or exemption under the relevant tax treaties) by non-resident taxpayers.
The pre-approval process or record-filing acknowledgement from the Chinese tax authorities is no longer necessary. Instead, non-resident taxpayers and their withholding agents will be required to file certain prescribed forms and other supporting documents when performing tax filing to justify their claims for the tax treaty benefits.
Refinement to Super-deduction Policy for Research and Development Expenses
Caishui  No.119 (“Circular 119”) provides further clarification and refinement in relation to the scope of R&D activities and R&D expenses, financial accounting and administration, and record-filing requirements. It clarifies the detailed measures implemented regarding the super-deduction of R&D expenses for the purpose of corporate income tax assessment.
Application of Zero Value Added Tax Rate to Certain Services
Caishui  No.118 (“Circular 118”) states that domestic enterprises or individuals providing the following services to companies overseas can adopt the zero VAT rate:
- Production and distribution of radio and television programmes;
- Technology transfer services, software services, circuit design and testing services, information system services, operation process management services, and energy management services; and
- Offshore outsourcing services, including information technology outsourcing (ITO), business process outsourcing (BPO), and knowledge process outsourcing (KPO).
Foreign Exchange Settlement of Foreign Debt Funds
The Shanghai Branch of the State Administration of Foreign Exchange implemented rules for further promotion of foreign exchange administration reform in the China (Shanghai) Pilot Free Trade Zone (the “SHFTZ”) that took effect on 17 December 2015.
The rules state that enterprises (excluding financial institutions) in the SHFTZ are allowed to make foreign exchange settlement of their foreign debt funds, and the procedures for foreign exchange receipts and payments under current items shall be further simplified.
Trading of Recognised Hong Kong Funds by Individuals
The Ministry of Finance and two other departments jointly issued the Circular on Relevant Tax Policies for the Mutual Recognition of Funds between the Chinese mainland and Hong Kong (the “Circular”) for implementation with effect from 18 December 2015.
The Circular specifies that income from the price margin in trading of recognised Hong Kong fund units by mainland individual investors shall be temporarily exempt from individual income tax for three years from 18 December 2015 to 17 December 2018. It also states that individual income tax shall be withheld and paid by the mainland agents of such Hong Kong funds at a tax rate of 20% for proceeds obtained by individuals from the distribution of recognised Hong Kong funds.
Budgeting for 2016 HR Cost
When HR departments plan for the HR cost of 2016, they should consider the following issues:
- The HR cost should at least include the gross salary and social security components as well as certain supplementary benefits such as commercial insurance and staff health check-up
- The minimum wage would be adjusted in April every year in Shanghai as usual
- The social insurance base would be increased in April 2016 in Shanghai
- The housing fund base would be increased in July 2016 in Shanghai
- How to improve staff benefits without increasing the HR cost, for example, by increasing the annual leave entitlement
Announcement of China’s Public Holidays in 2016
China’s General Office of the State Council released the official list of non-working public holidays, bridge public holidays, and compensatory Saturdays and Sundays for the calendar year 2016.
|New Year||1–3 Jan 2016|
|Spring Festival||7–13 Feb 2016|
|Tomb-sweeping Festival||2–4 Apr 2016|
|Labour Day||30 Apr–2 May 2016|
|Dragon Boat Festival||9–11 Jun 2016|
|Mid-Autumn Festival||15–17 Sep 2016|
|National Day||1–7 Oct 2016|
Please note that the following Saturdays and Sundays are working days: Feb 6 & 14, Jun 12, Sep 18, Oct 8 & 9
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Yeo Lee Soon (Mr), Director
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Rita Boyle, Director
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