OUR INSIGHTS
• New regulations on withholding corporate income tax for non-resident enterprises
TAX
• More types of R&D expenses qualify for super tax deduction
CORPORATE ADVISORY
• Amended law against unfair competition expands commercial bribery definition, increases penalties
• New regulations for manufacturers of food exports
HUMAN RESOURCES
• Hong Kong, Macao, Taiwan workers in mainland China may contribute to housing provident fund
• Prerequisite for residence permit application in Shanghai
OUR INSIGHTS
New regulations on withholding corporate income tax for non-resident enterprises
China’s State Administration of Taxation released a circular on withholding corporate income tax (CIT) for non-resident enterprises (Circular 37) that took effect on 1 December 2017. This supersedes a series of circulars and regulations on this issue, including Guoshuihan [2009] No. 698 (Circular 698) and Guoshuifa [2009] No. 3 (Circular 3).
Key areas covered by Circular 37 include:
1. Simplification of tax filing for non-resident enterprises
Article 5 of Circular 3 stated that a withholding agent’s obligation to withhold CIT would be triggered upon execution of a contract with a non-resident enterprise, in which case the withholding agent had to apply to the relevant tax authority within 30 days of the contract’s execution for tax filing in relation to the contract.
In the case of multiple payments under a single contract, Article 18 of Circular 3 stated that the withholding agent had to submit all relevant materials required for tax filing each time a payment was made. These included payment breakdowns, the tax return and tax payment certificates of previous payments under the contract. Then, the withholding agent had to complete clearance procedures for withholding CIT within 15 days of making the final payment under the contract.
With Circular 37 superseding Circular 3, withholding agents are also no longer subject to Articles 5 and 18 of Circular 3.
2. Tax payment by instalments for income derived from instalment sales of assets
If a non-resident enterprise derives income from instalment sales of assets, tax liability for such income may be deferred. Non-resident enterprises do not need to calculate and withhold tax until all relevant costs are fully recovered.
3. Exchange rate application under three different situations
There are 3 tax payment situations for non-resident enterprises:
• Tax payment via a withholding agent
• Direct tax payment
• Order by tax authority to pay tax
Tax payment via a withholding agent
Tax payment in a foreign currency via a withholding agent should be converted into RMB based on the currency’s middle exchange rate with the RMB on the date of withholding. The date of withholding is the actual tax payment date or the due date for settling the tax payment.
Direct tax payment
If the withholding agent fails to fulfil its obligation to withhold tax, the non-resident enterprise shall pay tax directly to the tax authority. In this situation, if the enterprise pays tax in a foreign currency, the amount should be converted into RMB based on the currency’s middle exchange rate with the RMB the day before the tax payment voucher’s issuance date.
Order by tax authority to pay tax
If tax is not paid by the payment due date, the tax authority would order the non-resident enterprise to withhold CIT at source within the prescribed period. Should the enterprise derive income in a foreign currency, relevant income should be converted into RMB based on the currency’s middle exchange rate with the RMB the day before the issuance date of the written order to pay tax.
4. Change of withholding obligation trigger point for dividend distribution
According to Circular 37, the withholding obligation on dividends and bonus dividends would only be triggered on the actual payment date rather than the date of the distribution decision.
More types of R&D expenses qualify for super tax deduction
More types of R&D expenses qualify for a super tax deduction with effect from corporate income tax filing for the 2017 calendar year onwards, the State Administration of Taxation said. Such expenses include:
• Salaries of external R&D personnel covered by fees paid to HR outsourcing providers
• Equity incentives for R&D personnel
• Welfare expenses, as well as supplementary pension insurance and medical insurance premiums directly related to R&D activities, with a cap of 10% of the total R&D expense for super deduction
• R&D expenses from unsuccessful R&D activities
CORPORATE ADVISORY
Amended law against unfair competition expands commercial bribery definition, increases penalties
China’s newly amended law against unfair competition that came into effect on 1 January 2018 expands the definition of commercial bribery, explains corporate liability for such acts by employees, and increases the associated penalties.
Expanding the definition of commercial bribery
The original 1993 law against unfair competition only identifies commercial bribery that happens during the course of selling and buying goods. Article 7 of the newly amended law states that businesses shall not offer bribes to any of the following entities or individuals in the form of money, property or other benefits with the intention of seeking to obtain a transaction opportunity or competitive advantage:
• Any employee of the counterparty in a transaction;
• Any entity or individual entrusted by the counterparty in a transaction to handle relevant affairs; or
• Any other entity or individual that is in a position to influence a transaction between the business and the counterparty
The counterparty itself is not mentioned as a recipient in Article 7 and may accept discounts or commissions, provided that these are transparent and recorded in the counterparty’s accounting records.
Corporate liability for commercial bribery by employees
A key issue is the question of how to distinguish an employee’s actions from those of the entity for which he works. Section 3 of Article 7 states that “an act of bribery by an employee of a business shall be deemed an act of the entity itself, unless the business proves that such an act is not related to efforts in seeking a transaction opportunity or competitive advantage.” The organisation’s only defence would be that the employee performed the act of bribery for his or her own benefit, rather than for the benefit of the entity. However, it is unclear as to what extent the entity is required to prove that it was unaware of its employee’s actions or did not authorise them, and more specific guidelines are required to clarify this matter.
Increased penalties for commercial bribery
The newly amended law raised the maximum fine for commercial bribery to RMB3 million. Authorities may include the case and resulting financial penalty imposed on the entity in its credit record for disclosure to the public, possibly affecting its brand image and reputation. In serious cases, the entity’s business licence may even be revoked.
Conclusion
While the newly amended law provides businesses with greater clarity on the legal implications of commercial bribery, its wider scope means that entities might face a greater risk of liability for such acts by employees. It is therefore crucial for businesses to have robust policies, training, and reporting channels against commercial bribery in place to minimise the risk of such liability.
New regulations for manufacturers of food exports
Manufacturers of food exports that fail to submit the required documents and information, or whose submissions do not meet relevant requirements, are prohibited from exporting their products, according to new regulations issued by General Administration of Quality Supervision, Inspection and Quarantine that took effect on 1 January 2018.
Such manufacturers are also required to establish archives of their food safety and hygiene control measures as well as manufacturing processes. In addition, production records of food exports must be kept for at least six months after expiry of the shelf life. If there is no definite shelf life, these must be kept for at least two years.
HUMAN RESOURCES
Hong Kong, Macao, Taiwan workers in mainland China may contribute to housing provident fund
Employees from Hong Kong, Macao or Taiwan working in mainland China may contribute to the housing provident fund in accordance with relevant regulations with effect from 1 April 2018. A joint announcement by the Ministry of Housing and Urban-Rural Development and other departments stated that all relevant procedures and rules relating to the housing provident fund for such employees would be the same as those from mainland China.
If such employees contribute to the housing provident fund, they may withdraw from it for purposes such as housing purchases and loans in mainland China. Should their employment location change from one mainland Chinese city to another, they may transfer their housing provident fund account to the new location.
Those in mainland China who terminate the employment contract and return to Hong Kong, Macao or Taiwan may withdraw the balance from their housing provident fund account in accordance with relevant legal provisions.
Prerequisite for residence permit application in Shanghai
Chinese citizens from other parts of the country who wish to work or study in Shanghai must now register required residential details at the city’s community affairs service centre, according to new regulations that took effect on 1 January 2018.
The person’s residential details must be registered for six months or more before he/she can apply for a local residence permit at the same service centre. Only residence permit holders may enjoy local benefits relating to employment, social insurance, the housing provident fund and basic public services.
ABOUT US
Established in 2001, SBA Stone Forest 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 navigate its regulatory and business environment.
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, hassle-free solutions for business assurance, accounting & advisory, payroll & HR advisory, tax compliance and advisory, risk management, and corporate advisory.
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 membership in the Allinial Global international network.
