China’s new Enterprise Income Tax regulation and its impact on international transportation business
As reported in Clyde & Co’s 2011 article titled ‘Chinese charterers deducting taxes from hire payments’ (click here to view), foreign vessel owners engaged in business with Chinese charterers have long faced China’s Enterprise Income Tax regime (“EIT”). That regime looks set to extend further into the international transportation sector following a State Authority of Taxation Notice published on 30 June 2014.
Due to come into force on 1 August 2014, the “Notice on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business” (非居民企业从事国际运输业务税收管理暂行办法 – the “Notice”) sets out the various tax registration requirements for parties engaged in “international transportation business” and specifies provisions for withholding tax and the applicability of tax treaties.
Whilst previous regulations have dealt exclusively with a foreign entity’s liability for Enterprise Income Tax under a charterparty, the Notice is much further reaching.
Intended to regulate the levy of EIT on “non-resident taxpayers engaged in international transportation”, the Notice applies to all foreign entities engaged in commercial activities conducted by vessels and aircrafts. Such activities will include the transportation of passengers, cargo and post in and out of Chinese ports, together with other cargo-handling and warehousing activities.
The Notice also expressly covers non-resident companies engaged in leasing vessels under voyage charter and time charter and also aircraft leasing arrangements. Notably however, demise charters are excluded from the scope of the new regulations.
Foreign companies seeking to provide any of the aforementioned international transportation services to Chinese counterparties are required to register with the local tax authority within 30 days after signing any transportation agreement. In the event that the foreign company has operations in more than one Chinese port, they will be entitled to select which port they wish to register with.
Various documents need to be presented to the tax authority, including a ‘Certificate of Operating Qualifications’, together with any agreements related to the services and local contact details of the foreign company.
Pursuant to Article 7 of the Notice, EIT shall be deducted from the actual income received for the provision of the transportation services, less any expenses incurred. Income derived will include freight and, for passenger transport, ticket revenues, excess baggage charges, insurance fees and any fees for on-board entertainment and meals. We anticipate that further practical guidance may be issued by the relevant authorities in due course.
As regards a Chinese company’s duty to withhold tax, the Notice does not significantly alter the existing regulations. In the event that a foreign company fails to register with the relevant tax authority, its Chinese counterparty is required, under Chinese law, to deduct the tax from the invoice amount.
If a non-resident taxpayer intends to benefit from a tax treaty between its nation state and China, the company should apply for confirmation of the applicability of that treaty from the relevant tax authority. Such application should be supported by, among other things, copies of the Enterprise Registration Certificate and any relevant services agreements entered into with the Chinese counterparty.
Companies failing to adhere to the tax treaty application process will be required to submit a revised application and, if not submitted within the prescribed time frame, will be required to pay back any tax due.
Companies which have inadvertently missed out on any tax treaty benefits can apply for a tax refund within three years of the over-payment.
Importance of adhering to the regulations
The Notice encourages the relevant tax authorities to increase their surveillance of non-resident enterprises operating in Chinese ports to ensure that such foreign companies have fulfilled their tax obligations. The Notice also allows for the escalation of such enquiries to the State Administration of Taxation who will then authorise further investigation into any company thought to be in breach of the regulations. Non-resident taxpayers obliged to pay EIT should therefore carefully monitor their responsibilities under the Notice and seek legal advice before entering into transportation services agreement with Chinese entities.
Impact and our suggestions
The Notice repeals a number of existing tax regulations (dated from 1993 to 2008) and its impact is intended to be far-reaching, bringing a far greater number of commercial parties within its scope.
As noted above, it is likely that the State Authority of Taxation will produce a detailed guide to accompany the Notice in the near future. We will continue to monitor these developments.