Is
your Rep Office Compliant? Paying too much tax?
Are you sure your
Representative Office in China is compliant with Chinese taxation
regulations?
Can your Representative
Office be exempt from tax?
With
recent changes in taxation regulations for Representative Offices
("Rep Offices") many foreign companies are discovering
that their Rep Office is not compliant with Chinese taxation
regulations. Furthermore, many Rep Offices are paying taxes
when they are permitted to apply for tax exemption status.
Below is an
overview of the taxation regulations regarding Rep Offices:
Representative offices ("ROs")
first became subject to tax in 1985. A circular was issued in
1996 (Guo Shui Fa [1996] 165) to improve the tax administration
of ROs.
Most ROs are not permitted to
perform true business activities or record income, even though
many ROs are still subject to tax. The Chinese tax authorities
often tax ROs on a "cost-plus revenue with deemed profit" basis.
In March 2003, the State Administration of Taxation ("SAT")
issued another circular Guo Shui Fa (2003) No. 28 to
clarify the tax treatment of ROs.This circular had a large impact
on representative office taxpayers. The circular not only re-defined
tax liability of various types of representative offices ("ROs")
and the applicable taxation bases, but also made a big change
by including ROs of principal suppliers into the tax net under
a cost-plus taxation method.
Effective from 1 July 2003,
the Circular 28 has ruled out most tax exemption opportunities
except for ROs set up by manufacturers, government organizations,
international organizations, non-profit seeking organizations
and other similar private organizations. Unlike the 1996 circular,
the new rules encourage ROs to file their tax returns or activity
reports bases on their actual activities in China.
The tax base varies according
to industry as follows:
- ROs with a head office engaged in business
advisory, tax advisory, law, accounting, auditing or other
types of consulting services will be taxed on an actual basis,
and the RO should maintain complete accounting records and
be able to properly calculate revenue and taxable income.
- ROs whose head offices are engaged in trading
or agency activities carry on business activities on behalf
of the head office. Such ROs do not enter into agreements
with their customers directly. Because the head office normally
collects income attributable to these ROs, revenue of the
ROs is determined on a "cost-plus basis". Companies engaged
in the following service businesses fall into this category:
- ROs of trading companies or agents that
conduct agency activities for the trade of goods;
- ROs of foreign advertising companies
that conduct advertising agency services for their head
offices; and
- ROs of foreign tourist companies that
provide services to tourists (e.g., applications for visas,
hotel reservations, booking air tickets and organizing
tours and tour guides). ?In the case of ROs carrying on
other taxable activities, tax will be imposed on the actual
revenue generated, including amounts received by the head
office that are attributable to the RO. Annual activity
reports should be filed within one month of the year-end
if no revenue is generated.
- For ROs with head offices that are foreign
governments, international organizations, non-profit or nongovernmental
organizations, tax exemption applications should be filed
with the competent tax authorities. Such applications should
include documentation prepared by the tax authorities or government
of the home country identifying the nature of the head office.
Applications should be reviewed by the competent tax authorities
and are subject to the final approval of the SAT.
In a dramatic change, a new circular - Guo
Shui Han [2004] 568 was issued in May 2004 to reinstate
the tax exemption status of ROs of principal suppliers. There
is a strict definition of principal supplier for this purpose.
A qualified principal supplier must be solely engaged in
trading business on its own account and bearing inventory risk.
That is, a supplier, which is partly engaging in trading business,
is not qualified for this tax exemption purpose.
This circular reopened the door to tax exemption
for some RO taxpayers. Applicants should note that application
for such tax exemption could be cumbersome. They will be required
to provide a substantial amount of evidence to prove the business
model of its head office together with regular reviews on the
status. ROs of companies engaging in other types of activities
will not affected by this circular.
ROs of advertising companies or tour companies
with business activities should still be taxed on the cost-plus
method whereas ROs of consulting companies in relation to business,
law, taxation, accounting, audit, etc. are taxed on an actual
income basis.
|
|
LehmanBrown's
view on accounting and foreign businesses in China
The following is an excerpt of an interiew with Russell
Brown which appeared in the July edition of Metrozine magazine
(China).
Q:
Some accounting scandals have emerged in China, especially in
the A share listed companies. What are your comments in this
phenomena?
A: Accounting is a professional vocation and, as such, both
the profession itself and professionally qualified accountants
must uphold the most strict ethical values. China is certainly
not ring-fenced against fraudulent accouting scandals or behavior,
especially as the pressure for greater profits and to avoid
regulatory restrictions increases. As such, like most other
nations around the world with professional accounting bodies,
accountants in China must look to China's accounting body (CICPA),
other regulatory bodies (e.g China Securities Supervisory Commission,
Ministry of Finance) as well as the international accoutning
bodies for guidance and also to protect them from ethical dilemnas.
Q: Have you run into
an ethical dilemma in your career?
A: Never. If LehmanBrown was put into a situation whereby a
potential client demanded us to undertake unethical or non-compliant
behvaiour we would turn the business away. Accounting firms
win business because people trust their ethical values, as well
as accounting knowledge. We believe it is an integral function
for accounting firms to assist in the education of accountants,
companies and to promote good Corporate Governance in China,
especially given China's emergence as a world business centre.
Q: What do you think
are the major hurdles for international companies operating
in China?
A: We have looked at hundreds of companies in many industries
and of many nationalities. My biggest frustration is China is
the lack of standard interpretation of rules by different Government
departments and organizations.
The banking system is a typical example of non
standardisation of foreign exchange regulations. This is primarily
cuased due to having a diverse range of banks and localised
regulatory bodies operating throughout China - from the State
Administration of Foreign Exchange (SAFE), People's Bank of
China, the big four banks, foreign banks, policy banks and other
commercial banks. Additionally you have both the tax bureau
and SAFE involved in overseas payments, with the majority or
regulations being interpreted at local level. We have seen many
cases where such interpretations between locations are inconsistent
and this can cause huge uncertainty and lack of transparency
for Foreign Companies operating in China.
|
