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.
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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.
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