Corporate Tax 2010 - BMR Advisors

Hendersen Taxand
China
2.4 Is it always fully recoverable by all businesses If not,
what are the relevant restrictions
3.2 Would there be any WHT on interest paid by a local
company to a non-resident
China
Input VAT is only recoverable by a general VAT taxpayer.
Furthermore, under the following circumstances, input VAT is not
recoverable even for general VAT taxpayers and should be
transferred out as a cost or expense of the enterprise:
Purchase of goods or taxable services which are used for
non-taxable items.
Purchase of goods or taxable services which are used for tax
exempt items.
Purchase of goods or taxable services which are used for
collective welfare or personal consumption.
Purchase of goods which suffer abnormal losses.
Purchase of goods or taxable services consumed in the
production of work-in-progress or finished products which
suffer abnormal losses.
Purchase of motorcycle, car and yacht for self use.
Purchase of goods or taxable services without receiving valid
VAT invoices.
In case of exportation, input VAT may be totally or partially nonrecoverable
provided that the exported goods are not entitled to a
VAT refund or the VAT refund rate of the goods is lower than its
applicable VAT rate.
In addition, in order to credit the input VAT against output VAT, the
input VAT invoices should be valid and be verified within a
determined period (normally 90 days); otherwise the relevant input
VAT will be non-recoverable.
2.5 Are there any other transaction taxes
Consumption Tax (“CT”)
CT is levied on 14 categories of goods, including tobacco, alcoholic
drinks, cosmetics, jewellery, fireworks, gasoline, tires, motorcycles,
automobiles, golf balls and instruments, luxury watches, yachts,
disposable wooden chopsticks and solid wood floor boards. CT is
normally levied at the manufacturing stage and import stage but for
some goods it is levied at the sales stage.
2.6 Are there any other indirect taxes of which we should be
aware
Under the Corporate Income Tax Law of China and its
implementation rules effective January 1, 2008, China-sourced
interest income obtained by a foreign enterprise shall be subject to
5% BT and 10% WHT with the Chinese payer as the withholding
agent.
3.3 Would relief for interest so paid be restricted by reference
to “thin capitalisation” rules
The Corporate Income Tax Law stipulates that if the debt
investment from affiliated parties exceeds the statutory
requirement, the interest expense for the exceeded debt investment
will be non-deductible for corporate income tax purpose.
3.4 If so, is there a “safe harbour” by reference to which tax
relief is assured
There is no such “safe harbour” available under current China tax
rules and regulations.
3.5 Would any such “thin capitalisation” rules extend to debt
advanced by a third party but guaranteed by a parent
company
Yes, the “thin capitalisation” rules extend to debt advanced by a
third party but guaranteed by a parent company.
3.6 Is any withholding tax imposed on dividends paid by a
locally resident company to a non-resident
Under the corporate tax law of China and its implementation rules,
the WHT rate for dividends paid by a locally resident company to a
non-resident is 10%. In some treaties, the rate is reduced to 5%.
3.7 Are there any restrictions on tax relief for interest
payments by a local company to a non-resident in addition
to any thin capitalisation rules mentioned in questions
3.4-3.6 above
Customs Duty (“CD”)
All goods permitted to be imported into or exported out of China
shall be subject to Customs import or export duties according to the
PRC Customs Import and Export Tariff.
3 Cross-border Payments
3.1 Would there be any WHT on royalties paid by a local
company to a non-resident
Under the Corporate Income Tax Law of China and its
implementation rules effective January 1, 2008, China-sourced
royalties obtained by a foreign enterprise shall be subject to 5% BT
and 10% WHT based on the royalty payments. BT may be exempt
for licensing of technologies. The BT and WHT should be withheld
from the amount of each payment by the Chinese payer (as the
withholding agent).
There is no relevant rule.
3.8 Does China have transfer pricing rules
Yes. China established detailed transfer pricing rules in 1998. In
2009, China issued a new transfer pricing documentation rules
which retroactively take effect from January 1, 2008. According to
the current transfer pricing rules, related party transactions should
be carried out at arm’s length; otherwise the tax authorities are
empowered to make adjustment on the taxable income by a
reasonable method and to impose relevant taxes accordingly. Tax
payers are required to submit various disclosure forms of the related
party transactions in the annual enterprise income tax filing. In
addition, if the sum of annual related party transactions reaches
certain thresholds, the tax payer will be required to prepare,
maintain and provide upon the tax bureau’s request a set of
comprehensive contemporaneous documentation to substantiate the
arm’s length nature of their related party transactions.
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