Tax liability of Services provided by non-resident enterprises 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 1 Aco China Service provision Payment Country B Bco What if Bco provides service to Aco in country B and derives the income? What if Bco provides service to Aco in China and derives the income? What taxes shall be paid to Chinese tax authority? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 1 Aco China Service provision Payment Country B Bco How can China’s tax authority determine whether the service is provided in China or not? How does the tax authority ensure the tax collection? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 1 Aco China Service provision Payment Country B Bco Bco will be regarded as deriving China-source business income and subject to EIT if: (1)Bco sends employees to work for Aco in China, or (2)Bco sends employees to work for Aco in China for a certain time period (e.g. 6 months) if country B is China’s treaty partner. In order to make payment to Bco, Aco must apply to the tax authority for the tax payment certificate and pay tax. Otherwise, according to the foreign exchange regulations, Aco’s bank will refuse the payment The tax authority will check the relevant payment records of Aco and visa records of Bco’s employees for the tax auditing. If Aco and Bco do not truthfully report to the tax authority, they shall have to pay fines and late payment surcharges. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 2 Aco China Service provision Deposits Country B Payment Bank in country B Bco What if Aco make the payment directly from its overseas bank accounts to Bco? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 2 Aco China Service provision Deposits Country B Payment Bank in country B Bco What if Aco make the payment directly from its overseas accounts to Bco? In this case, the tax authority can still check the relevant payment records of Aco and visa records of Bco’s employees for the tax auditing. In order to avoid the risk of high late payment surcharges and fines, the taxpayers shall comply with the tax laws carefully. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 3 Aco China Service provision (design and management) Payment Country B Bco What if Bco provides to Aco a package of different kind of services? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 3 Aco China Service provision Payment Country B Bco What if Bco provides to Aco a package of different kind of services? In this case, different services shall be accounted separately and subject to different effective tax rates. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Relevant rules: If a non-resident enterprise establishment fails to keep proper accounting books and records and cannot calculate the accurate amounts of income, costs or expenses and is unable to report taxes on actual basis as stipulated, the tax authority is empowered to verify the amount of its tax payable. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Different basis for verification Verification of taxable income based on gross revenue: Taxable income = gross revenue ×verified margin Assessment of taxable income based on costs and expenses: Taxable income = total costs and expenses ÷ (1 – verified margin ) × verified margin Assessment of taxable income based on revenue converted from operational expenditures: Taxable income = total of operational expenditures ÷ (1 –verified margin – business tax rate) × verified margin 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Different margin rates for verification For enterprises engaging in project contracting, design and consulting services, the margin shall be 15% to 30% For enterprises providing management services, the margin shall be of 30% to 50% For enterprises providing other services or engaging in business other than providing services, the margin shall be not less than 15% 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 4 Aco China Equipment Installation service Payment Country B Bco What if Bco sells equipment to Aco and sends employees to help install the equipment in China ? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 4 Aco China Equipment Installation service Payment Country B Bco What if Bco sells equipment to Aco and sends employees to help install the equipment in China ? In this case, the installation fee shall be separately accounted and subject to EIT in China. Income from sale of equipment shall not be subject to China’s EIT. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 5 Aco China Service provision (design) Payment Country B Bco What if Bco do the design work in country B but does not transfer the Intellectual property of relevant products to Aco? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Case 5 Aco China Service provision (design) Payment Country B Bco What if Bco do the design work in country B but does not transfer the Intellectual property of relevant products to Aco? In this case ,the income will be regarded as royalties and subject to 10% withholding tax in China. 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

Dr. Du Li Department of Public Economics,Fudan University Summary: steps for determining the tax liability in China for NRE providing services to Chinese entities Determine source of the income: providing service within or outside China? Determine status of taxpayer: establishment or not? (PE or not?) Determine the type of taxable income: service income or royalties? Determine mode of assessment: WHT, based on actual accounting profits or applicable margin? 2018/9/21 Dr. Du Li Department of Public Economics,Fudan University

NREs providing services to Chinese entities With employees working in China? yes no providing services within China providing services outside China From treaty country? IP transferred to China? yes no yes no Present in China for 6 months or more? With establishment Business income royalties yes no No tax 10% WHT With PE No tax With sound accounting system? yes no EIT based on accounting profits EIT based on applicable margin Other services Design/project Contracting/ consulting management 2018/9/21 15-30% 30-50% Dr. Du Li Department of Public Economics,Fudan University >=15%