China: Significant Changes To Business Tax For Foreign Service Providers

Changes to Levying Principle on Taxable Services

Effective 1 January 2009, the levying principle of business tax ("BT") on services in the People's Republic of China ("PRC") has been changed from where the service is performed to where the service provider or the service recipient is located. This change may have a substantial impact on the BT liabilities of foreign service providers who provide services outside the PRC to PRC clients.

Similar to the repealed Tentative Regulations on Business Tax (1993 Version), the Tentative Regulations on Business Tax (2008 Revision) provide that any unit or individual that provides services, transfers intangible assets or sells immovable property in the PRC is liable for BT and must pay it in accordance with the regulations.

Article 4 of the Implementation Rules of the Tentative Regulations on Business Tax (2008) ("New BT Implementation Rules") further explains that "providing services in the PRC" refers to "units or individuals who provide or receive services as prescribed in the Regulations who are in the PRC". This is substantially different from the provision of the Implementation Rules of the Tentative Regulations on Business Tax (1993) ("Old BT Implementation Rules"), under which the service provider was liable for BT only if the taxable services were rendered within the PRC. Services rendered outside the PRC were not subject to BT.

The new regulations imply that as long as the service provider or the service recipient (including foreign invested enterprises) is located in the PRC, the service income shall be subject to BT, regardless whether the services are rendered in the PRC or elsewhere. In this regard, BT may now be imposed on fees such as interest on loans paid by a PRC entity or individual to a foreign company and payments to a foreign lessor by a PRC lessee for the lease of tangible assets.

It is uncertain whether the New BT Implementation Rules govern the taxability of services provided by a foreign entity to a PRC client in 2008, but paid for in 2009. If applicable, then the services are subject to BT. But if the Old BT Implementation Rules govern, then the services rendered in 2008 are exempt from BT. Oral enquiries with some local tax bureaus indicate that most hold that services provided by a foreign enterprise to a PRC enterprise outside of the PRC in 2008 may not be subject to BT. But such cases should be supported by documentation that satisfies the responsible tax official. Communication with the competent local tax bureaus to understand their position and documentation requirements is recommended.

Without a doubt, the modified BT levying principle on taxable services will have a significant impact on many foreign service providers. It is advisable for them to immediately assess the BT exposure arising from services related to the PRC and be prepared to deal with potential BT costs.

Place of Tax Declaration and Withholding Agent

Under the New BT Implementing Rules, a taxpayer that provides taxable services shall declare and pay tax at the place where the taxpayer is located or resides (instead of the place where the service is rendered, as formerly required). However, for construction services, taxpayers shall declare and pay tax at the place where the services are rendered.

Where a foreign enterprise that provides taxable services, transfers intangible assets or sells immovable property in the PRC has no operating institution within the PRC, its agent in the PRC shall be the BT withholding agent; if the foreign enterprise has no agent in the PRC, the transferee or purchaser shall be the BT withholding agent. The new rules also clarify withholding time, withholding location and withholding deadline.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.