Gu Gong Lei, Journalist
With more Chinese enterprises and individuals venturing overseas for investments, China’s State Administration of Taxation (SAT) has stepped up enforcement of tax collection to generate more tax revenues as the country faces slower economic growth.
The Chinese government has been taxing the overseas incomes of Chinese enterprises and citizens. However, many Chinese citizens seem to be unaware of this policy despite the fact that it is not newly implemented, according to tax advisors and lawyers.
Speaking to Lianhe Zaobao, Scott Jin, Associate Director of Tax Advisory at SBA Stone Forest, noted that this tax law has been in force for a long time and applies to Chinese businesses that expand into foreign markets. With more businesses venturing overseas, stepping up enforcement of this law has become necessary, he said.
Jin added that with growing international efforts against tax evasion, the Chinese government will continue to tighten enforcement of tax collection from Chinese enterprises’ overseas operations and strengthen collaboration with other countries in the exchange of tax information.
He Li Juan, the founder of Shanghai Veritas Law Corporation in China, said she believes that SAT will strengthen the enforcement of taxation law and investigations of overseas transactions, incomes and other information of Chinese businesses and citizens. She added that China has signed double taxation agreements with many countries, which provides relief to companies and individuals with relevant supporting documents.
Jin said SAT released a “Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-controlled Overseas Registered Enterprises as Resident Enterprises in accordance with the Actual Standards of Organisational Management”. The circular states that if a company registered in a foreign country is regarded as a Chinese tax resident enterprise, the company would be taxed on revenues earned both within and outside of China.
Specifically, if the effective management team of a Chinese enterprise’s overseas subsidiary is stationed in China, and this management team has decision-making power over the overseas entity’s daily operations, including areas such as financing arrangements (loans and borrowing) and employee deployment, the overseas entity will be regarded as a Chinese tax resident entity and subject to Chinese corporate income tax.
Strengthening Measures against Corporate Income Tax Evasion through Affiliated Enterprises
SAT has also strengthened measures against corporate income tax evasion through affiliated enterprises. If a Chinese enterprise registers an affiliated enterprise overseas, sells a product or service below market price to that affiliated entity, and consequently allows it to earn a higher profit, the Chinese tax authority would request an adjustment for transfer pricing. This requires the Chinese enterprise to declare a higher profit and pay the additional tax after the adjustment.
In addition, if an overseas Chinese enterprise delays dividend distribution to its China parent company under certain circumstances, SAT could deem the dividend to have been paid and tax the parent company accordingly. An equity transfer through a shell company with no business operations might also be liable for tax.
For individual income tax, Jin pointed out that China’s current tax regime adopts the “domicile and residence” principle – incomes earned by individuals within China and foreign incomes earned by Chinese citizens would be taxed by the Chinese government.
Under China’s individual income tax law, an individual with a habitual residence in China (living habitually within China’s territory because the person has a registered permanent residence, family and economic interests in the country) or without habitual residence in China but who has stayed in the country for a full year is liable to pay individual income tax for overseas incomes.
SAT explained the meaning of “habitual residence” in its “Provisions on Several Issues on Imposition of Individual Income Tax”. It said this term also applies to Chinese citizens who previously lived outside China for study, work, visits to relatives or tours but have returned to China after these reasons for staying abroad no longer exist. In such cases, China is the country of the tax payer's habitual residence.
Jin said that tax revenue is fundamental for a country to provide its citizens with public services. Regardless of the duration of their stay overseas, individuals who return to China and eventually settle down there are beneficiaries of such public services and hence obligated to file their income tax returns in the country, he added.
While China’s current corporate income tax rate is 25%, companies that qualify for the country’s tax incentives can enjoy preferential rates. For example, high-tech enterprises enjoy a 15% preferential tax rate. Individual income tax rates are progressive, ranging from 5% to 45% depending on the individual’s income level.
Jin said that Chinese citizens who work overseas and already paid their income tax to the foreign government would still have to declare their incomes to the Chinese government. The income tax paid overseas could be deducted when declaring tax in China. In many circumstances, the income tax rate overseas is lower than that in China, in which case, individuals would have to pay the difference.
SAT Raises Tax Declaration Requirements
To improve enforcement of corporate income tax collection, the SAT included a new requirement for corporate tax declaration in 2014. Since 1 September 2014, two new forms have been required in the corporate income tax pre-filing and annual filing processes – “Form for Information on Chinese Tax Resident Enterprises’ Shareholdings in Foreign Enterprises” and “Form for Controlled Foreign Companies”.
For individual income tax, the Chinese government revised the terms of the “Declaration of International Receipts and Payments” in November 2013 and added that “A Chinese citizen who owns foreign financial assets and liabilities should file his/her foreign assets and liabilities with the State Administration of Foreign Exchange (SAFE).”
As of March 2014, China had signed 99 double taxation agreements, 97 of which had taken effect. The mainland government had also signed taxation agreements with Hong Kong and Macau. These taxation agreements also allow China to establish systems for exchanging tax intelligence with the other contracting parties. In addition, China currently has tax information exchange agreements with 10 tax havens.
Jin mentioned that the SAT would assess information such as Chinese enterprises’ overseas investments and share status, financial information, and holding ratio. Subsequently, the authority would verify if Chinese employees hired by overseas entities are in compliance with tax law. China also works with relevant foreign state agencies to establish an international tax intelligence and information exchange system; this would improve the effectiveness of individual income tax collection from Chinese citizens overseas.
Jin added that with China’s globalisation and legal reforms, Chinese enterprises would inevitably face a stricter legal environment. He suggested that enterprises with operations overseas may avoid double taxation through clarifications with government agencies, or by consulting professional tax advisory firms to find out more about the relevant tax benefits.