May 26, 2010
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On February 20, 2010, the State Administration of Taxation issued the Provisional Measures for Tax Collection and Administration for Foreign-Enterprise Representative Office (“Provisional Measures”). The Provisional Measures bring significant changes to the existing taxation rules and may have significant implications for the tax liabilities of representative offices (“Rep Offices”).
The Provisional Measures, which apply to representative offices established in China by foreign enterprises, including enterprises in Hong Kong, Macau and Taiwan (i.e. essentially all Rep Offices), are the first regulations clarifying taxation issues relating to foreign representative offices after the Corporate Income Tax Law (“CIT Law”) took effect in 2008. The Provisional Measures bring significant changes to the existing taxation rules related to Rep Offices. The Provisional Measures bring the Corporate Income Tax (“CIT”) of Rep Offices in line with the CIT Law applicable to other enterprises, and clarify that Rep Offices are subject to business tax and value-added tax (“VAT”) on their relevant taxable incomes.
Released on February 20, 2010, the Provisional Measures apply retroactively from January 1, 2010.
Below is a summary of the significant issues in the Provisional Measures
(1) Previous Tax Exemptions Revoked as of January 1, 2010
As of January 1, 2010, the provisional measures invalidate previous tax circulars governing various tax exemptions for representative offices. The tax authorities are prohibited from accepting new CIT exemption applications, whist being required to review and clean up the existing tax exemptions granted to Rep Offices.
The Rep Offices’ income eligible for preferential taxation treatments under a Sino-foreign double taxation agreement (“DTA”) may continue to enjoy such preferential treatments. However, from October 1, 2009, as a prerequisite for enjoying the DTA treatments, the qualified non-tax-resident taxpayers are required to seek approval from or to file for record with a competent tax authority before enjoying such DTA treatments. The application shall be conducted in accordance with the Administrative Measures of Enjoying Tax Treaty Treatments by Non-Tax-Residents (Trial) (GuoShuiFa  124).
(2) Tax Registration and Filing Requirements
Rep Offices are required to perform tax registration within 30 days after the business registration certificate is issued. When there are any changes to the registration or where the Rep Office is to be closed, the Rep Office shall amend the tax registration or deregister it after liquidation and settlement of all the outstanding tax liabilities.
(3) Accounting and Record-keeping
The Provisional Measures require all Rep Offices to keep accurate accounting books and records according to laws and regulations and to determine the taxable income according to the principle commensurate with the functions and risks the Rep Office actually undertakes. On meeting the statutory requirements of accounting book and record-keeping, Rep Offices are permitted to use actual taxable income to file the CIT returns. If the actual taxable income is used, the Rep Office shall file quarterly the CIT and business tax returns within 15 days of the end of each quarter. Filing of VAT returns is required to be done in accordance with the rules set out in the Provisional Regulations on Value-Added Tax and the implementing regulations.
(4) Taxation of Representative Offices
CIT on the profits of a Rep Office is at the statutory rate of 25% on its taxable profit, and the Rep Office is also liable to pay business tax or VAT. The Rep Office is required to pay CIT and business tax to the appropriate tax authorities within 15 days after the end of each quarter, while it has a duty to report and settle VAT with its tax authorities by the due date according to the revised VAT provisional regulations and its implementation rules.
The Provisional Measures provide that a Rep Office is chargeable to taxes on an actual basis if the Rep Office keeps proper books and records, and can accurately account for the taxable income commensurate with its functions performed and the risks assumed. The normal transfer pricing principles will extend to Rep Offices. However, if a Rep Office does not have proper financial records that accurately reflect revenue, costs or expenses, then the tax authority is empowered to assess the Rep Office’s taxation profits by using a deemed profit rate of no less than 15% of its deemed income, which is either the total revenue (if such figure is available from the records of the Rep Office) or a figure derived using a formula based on the cost-plus method.
Given the impact of the Provisional Measures with the recent developments relating to the administration of Rep Offices (i.e. the limitation on the number of representatives and the restriction on the scope of activities), clients are strongly urged to consider whether a Rep Office is still the most efficient platform for entering the PRC market.