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Tax uncertainty on foreign bank reorganization exercise
Under China's WTO commitment in 2001, it has agreed to liberalize its banking sector to foreign access on a phase-in basis over a 5-year period. Since then, China has gradually relaxed various banking rules on geographic and customers' restriction imposed on foreign banks. By December 2006, China has to honor its commitment to allow foreign banks to provide banking services to PRC individual customers.
However, foreign banks intending to offer full scope banking services to PRC individual customers are required to convert their existing branches into a locally incorporated bank in China under the new PRC administrative regulations of foreign-invested banks issued on 11 November 2006. Without undergoing the "corporatization" exercise, foreign bank branches in China can only accept large scale deposit from local individuals in future. That is, the branch structure would not be allowed to take any deposit below the amount of RMB1 million from local individuals. It is anticipated that foreign banks intending to expand its consumer banking business in China would likely proceed with the application for conversion of its existing branch network into a locally incorporated bank.
One of the foreign banks' key concerns on this local bank corporatization exercise is the potential PRC taxation burden arising from transfer of business from branches to a new entity. The following unfavorable tax consequences may arise in this reorganization exercise:
- Potential capital gain and goodwill recognized on the transfer of business and assets to the new entity which may attract corporate income tax and business tax;
- Potential stamp duty costs on the transfer of loan portfolio and other assets to the new entity;
- Possible loss of the unutilized tax loss in the existing branches after their deregistration;
- The inability to claim head office expenses in the new entity; and
- The uncertainty on the tax regime applicable to the new entity, e.g. the feasibility of consolidated tax filing, applicable tax rates and potential withholding tax on overseas payments.
The above tax concerns have been voiced out by various foreign banks individually and also collectively by the China Banking Association to the China Banking Regulatory Commission ("CBRC"). Recently, CBRC has worked with various local tax authorities to conduct a survey on the tax concerns raised by the foreign banks and thereafter report these matters to the PRC State Administration of Taxation ("SAT") for review and consideration. There is a general hope by the foreign banking sector that SAT may issue a specific tax ruling to give relief on the potential adverse tax consequences arising from the local branch corporatization exercise so that foreign banks can smoothly go through their reorganization.
To sum up, the new banking regulations have created excitement to the industry as it offers an opportunity for foreign banks to reorganize themselves for launching full scope consumer banking services in China. Hopefully, the clarification of tax treatment on this reorganization exercise would be seen as the next greatest tax development in the foreign banking sector. Once the potential unfavorable/uncertain tax issues on the branch conversion scheme are removed, we shall be able to see a new wave of foreign bank incorporation applications. |
