China Tax/Business News Flash 

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Please click on the links below to view more:   New double tax treaty between China and Singapore    The existing Double Tax Treaty between China and Singapore ("China-Singapore DTT") with subsequent amendment has been in force since 12 December 1986.  On 11 July 2007, the Chinese State Administration of Taxation ("SAT") and the Inland Revenue Authority of Singapore ("IRAS") concluded a new one at the 4th China-Singapore Joint Council for Bilateral Cooperation meeting held in Singapore.  The new China-Singapore DTT will enter into force after ratification by both countries [update on 21 September 2007: see footnote 1].  It will apply to income arising in the year after its entry into force.  The SAT is expected to issue a tax circular shortly to release this new DTT and clarify the date of enforcement.   Read more...... Expand / Collapse The key changes under the new China-Singapore DTT include the following.  For ease of illustration, below is addressed from the perspective of a Singapore resident deriving income from China. Withholding tax ("WHT")      Dividend Interest Royalty China's non-treaty rate 0% (1)/10% 10% 10% Existing China-Singapore DTT 7%/12% (2) 0%/7%/10% (3) 10% New China-Singapore DTT 5%/10% (2) 0%/7%/10% (3) 6%/10% (4)    Notes: Dividends from a Chinese foreign investment enterprise ("FIE") with at least 25% registered capital held by Singaporean investor(s) are generally exempt from WHT under the current Chinese domestic tax legislation; and 10% for all other cases.   7%/5% applies to dividends paid by a Chinese company to a Singapore resident, provided that the recipient is a company that holds at least 25% of the capital of the Chinese company; and 12%/10% for all other cases.  This treaty benefit is effectively unnecessary as the current Chinese domestic tax legislation provides unilateral exemption.   0% applies to interest received by the specified governmental bodies of Singapore; 7% for interest paid by a Chinese company to a Singapore bank or financial institution; and 10% for all other cases.   6% applies to lease payments regarding industrial, commercial or scientific equipment paid by a Chinese company to a Singapore resident; and 10% for all other cases. Capital gains    The "Capital Gains" clause is changed in the fashion that a full tax exemption in China is available on a capital gain derived by a Singapore investor from the disposal of shares in a Chinese company, provided that 1) the Singapore investor's shareholding in the Chinese company is less than 25% during the 12 month period before the alienation of the shares; and 2) No more than 50% of the value of shares disposed is derived, directly or indirectly, from immovable property situated in China.    Dependent personal services    There is a change in the basis period for counting the number of days of presence in China for Singapore employees frequently visiting China from a calendar year to any 12-month period.    Other points "Tie breaker" rule to determine the residence status of an individual or a company which is a resident of both countries is changed;   Some anti-abuse provisions have been added into the articles regarding passive income; and     The tax sparing clause, from a Singapore perspective, which enables credit on dividend, royalties and interest derived from China will be withdrawn.  However, the tax sparing in respect of tax incentives under Chinese income tax laws still remains. PwC observations    Hong Kong and Mainland (China) revised their Double Tax Arrangement ("Mainland-HKSAR DTA"), with respective effective dates earlier this year, to provide some attractive new terms, such as 5% and 7% WHT rates on dividends and interest respectively.  With this, Hong Kong is seen to be more competitive than Singapore as a regional hub for investments into China.  Since then, Singapore government has been very keen to revise the China-Singapore DTT to put it at par, if not better, against the Mainland-HKSAR DTA. This provides one more choice for MNC groups when selecting the location for an intermediate company to hold investments in China.   [update on 21 September 2007]   Footnote 1: The Singapore Ministry of Finance has announced that the 2007 new China-Singapore Agreement for the Avoidance of Double Taxation (DTA) has been ratified by both countries and entered into force on 18 September 2007.  With the ratification, the provisions of the new DTA shall have effect on income derived on or after 1 January 2008 on both sides.  We expect that the State Administration of Taxation will soon issue a formal circular to clarify the date of enforcement and the period of income to be covered by the new DTA on the side of China.   Close Chinese tax and foreign exchange policies tightened up for real estate sector    In order to curb China's over-heated real estate sector and regulate its development, the State and local governments continuously tighten up the tax and foreign exchange ("forex") policies.   Read more...... Expand / Collapse State level   The Ministry of Commerce ("MOFCOM") and the State Administration of Foreign Exchange ("SAFE") jointly issued Circular Shang Zi Han [2007] No.50 in May 2007 to require foreign investment property developers to file their establishment and new projects with MOFCOM.  To echo this Circular, the SAFE issued another Circular Hui Zong Fa [2007] No.130 ("Circular 130") to unveil the first batch of new foreign invested real estate projects successfully filed with MOFCOM.  In particular, Circular 130 imposes the following stringent forex measures on all foreign investment property developers effective from 1 June 2007: For foreign investment property developers which have only obtained approval certificates from local approval authorities but not yet successfully filed their projects with the MOFCOM, the local SAFEs shall not perform forex registration, alteration or settlement of capital accounts for them.  This implies that these developers will not be able to open capital forex account to receive registered capital from foreign investors.  Even if they have forex reserves in their capital accounts, they will not be allowed to convert the forex into RMB to fund the real estate projects in China.   Even if a foreign investment property developer has successfully filed its new project(s) with the MOFCOM, the local SAFEs shall not process any registration or settlement of forex loans for them. In general, property development projects invested by foreign investors are highly leveraged to maintain its liquidity and profitability.  A large proportion of the working capital for the projects would be financed by foreign loans, mainly from foreign investors.  Under the current forex rules, a foreign investment property developer would not be able to repay forex interest or loan principal if the foreign loan is not registered with the local SAFE.  The 2nd measure above under Circular 130 immediately closes the option for foreign investment property developers to seek foreign loans.  Furthermore, as foreign investors' loans are usually used as a tax efficient strategy, this measure will immediately affect the cash flow and profitability for projects that are under way.   It is understood that many new property development projects have been put on hold ever since the release of Circular 130.   Local level   Similar to Beijing, Chongqing's local tax bureau also released a local circular to provide for the detailed administrative measures for the reconciliation of LVAT by property developers in Chongqing to echo the State's circular Guo Shui Fa [2006] No.187 ("Circular 187").   Shanghai tax bureau has released two circulars to strengthen the land value appreciation tax ("LVAT") collection. The tax rate for provisional LVAT filings is fixed at 1% for property developers.   LVAT will be levied on gains derived by individuals who dispose non-ordinary properties within 3 years after purchase; and a half deduction is allowed for properties sold between 3 to 5 years after purchase.  If the gain cannot be accurately determined due to absence of invoices, etc., a deemed rate at 0.5% (for properties sold within 3 years after purchase) or 0.25% (for properties sold between 3 to 5 years after purchase) will be applied on the gross sales proceeds. Beijing and Shenzhen local governments separately issued local policies to restrict the purchase of properties by foreigners. Both cities disallow foreign individuals to purchase more than one household property in the respective city. In addition, foreign institutions and individuals have to declare in writing that the properties are purchased for self-use purpose. However, the enforcement is not seen to be serious.   PwC observations   It is a daunting task for China to control the over-heated real estate sector as this is a very complex issue blended with economic, financial and social concerns.  To achieve her goal, it is predictable to see that China would continue to issue various policies and measures; and tax policies will be one of the important tools to be used.  Moreover, it is not surprising that different cities would adopt different policies, or even the same policies but to different extent, to address their local real estate sectors. Close Transfer pricing - First wave of information collection by the tax authorities    With the issuance of Guo Shui Han [2007] No.363 by the SAT on 27 March 2007, Chinese tax authorities have been placing more significant emphasis on transfer pricing enforcement.  Many companies in a number of provinces and municipalities such as Beijing and Tianjin have recently received inquiries from local tax authorities regarding transfer pricing.   Read more...... Expand / Collapse Generally, the information request consists of an Enterprise Function and Risk Analysis Form and an Enterprise Related Party Transaction Financial Analysis Form, which are the same as the ones contained in Guo Shui Han [2007] No.363, as well as a number of other forms on the company's general, financial and related party transactions information.  The specific information requests from these tax authorities may vary, but the forms are uniform within each of the local jurisdictions.    Based on our understanding, the information requests are intended for the tax authorities to conduct desktop reviews in order to identify potential transfer pricing audit targets. PwC observations    The Function and Risk Analysis Form is not straightforward - actually, it is rather complicated and sometimes confusing.  However, it is essential for the company to provide an accurate description of its functions and risks in order to have a good explanation of its transfer pricing.  We recommend these companies to have a detailed review of their transfer pricing, and take into full consideration of their functions/risks when preparing the response in order to ensure the consistency between their transfer pricing and their functions and risks.    Some of the forms require taxpayers to provide segmented financials on related and unrelated sales, or on export and domestic sales.  Such information may not be readily available for many taxpayers.  We strongly recommend taxpayers to carefully evaluate how they should prepare and present such information, as inappropriately prepared information may potentially have negative consequences such as inviting additional enquiries or even transfer pricing audits.    Taxpayers are usually given a very short period to respond, sometimes less than ten days, so it is essential for taxpayers to respond promptly, including requesting extension as appropriate if they anticipate difficulties in meeting the deadline.    For companies with significant amounts of intercompany transactions, having sustained low profitability or consecutive losses, or dealing extensively with tax havens, their transfer pricing audit risk may be particularly high, so professional assistance is strongly recommended. 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