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Taxation aspects of Beijing 2008 Olympic Games
Following the completion of the one-year countdown ceremony in Tiananmen Square on 8 August 2007, China has entered the most critical preparation stage for the Beijing 2008 Olympic Games. From now onwards, more overseas enterprises will send their work crews and contracted consultants to China to participate in the preparation of relevant Olympic projects and the Olympic Games.
These Olympic participants include foreign contractors on some construction work of infrastructure, installation of facilities and other hardware, project consulting, project management, and other services, etc. Some others are organizers for sponsorship activities, media workers, athletic specialists or even athletes. Diverse business activities of Olympic participants may cause them to face entirely different PRC tax exposure.
Foreign service suppliers
As mentioned above, some foreign contractors may provide a wide range of services in Olympics related projects. However, there is one common concern for them - whether their services in China may create a permanent establishment ("PE") in China. Once foreign service providers are regarded as having a PE in China, they will be facing China corporate income tax exposure to different extent depending on their specific situations. Their work crews and consultants may also be exposed to personal tax issues in China.
Where considering PE, it is a general perception that the "more than 6 months in a 12-month period" test should apply, i.e. a PE would be created only when the service project lasts for longer than 6 months. Actually, it has over generalized PE cases by simply referring to "more than 6 months in a 12-month period". Different counting methods should be adopted for construction/installation projects and other services (including consulting services) projects respectively. Meanwhile, amongst over 90 tax treaties signed by China, there are variations in PE definitions. In some cases where the subject foreign enterprise is from a country without any tax treaty with China or from a country whose tax treaty with China does not contain the necessary protection clause, the "more than 6 months in a 12-month period" test could not apply.
In addition, after the publication of Circular 403 on the application of PE concept in Hong Kong / China Tax Arrangement this April, a revised PE concept for foreign service providers (i.e. not referring to construction / installation project cases) has been adopted by China tax authorities. Under Circular 403, foreign enterprise shall be regarded as having a PE in China if it has provided services in China for "more than 6 consecutive or cumulative months in any 12-month period". Unlike the old treatment, the entire period starting from the first month when the first employee arrives China till the last month when the last employee leaves China should be counted. Specifically, it provides that any period of 30 consecutive days without any employee working in China can be excluded as "a month". In extreme cases, staying in China for a few days in China by one employee for a project may create a PE. However, to address the inappropriate tax effect in such extreme cases, this counting method may be changed in the near future.
Sponsors
It is honorable to be a sponsor of Olympic Games. In this connection, the State Administration of Taxation, the Ministry of Finance and the General Administration of Customs jointly issued a circular to allow full income tax deduction for the sponsorship contribution to Beijing 2008 Olympic Games.
Certainly, application of this treatment may nevertheless encounter some practical problems due to complexity of business arrangements. For instance, sponsorship contribution in the form of goods or services may bring out issues of valuation and deemed sales. Whether contributing a few lots of self-manufactured products will be regarded as a sale from VAT and income tax perspectives? Would contributing services be better from tax perspective? What if the contributed products are manufactured by the sponsor's affiliate enterprise? Will the income tax deduction be allowed if the cost of sponsorship is shared amongst group companies?
In addition, the unified Corporate Income Tax Law is going to take effect on 1 January 2008. Although the major income tax principles are in line with the prevailing ones, tax treatments on specific items may not be necessarily the same. This adds further practical ambiguity to the deduction rule.
Other individual participants
It is expected that thousands of athletes, entertainers, writers, etc will come to Beijing as well as other cities in China to participate in this spectacular event.
Though some preferential tax treatments are available for income of athletes derived from the Olympic Games, they should still pay attention to their other streams of income such as income from sponsorship, performance or advertising. It will be helpful if they fore-plan their commercial arrangements before the relevant income is derived. Moreover, overseas athletes and entertainers should also explore the opportunity of tax treaty protection on the income derived during their presence in China.
PwC observation
We foresee that the upcoming Beijing 2008 Olympic Games will be the most successful Olympic Games in the history and involves millions of corporate and individual participants. Different, new and complicated tax issues are expected to arise.
Except for the few tax rulings specific to the Olympic organizers, such as Beijing Organizing Committee of the Olympic Games, International Olympic Committee, some international and local athletes associations, etc., the Chinese authorities so far have not issued a set of comprehensive taxation rules focusing on these Olympic participates, either for corporate or individuals. It may imply that they need to observe the existing Chinese taxation rules or they may apply to the relevant tax authorities for special tax treatments on a case by case basis.
Apart from the Chinese taxation policies, it is equally important for the Olympic participants to be knowledgeable about the tax compliance requirements in China, both for corporate and individuals, such as tax registration, withholding requirements, tax calculation, tax settlement, record-keeping, etc.
The key factor for the Olympic participants to better position their Chinese tax profiles and fully comply with the tax compliance requirements is to appreciate the prevailing Chinese taxation policies and tax compliance procedures, plan the actions at the early stage and manage the process proactively.
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