China’s New Foreign Exchange Rules Waive Tax Clearance for Payroll Remittances

9 min.

By Richard Hoffmann, ECOVIS Beijing China

China’s State Administration of Foreign Exchange (SAFE) has announced a change of foreign exchange rules from September 1, 2013, making operations of Foreign Invested Enterprises considerably easier. Leslie A. Pappas from Bloomberg’s Bureau of National Affairs has written a very interesting article about this, to which ECOVIS Beijing has contributed. We’d like to share the article with our readers below.

By Leslie A. Pappas

BEIJING—Multinational companies in China will find it easier to remit large salary payments overseas under new foreign exchange rules that take effect Sept. 1, practitioners told BNA.

China’s strict foreign exchange controls have required a tax clearance certificate since 2009 to remit payments of more than $30,000—often hindering multinationals from reimbursing the cost of expatriates on China assignments.

The new regulations will remove the existing mandate that any overseas remittance exceeding $30,000 be cleared by the tax authority before a bank can carry it out. Under the new rules, banks may remit service trade transactions overseas directly without a tax clearance certificate, and companies only need to file a record of the transaction with state tax authorities if the amount exceeds $50,000.

“The key point is that you don’t have to obtain a tax clearance beforehand,” Abe Zhao, a tax partner with KPMG China in Beijing, told BNA in a phone interview Aug. 5. “They are trying to make the process easier.”

New Rules

The new rules issued in July by China’s State Administration of Foreign Exchange (SAFE) and the State Administration of Taxation (SAT) are known as SAFE/SAT Announcement [2013] No. 40, Issues Relating to Tax Recordal Filing for Payments to Foreign Parties Under Service Trade, Etc., and SAFE Circular [2013] No. 30, Notice Regarding the Issuance of Regulations Related to Foreign Exchange Administration of Service Trade.

The rules abolish more than 50 earlier regulations, including the controversial SAFE/SAT Circular [2008] No. 64, which has created payment problems for multinational corporations since it took effect Jan. 1, 2009, practitioners told BNA.

Circular 64 established the current requirement to obtain a tax clearance certificate for remittances of more than $30,000. The requirement has made it difficult for multinational companies to reimburse salaries for expatriate employees on secondment arrangements.

Reimbursements Stalled

Secondment arrangements have come under greater scrutiny in recent years, because Chinese tax authorities suspect multinationals use them to avoid paying tax (99 ITM, 5/20/13).

In most such arrangements, the home office pays the salary and benefits of the dispatched employee, and the Chinese subsidiary reimburses the costs.

Under Chinese law, such reimbursement should not incur corporate tax liability, but sometimes local tax authorities question the validity of the arrangement. If a company refuses to pay the tax, tax authorities may refuse to issue a tax clearance certificate for the reimbursement, leaving the company unable to remit funds.

For some companies, reimbursements “take years to remit,” according to Lisa Shi, senior tax manager at Ecovis, a tax, accounting and legal consultancy in Beijing, who spoke to BNA by phone Aug. 8. Circular 64 has been “really a hindrance to them doing business,” she said.

‘Millions Trapped.’

Some companies have “millions trapped in China,” because they are unable to secure tax clearance certificates for salary costs under secondment arrangements, Liu Jinghua, a partner in Baker & McKenzie’s tax group in Beijing, told BNA Aug. 15.

A lot of seconded employees working in China continue to receive their pay in the home country, but since the China operations are unable to remit funds overseas to reimburse the home office, the companies end up with millions languishing in “accounts payable/accounts receivable” columns on the books, Liu said.

Some companies, as a work-around, end up paying seconded employees in China again with renminbi (RMB)—China’s official currency—then ask them to convert and transfer the funds back to the home country as a transfer of personal funds to repay the home office, Liu said.

Foreign Exchange

Companies have been able to use such a work-around, because the exchange of personal funds carried out by individuals in China falls under a different set of rules and regulations than overseas remittances sent by companies, practitioners said.

Foreign exchange by private individuals is governed by rules issued in 2006 and 2007, said Peter Chen, senior legal and tax manager with DLA Piper in Hong Kong, who spoke with BNA by phone Aug. 9.

Those regulations are a 2006 decree from the People’s Bank of China, PBOC [2006] No. 3, Measures for the Administration of Individual Foreign Exchange, and a 2007 notice from SAFE known as Notice [2007] No. 1, Detailed Rules on the Implementation of the Measures for the Administration of Individual Foreign Exchange.

Decree [2006] No. 3 and Notice [2007] No. 1 apply to foreign exchange by expatriates who work in China, including the conversion of foreign exchange into RMB, the conversion of RMB into foreign exchange, and the remittance of foreign exchange, Chen said.

No Limit

The rules limit the amount of foreign currency that an individual may convert into RMB. According to the 2007 Notice, there is a $50,000 annual quota on the amount of RMB that any individual can purchase, regardless of whether the individual is a foreigner or a Chinese citizen. The 2007 rules also limit Chinese citizens from converting more than $50,000 worth of RMB into foreign currency per year.

However, expatriate employees who are paid in RMB may convert their entire salary into foreign currency as long as they provide supporting documentation such as the employment contract, work permit, and proof that individual taxes have been paid on the salary.

“There is no annual quota or limit on the amount of RMB that the foreign individuals in China are able to convert into foreign exchange,” Chen told BNA in an email Aug. 15.

Chen added that in practice many banks may request additional documentation to remit salaries for individuals even when the remittance is small.

Personal Transfers

As long as expatriate employees can provide receipts for individual income tax payments on their salary, they are not limited in the amount of salary that they can remit, Baker & McKenzie’s Liu told BNA in an email Aug. 20.

Yet although individual remittances have been possible, having seconded employees reimburse the home office through personal transfers is rarely a practical solution for most companies.

Usually this only works for companies with a small number of employees, and adds paperwork for both the company and the employee, Liu told BNA.

Tax Clearance

The new foreign exchange rules and the abolishment of Circular 64 finally de-link the remittance process from tax clearance, according to KPMG.

“Circular 64 is history starting from next month,” KPMG’s Zhao told BNA. “Technically we’re back to where we were before 2009, as far as salary remittance by expatriate employees is concerned.”

Practitioners are still waiting to see how the new rules will be implemented in terms of salary remittances, Zhao said. His “educated guess” is that after Sept. 1, the documentation needed for employees or independent contractors to convert more than $50,000 per remittance would probably include a work contract or service agreement, proof of Chinese individual income tax payment, and the sealed tax registration form that will need to be filed ahead of time with the tax bureau.

Tax Obligations

Practitioners noted that while the new foreign exchange rules will make it easier to remit salary payments, they do not change existing tax requirements for individuals or companies.

“This change will significantly reduce the work of companies and individuals when handling overseas payments, but this circular does not loosen the burden for companies or individuals to be compliant in terms of tax filing,” said Ecovis’s Shi. “This new regulation only saves people time for remitting the money out. It does not affect the tax obligations of the parties.”

Shi noted that the new regulations will ease the workload of tax authorities because they will no longer have to approve every remittance before it goes out. At the same time, the regulations shift tax risk from the tax authority to individuals and companies.

The burden is now on companies to be more vigilant about tax compliance, said Grace Shi, a partner at Ecovis who is not related to Lisa. “From the management point of view, it increases their risk.”

Audits Likely

Under the old system, tax authorities were able to thwart companies that did not pay tax by withholding tax clearance certificates. Under the new system, companies will be able to easily remit payments but could face penalties and interest afterward if an audit finds that taxes were underpaid.

“We think that most likely tax audits will be increased,” KPMG’s Zhao said. Based on experience in China and other parts of the world, any time a tax authority switches from a “before approval to an after-audit process,” there’s an incentive to penalize taxpayers for not complying, Zhao said.

“The system is convenient but it does not relieve a taxpayer’s obligation to pay taxes,” Zhao said. “Now we’re under greater potential penalty risk.”

Clearance Certificates

Zhao said that any company or individual that already has secured a tax clearance certificate but has not yet remitted payment should do so by Sept. 1, because afterward the tax clearance certificate will likely be declared invalid.

Although the regulation does not say that tax clearance certificates will be made invalid after Sept. 1, KPMG has learned that this is what will happen based on “informal clarifications with tax authorities,” Zhao said. “They want to have a clean system after Sept. 1.”

Baker & McKenzie’s Liu said it is not yet known whether the new rules will help companies clear the backlog of unpaid remittances or if the new rules will only apply to future transactions.

For More Information

SAFE/SAT Announcement [2013] No. 40, Issues Relating to Tax Recordal Filing for Payments to Foreign Parties Under Service Trade, Etc., effective Sept. 1, is available in Chinese at http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/12348611.html.

SAFE Circular [2013] No. 30, Notice Regarding the Issuance of Regulations Related to Foreign Exchange Administration of Service Trade, is available in Chinese at http://www.safe.gov.cn/resources/wcmpages//wps/wcm/connect/safe_web_store/safe_web/zcfg/jcxmwhgl/fwmywhgl/node_zcfg_jcxm_fwmy_store/e433190040775f79858ce726bedaaa55/.

SAFE/SAT Circular [2008] No. 64, Issues Relating to the Provision of Tax Certificate for Payments to Foreign Parties Under Service Trade, Etc., abolished as of Sept. 1, is available in Chinese at http://fj.safe.gov.cn/110000/110000c0263230.html.