New laws and policies related to the “service trade”

By ECOVIS Ruide China, Pingwen Hu

In July 2013, both the State Administration of Taxation (“SAT”) and the State Administration of Foreign Exchange” (“SAFE”) promulgated two important policies related to both taxation and foreign exchange of “service trade”, including,

(a) On 9 July 2013, SAT and SAFE jointly promulgated an announcement SAT & SAFE [2013] No. 40 “Announcement on issues concerning the tax-recording-filing for the foreign payment under service-trade” (hereinafter: “the Announcement 40”)
(b) On 18 July 2013, SAFE released a Circular HUIFA [2013] No. 30 “Circular of the foreign exchange management laws and regulations related to service trade” (hereinafter: “the Circular 30”)

The aforesaid two policies will be effective at 1 September 2013, and will make certain influence importantly on current laws and regulation of “foreign exchange payment of service trade”.

A. Highlights of Announcement 40

1) Major targets
Major targets include: integrating the relevant laws and policies related to foreign payment under service trade; facilitating the application procedure of the foreign payment under service trade; and strengthening the revenue source management on cross-border transactions under service trade.

2) Main Contents
2.1) Simplify the process /procedure of the foreign payments related to taxation: simplify the process and procedure of the foreign payment under current SAT and SAFE regulations (for example, GuoShuiFa [2001]No.139, Guo Shui Fa [2002] No.107, Hui Fa [2008] No.64, Guo Shui Fa [2008] No.122, Hui Fa [2009] No.1, Hui Fa [2009] No.52, etc.); and to cancel the “Tax Certificate of Foreign Payment for Service Trade, Profits, Current Transfer and Partial Capital Items (“Tax Certificate”). It means, to adopt the “tax-recording-filing system” for foreign payment under service trade instead of “tax-approval-filing system”.

2.2) Clarify such case or situation of which is obligated to conduct the tax-recording-filing for the foreign payment:
to list the case /situation of which is necessary to conduct “tax-recording-filing” (“necessary cases”) and the ones of which is NOT necessary (“un-necessary cases”) respectively,

(a) The un-necessary cases are stated by 15 items, such as,
i) Various expenses, such as travel, meeting and commodities exhibition and so on, of which the expenses are incurred abroad by the domestic entity;
ii) Office expenses of overseas representative agencies of a domestic entity, and project costs paid by a domestic entity for the contracting project abroad;
iii) The commissions, insurance costs and compensation amounts in import and export trade that are incurred abroad by a domestic entity;
iv) International transportation costs under import trade items obtained by overseas entities;
v) Insurance premiums, benefits and relevant expenses under insurance items;
vi) Expenses incurred in oversea such as repairing, fuel, miscellaneous expense incurred at the port, etc., but paid by a domestic entity engaging in transportation and pelagic fishery;
vii) Expenses such as tour fees, ordering /arranging fees of accommodation and transportation, etc. paid by a domestic traveling agency on tourists’ behalf for oversea traveling business;
viii) Income or revenue obtained by international finance companies affiliated to Asian Development Bank and World Bank Group from China, including profits from investing joint ventures, income from transfer of shares, revenue from leasing or transfer of properties (including real estate) located in China and interest accrued from loans granted to Chinese domestic entity;
ix) Interests accrued on foreign government (sub-) loans (including foreign government mixed (sub-) loans) granted to China by foreign governments and international finance entities. International finance entities refer to International Monetary Fund, World Bank Group, International Development Association, International Fund for Agricultural Development and European Investment Bank, etc.;
x) Interests accrued on designated foreign exchange banks or financing companies, from its own foreign financing, such as abroad loans, abroad inter-bank borrowing, overseas payment on behalf and other debts;
xi) Aid funds donated by free of charge to oversea by China state organs above the provincial level;
xii) Income of dividends, bonuses and interests, legally obtained by overseas entities or individuals, which are paid by domestic securities companies or clearing and registration companies, and income from sales of negotiable securities.
xiii) Foreign exchange used by domestic individuals for overseas education, tourism and visiting relatives, and so on;
xiv) Returns of foreign exchange to oversea by domestic entitys and individual under service trade, revenue and current account;
xv) Other cases stipulated by the state.

(b) Except the aforesaid unnecessary cases, any single foreign payment over than USD 50K is belonging to necessary cases, such as,
i) Incomes or revenues (under service trade) obtained by oversea entity or individual from domestic, such as, transportation, traveling, telecom, construction /installation and labor contracting, insurance services, financial service, IT services, knowhow usage and royalties, sport /culture and entertainment services, other commercial services, and governmental services so on;
ii) Remuneration earned by oversea individual from domestic working; incomes and revenue under current account earned by oversea entity or individual from domestic such as dividend, profit, interest under direct debt, guarantee fee, and donation /compensation /taxation /occasional income (under non-capital account) so on;
iii) Incomes earned by oversea entity or individual from domestic, such as, leasing fee of financial leasing, gain on transferring of real estate, gain on share transferring, and other legal incomes earned by foreign investor; A single reinvestment in China with more than USD 50K which is legally earned by the foreign investor from its direct foreign investment in domestic.

2.3) Simplify the procedure of application of tax-recording-filing,

(a) when a domestic entity or an individual (hereinafter the “applicant”) applies for the tax-record-filing, it shall fill out the “Tax recording form of foreign payment under service trade” (“the tax-record-filing form”), and then to submit the copies of the contracts (agreements) with its company chop or relevant transaction evidences with its company chop. In addition, it is necessary to apply the procedure of tax-record-filing in its competent state tax authorities only instead of current two procedures both in local and state tax authorities.
(b) While the receiving of aforesaid application of tax-record-filing form, the competent state tax authorities shall stamp its seal on the tax-record-filing form immediately on the spot without checking and reviewing of its taxation matters of the foreign payment. After that, the applicant can conduct the remittance of the foreign payment in the designated foreign exchange bank with the aforesaid chopped tax-record-filing form and other relevant documents.
(c) In case that multiple foreign payments are required for the same contract, the institution or individual shall handle the tax-record-fling forms before each payment, so long as the contract (agreement) or other relevant transaction evidences /vouchers are submitted upon the record filing of the first time of external payment.

2.4) Checking and reviewing afterwards on taxation matters:
Within 15 working days after receiving of the tax-record-filing forms, the competent tax authorities shall check its taxation matters related to the foreign payment based on the tax-record-filing forms and other related documents provided by the applicant. If any tax obligation on foreign payments are not withheld or levied, the entity or individual will be punished in accordance with relevant tax administration and collection laws, besides the tax payment and obligation.

3) Suggestion
Although the Announcement is simplifying the application procedure of foreign payment under service trade for domestic entity and individual (the applicant), it will bring them certain tax risks, such as, the tax authorities might make some punishment on domestic entity or individual if they do not make the tax obligation correctly (or apply tax exemption) and do not make tax returns /compliance of each foreign payment timely.

Thus, we suggest, in order to avoid the tax risk, for each foreign payment (including less than USD 50K) under service trade, the applicant shall verify “what is its tax obligation” (i.e., VAT/BT, EIT, etc.) and “what tax application /returns” (i.e., withholding, exemption application, etc.) in advance based on two tax circulars (i) Interim Administrative Measures for the Tax Imposition on Non-Residents Contracting Construction Projects and Providing Labor Services (SAT Order No. 19) and (ii) Circular of the State Administration of Taxation on Printing and Distributing of the Interim Administrative Measures for Source

Withholding and Remittance of Non-Resident Enterprise Income Tax (GuoShuiFa [2009] No.3).

B. Highlights of Circular 30

1) Major Targets
Facilitation of foreign exchange management under service trade; risk management for inflow and outflow of foreign exchange under service trade, etc.
2) Integration of laws and regulations
To promulgating “Guidance of foreign exchange management under service trade” (“the Guidance”) and “Implementing rules of the guidance of foreign exchange management under service trade” (“the Implementation Rules”), which replace and integrate more than forty (40) current foreign exchange laws and regulations, in order that payer and financial entities handle service trade’s related matters, and also providing related administrative regulations of foreign exchange for Announcement 40.

3) Main contents
3.1) Cancel approval of buying and paying of foreign exchange under service trade, and all of foreign exchange’s buying and paying for service trade can be directly handled in financial entities;
3.2) Clarify rights and responsibilities of financial entities in the area of examination and verification of the foreign exchange in service trade, and to strengthen its requirements of due diligence as well; In addition, financial entities shall adopt the Guidance and the Implementation Rules for its operational procedure, and stipulate the relevant operation steps and procedure accordingly.

3.3) For the inflow and outflow of each foreign exchange with an amount exceeding an equivalent of USD 50K under service trade, financial entity should conduct the examination and inspection procedure at below in accordance with the Guidance and the Implementation rules, and retain the related transactional documents as well, such as (but not limited):
(a) Under international transportation: transportation invoices or transportation bills or transportation lists;
(b) Under oversea labor service cooperation or overseas project-contracting: contract (agreement) and budget table of labor service (project budget table or project settlement statement);
(c) Know-how usage fees and royalties: contract (agreement) and invoice (payment notice);
(d) Foreign payment under profits, dividends and bonus: related audited financial statements issued by the licensed CPA firms, the BoD resolution on profit distribution and the latest capital verification report. Domestic entities may be allowed to pay foreign shareholders interim dividends and bonus in accordance the relevant laws;
(e) Under technology’s import and export: contract (agreement) and invoice (payment notice). If it belongs to the restricted category of technology’s import and export, domestic entities and individuals shall provide “Permit certificate of technology’s import and export” issued by the commerce authorities.
(f) Under international indemnity /compensation: original contract, indemnity agreement (indemnity clauses) and relevant documents in the whole compensation process; or only review court verdict or arbitral award issued by arbitration entity or conciliation statement issued by conciliation agencies, etc.

(g) Under expense (in service trade) to be disbursed or allocated among /between oversea and domestic affiliated entities: original contract, disbursement or allocation contract (agreement or explanation), invoices (payment notice); please note that the period of disbursement or allocation shall not exceed 12 months.
(h) Return of foreign exchange under service trade: transactional documents / bills generated in original inflow and outflow, related explanation and evidence of whole returning procedure; please note, returned amount shall not exceed original inflow /outflow amount and with original route.

3.4) Foreign exchange transaction in small amount under service trade can be directly handled in financial entities. For the foreign exchange transaction with an amount under an equivalent of USD 50,000, financial entities may not examine transactional documents in principal.
3.5) Cancel the submission of tax certificate for the foreign payment under service trade, and is necessary to provide the “tax-record-filing form” for each foreign payment more than USD 50K (or equivalent to) only
3.6) Relaxation of the restriction conditions on the foreign exchange receipts earned by domestic entities under service trade, and allow the enterprises to put the foreign exchange income together into oversea account;
3.7) Domestic entities and individuals shall keep the documents in connection with each transaction of foreign exchange payment and receipt for service trade for five (5) years for future inspection.

4) Suggestion:
(a) Before conducting foreign exchange payments and receipts for service trade, domestic entities and individuals whom are doing service trade shall go through relevant registration procedures in relevant authorities;
(b) To learn and understand the administrative and operating procedures of foreign exchange under service trade, and submit relevant documents and transaction documents;
(c) If the foreign exchange receipts earned by domestic entities under service trade might be stored in oversea bank, the registration shall be made in local SAFE, and its balance of oversea account shall not exceed the approved maximum quota from SAFE.
(d) For foreign exchange payments and receipts, if any fictitious transaction or intentional splitting on the foreign exchange transactions or such ways is incurred, domestic entity or individual will be punished according to Article 39 and 40 of “Administrative Regulations of the People’s Republic of China on Foreign Exchange”.

What can we help?

Our professional consulting team and personnel can offer you consulting service of the above mentioned contents. The services include:

Give you the interpretation of the regulation related to this policy,
Analyze the influence and effects of this policy for your enterprise according to the actual situation.
Help the enterprise to enjoy the benefits from the policy, reduce the unnecessary losses which caused by the misunderstanding of the new policy.

For more detailed information, please contact our professional team.