China Simplifies Foreign Exchange Rules Under Service Trade

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Jul. 26 – The State Administration of Foreign Exchange (SAFE) of China released the “Guidelines for the Administration of Foreign Exchange Under Service Trade (‘Guidelines’)” and its detailed implementation regulations (‘Implementation Regulations’) on July 18 as part of Huifa [2013] No. 30 (‘Circular 30’). Circular 30 aims to simplify foreign exchange rules for the service industry while abolishing 49 previous SAFE regulations. Both the Guidelines and its Implementation Regulations will enter into force on September 1, 2013.

The Guidelines provide that the State does not impose restrictions on international payments in services trade as long as the payments are based upon genuine and lawful transactions. According to the Implementation Regulations, banks are in principle not required to inspect and verify the transaction documents for receiving and paying foreign exchange under services trade where the value of such funds is the equivalent of US$50,000 or less. Exceptions apply when the nature of the funds are unclear, in which case banks should request the submission of transaction documents.

For funds exceeding the equivalent of US$50,000, the Implementation Regulations provide that transaction documents must be submitted to banks for approval before the transaction can be processed. To make dividend payments to a company’s foreign shareholders, for example, the bank will verify the annual financial audit report issued by a certified public accounting firm, the board resolution on profit distribution, and the company’s most recent capital verification report. The Implementation Regulations provide that banks should also abide by the “Announcement on Issues Concerning Tax Filings for Outbound Payments under Services Trade” (SAT & SAFE Announcement [2013] No. 40, hereinafter referred to as “Announcement 40”) when processing such transactions.

Announcement 40 was jointly promulgated by the State Administration of Taxation (SAT) and SAFE on July 9, 2013, and cancelled the requirement to obtain a tax payment certificate, which was previously required to prove that the correct amount of tax has been paid before the funds can be remitted abroad. Instead, individuals and institutions in China making outbound payments the value of which is the equivalent of more than US$50,000 are required to conduct record filing with the in-charge local offices of the State Tax Bureau (STB). Foreign investors reinvesting in China with income legally obtained from their direct investment in China in an amount that is the equivalent of more than US$50,000 also need to complete a filing.

This records filing system greatly simplifies the procedure for handling tax withholding for overseas payments. Instead of having to apply for tax clearance certificate before they can make payments overseas, companies will now only need to fill out a filing form and provide valid contracts of the transaction or other relevant transaction documents (Chinese translation required) to the STB. The STB will not conduct any examinations or tax assessments on the submitted documents, but will simply chop on the filing form. Companies will be able to remit funds outbound by submitting to banks the filing form chopped by STB.

However, verification of the documents and tax assessment will still be conducted within 15 days after the STB receives these documents and therefore the company might be facing more risks of being challenged in the future if the tax authorities deem that the tax withholding has not been done properly.

Based on 2012 statistics, SAFE estimates that the new foreign exchange rule will save time for the 88 percent of transactions involving less than US$50,000 per transaction. This is expected to further increase the efficiency of foreign exchange administration. The remaining 12 percent account for 92 percent of the total transaction amount under services trade.

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