China Clarifies Business Tax and Tax Relief Measures

October 28, 2009 Posted by China Briefing Reading Time: 2 minutes

Oct. 28 – The Ministry of Finance and State Administration of Taxation jointly released Circular 111 on September 27, clarifying the scope of the China’s business tax and providing temporary tax relief.

The BT regime was amended at the end of 2008 to bring within its scope any service, regardless of whether either the provider or if the recipient was in China. Since the adoption of this amendment, there has been a lot of debate over the introduction of specific exemptions or exceptions for certain overseas-performed services. Circular 111 clarifies the BT position for certain types of service provided overseas and is relevant to nearly all enterprises and individuals exposed to the impact of the new BT regime.

Main Issues of Circular 111
1) Articles 1, 2 & 5 provide for temporary BT exemption for the following items:
a. Individuals’ financial transactions,
b. Individuals’ granting of real estate and land use rights; and
c. Governmental fund and administrative fees.
2) Specific exemption/exception for certain overseas-performed services are stipulated in Article 3 & 4 as set out below:

Article 3: The following services provided overseas by PRC enterprises or individuals are temporarily exempt from BT.
a. Construction; and
b. Culture and sports (except televising).

Article 4: Certain services provided entirely overseas by overseas enterprises or individuals to PRC enterprises or individuals in non-PRC territories, will be deemed as falling outside the service scope regulated by the BT Statute provided in PRC as described in Article 1 of the BT statute, and thus they will not be subject to BT. The detailed scope of such services will be prescribed by the MOF and SAT.

In accordance with the above-mentioned principle, the following services provided out of PRC by overseas enterprises or individuals to PRC enterprises or individuals are not subject to BT:

a. Culture and sports (except televising)
b. Entertainment
c. Service business: hospitality, catering, warehousing; and
d. Other services: bath, haircut, laundry and dyeing, picture-mounting, copying, engraving, photocopying, and packaging

In general the BT statute changes the BT charge scope from basing the charge on the location where the services are performed to where the service provider or the service recipient is located. Under this principle, for cross-border services provision, if either the service provider or the service recipient is a PRC enterprise or individual, service proceeds for such service provision are subject to BT.

Circular 111 has clarified above implication by listing certain types of overseas-performed services which are beyond the BT charge scope. However, these listed services are limited in scope. Generally speaking, such services cannot be performed if the service recipient or service target is not at the location of the service provision. For most situations, both the service provider and service recipient should be out of PRC where the service is provided, for the exemption or exception to apply.

The effective date for Circular 111 has been retroactively set as January 1, 2009 for the purpose of making this circular a consistent supplement to the new BT regime. The circular also allows for overpaid taxes for services which qualify for BT exemption or exception to be used to offset future BT liabilities, or to be refunded.

For advice on tax liabilities and compliance issues in China, please email Sabrina Zhang, the national tax partner for Dezan Shira & Associates, at tax@dezshira.com.