New Provisions on EIT Liability for Foreign Transportation Service Providers Set to Come into Force
SHANGHAI – Provisions clarifying the tax liabilities in China of foreign transportation service providers doing business with Chinese charterers are due to come into effect on August 1, 2014. Overall, the provisions, as contained in the Notice on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business (the “Notice”), strengthen the tax authority’s ability to collect from foreign companies, even those lacking of a legal presence in China.
Specifically, the Notice stipulates the enterprise income tax (EIT) obligations of “non-resident taxpayers engaged in international transportation,” which are defined as any of the following:
- A foreign entity engaged in commercial activities conducted using vessels or aircrafts, including passenger transportation, import/exporting via Chinese ports, and cargo-handling & warehousing services;
- A non-resident company engaged vessel leasing (voyage chartering or time chartering), including aircraft leasing.
According to Chinese law, EIT shall be levied on income earned from commercial operations conducted within Chinese territory, by both resident and non-resident taxpayers. Foreign transportation service providers may qualify as the latter by virtue of their receiving from a Chinese party through a bank account based in China.
The Provisions specify that EIT is to be levied on the actual income received for the provision of transportation services after expenses have been deducted. This includes income derived from, but not limited to, freight, passenger transportation, ticket revenue, baggage fees, insurance fees, and on-board entertainment and meals.
Qualifying entities must register with a local tax authority within 30 days of signing an agreement for the provision of transportation services to a Chinese party. The specific tax authority is defined by the jurisdiction of the Chinese port involved in the transaction; a foreign company operating in more than one port is entitled to select its port of registration. Registration requires the following documents be presented to the tax authority: the foreign company’s Certificate of Operating Qualifications, local contact details, and agreement(s) for the provision of services.
For foreign companies failing to register with the tax authority, the Chinese party to the transaction is compelled to deduct EIT on behalf of the tax authority, or be faced with a fine of up to 300 percent of the original tax owing. If the foreign party intends to claim exemption based on a tax treaty in place between its country of origin and China, it must apply to do so with the relevant tax authority prior to entering into a service agreement with a Chinese party. Failure to apply for treaty benefits within the prescribed time frame may result in the foreign party’s forfeiture of exemptions.
Faced with these changes, foreign investors are strongly advised to reexamine the status of double taxation avoidance agreements in place between their country of origin and China. Whether in terms of securing treaty benefits for your business or designing a comprehensive strategy to minimize your tax obligations, the legal and tax professionals of Dezan Shira & Associates are your partner for growth in Asia.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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