Web alert: China - New Enterprise Income Tax regulation now in force

On 30 June 2014, the China State Administration of Taxation (CSAT) issued the 'Notice on Provisional Measures on the Collection of Tax on Non-Resident Enterprises Engaged in International Transportation Business' (2014 No 37 Notice). This came into effect on 1 August 2014. The Notice seeks to tighten the tax regulations for 'non-resident taxpayers' who benefit from the 'international transportation business'. The tax treatment and administrative procedures in the Notice could therefore have a significant impact on members. 
 
Scope of 'international transportation business' and 'non-resident taxpayers'

Clause 2 of Notice no 37 clarifies that 'international transportation business' includes the transportation of passengers, cargo or post in and out of Chinese ports by non-resident companies through vessels, aircraft or space slots.  The clause further clarifies that voyage chartering or time chartering, with the purpose of income generation, shall be classified as 'international transportation business'. 
 
Tax Registration Procedure

The Notice requires non-resident companies to register with the local tax authority within 30 days of concluding a charterparty.  Non-resident companies may complete tax registration either by themselves or by their appointed local agents. If a non-resident enterprise fails to register and pay tax within the relevant tax authority, Chinese companies have a duty to withhold tax.  Its Chinese counterparty is required to deduct the tax before making payment to the non-resident taxpayer.
 
Taxable Income

Enterprise income tax shall be calculated by deducting 'deductible expenses' from the actual income received from the provision of the transportation services.  Deductible expenses consist of the reasonable expenses incurred to earn the revenue received. 
 
Double Taxation Treaties

Non-resident enterprises are able to benefit from reduced or waived enterprise income tax due to a double taxation treaty between their nation and China. The foreign enterprise should apply for an official confirmation of the applicability of that treaty from the relevant tax authority.
 
Conclusion

The new Regulations are in their infancy.  At this stage, there remain many uncertainties in the application of the Notice and quite a few issues need to be clarified. The new Regulations are acknowledged as 'Interim Measures' and further clarification from the Chinese tax authorities is awaited.