New Rules for Non-Tax Resident Enterprises
By Kelvin Lee, PwC Tianjin
就在刚刚过去的10月，国家税务总局颁布了《国家税务总局关于非居民企业所得税源泉扣缴有关问题的公告》。该公告将于 2017 年12 月 1 日起正式施行，并取代现行的国税发（3 号文）等一系列重要文件。37 号公告对源泉扣缴制度进行了重新梳理，与现行文件相比，其最重要的变化包括：将股息的扣缴义务发生时间由作出利润分配决定日（如实际支付在先则为实际支付日）调整为实际支付日；对采用分期收款方式取得的财产转让收入允许分期纳税，且先按收回投资成本处理，再就转让所得纳税；明确税款计算中的汇率换算时点、修订股权转让所得的外币折算规则；取消了非居民企业在扣缴义务人未依法扣缴税款情况下应在 7 日内自行申报的规定；废止了相关的旧文件或其中的相关条款，包括废止了国税函全文。
37号公告将给非居民企业如何履行中国纳税义务、扣缴义务人如何履行扣缴义务带来重大变化，可能涉及跨境交易的方方面面，跨境交易双方应特别予以关注。
在扣缴义务发生时间方面，《企业所得税法》规定扣缴义务发生于“支付或者到期应支付时”，同时将股息红利的扣缴义务发生时间重新定义为“实际支付之日”。与股息类似的还有股权转让所得，因为通常情况下，受让方支付的股权对价并不能计入当期成本费用，所以，受让方应仅在实际支付时履行扣缴义务。
37号公告考虑了非居民企业源泉扣缴在执行中的实际问题，对有争议的焦点进行了明确，简化了扣缴申报的流程，推迟了股息红利、分期支付形式取得的股权转让所得的扣缴义务发生时间，这些对非居民企业以及扣缴义务人来说都是积极的改变。另一方面，对非居民企业纳税人来说，虽然在源泉扣缴制度下，首要责任在于扣缴义务人，但是在扣缴义务人未扣缴或无法扣缴时，非居民企业纳税人也应自行申报。因此非居民纳税人也应对中国的相关税法以及税收协定等提供的税收优惠有足够的认识，确保扣缴义务的履行符合税法的规定。
37号公告将自 2017 年 12 月 1 日起施行。未在该日期前支付且未进行税务处理的股息红利等权益性投资收益以及采用分期收款方式的转让财产所得，可以适用37号公告的规定。
我们建议企业根据37号公告的规定审视、安排相关交易和付款进程，以享受37号公告带来的利好。
In October 2017, the State Administration of Taxation (SAT) released the Public Notice on Matters Regarding Withholding Corporate Income Tax (CIT) at Source for Non-Tax Resident Enterprises (Non-TREs) (SAT Public Notice [2017] No. 37, PN 37). PN 37 shall take effect from 1st December 2017 and replace a series of important circulars, such as Circular Guoshuifa [2009] No.3 (Circular 3), etc.
PN 37 streamlines the withholding regime in a comprehensive way. On comparing PN 37 with the existing circulars, notable changes are:
• Withholding obligation for non-TREs deriving dividends arises on the day the payment is actually made rather than on the day of the resolution to declare dividends (or the day of actual payment if it is paid before the resolution);
• Withholding tax (WHT) on property transfer income received in instalments can be settled in instalments and deferred until after the relevant investment cost is fully recovered;
• Exchange rate to be adopted in calculating the tax liability is clarified and foreign exchange conversion rules for foreign currency taxable income are revised;
• Provision that non-TREs shall self-report tax within 7 days if their withholding agents fail to withhold is removed;
• Relevant circulars or provisions, including the whole Circular Guoshuifa [2009] No.698 (Circular 698), have been abolished.
PN37 will bring significant changes to the way non-TREs fulfil their China tax obligation, and the way withholding agents perform their withholding obligation, in all aspects of cross-border transactions. Parties to any cross-border transaction should pay particular attention to these new rules.
Timing of Withholding: Inheriting and Clarifying
According to CIT Law, withholding obligation arises at the time the payment is made or becomes due. Generally, the word “payment” rarely leads to any controversy in practice as it could be easily identified; while the term “payment becomes due” is further stipulated under the Detailed Implementation Rules (DIR) of the CIT Law to refer to the payable amount that the payer has booked as cost and expenses on an accrual basis in its financial accounts. Besides that, SAT Public Notice [2011] No.24 (PN 24) further clarifies that for payables that are not actually paid on due date but recognised as costs or expenses (or capitalized as cost or pre-operating expenses and amortized or depreciated as costs or expenses in the following years) and the payer has claimed deduction for CIT purpose in the CIT annual filing, the withholding obligation arises at the time of CIT annual filing of the payer.
Such provisions remain in PN 37. Nevertheless, under PN 24, it also stipulates that the withholding obligation on dividend arises on the date of resolution to declare the dividend (if payment is made prior to the resolution, then it is the date of the payment). This term has generated a lot of discussion after its release, since dividend payment will not fall into the scope of “becomes due”. Quite a number of tax experts believe that such provision is contradictory to the CIT law’s principle on “payment is made or become due”. The good news is that PN 37 abolishes the provision in PN 24 and stipulates that withholding obligation on dividend payment shall arise when the payment is actually made. The deferred timing of withholding obligation not only helps reduce withholding agent’s compliance burden, but also leaves sufficient time for taxpayers and withholding agents to prepare the necessary record-filing documents to claim treaty benefit.
Similarly, for equity transfer, generally the consideration paid by the transferee could not be recognized as the cost/expense. As such, the transferee should only perform its withholding obligation at the time of actual payment. In the situation where the sales consideration is paid in instalments by the transferee, PN 24 stipulates that the entire income of non-TRE transferor shall be recognized at the time the equity transfer agreement takes effect and relevant procedures for equity ownership change are completed.
In practice the amount of tax withheld could be much more than the amount of initial instalment payment which could lead to cash flow difficulties for both parties. PN 37 provides a more lenient treatment by allowing tax payment to be made in instalments and further the instalment payments would firstly be treated as recovery of investment cost so that tax shall only be required to be withheld after the full recovery of such costs. This provision will bring significant benefits to equity transfer transactions with instalment payments.
Calculation of Withholding Tax：Reiterating, Refining, and Revising
It is relatively simple to calculate the tax payable for most income under the WHT regime. However, calculation of gain on transfer of property is more complicated as it involves ascertaining the income and cost of property being transferred, and in practice, there are different interpretations. To address this issue, based on what is stipulated in Circular 698, PN 37 further clarifies the following principles in calculating the tax on the gain on transfer of property, including:
Reiterating Current Provision
PN 37 reiterates the provision in Circular 698. For example, the undistributed retained profit of the investee enterprise cannot be deducted in calculating the equity transfer income; the taxable income should be grossed-up in the situation where withholding tax agents have to bear the withholding tax cost as agreed in contracts.
Refining Exchange Rate Conversion Rules for Taxable Foreign Currency Income
Foreign currency income should be converted into RMB, and PN37 clarifies the timing of exchange rate conversion in the following three cases: 1) Where the tax is withheld by withholding agent, the amount shall be converted to RMB according to the exchange rate on the date the withholding obligation arises (i.e. the date when payment is actually paid or become due); 2) where a non-TRE taxpayer self-reports and files a tax return, the amount shall be converted to RMB according to the exchange rate on the day before the issuance of tax payment certificates; 3) where a tax authority orders a non-TRE to pay tax, the amount shall be converted into RMB according to exchange rate on the day before the decision of setting the deadline for settling the tax payment is made.
In practice, if the withholding agents file WHT return with the tax authority before processing the outward remittance at the bank, they may experience problems of not knowing the exchange rate according to 1). Therefore, the withholding agent needs to arrange its schedule to withhold tax and proactively communicate with tax authorities so as to comply with the new rule in relation to exchange rate under PN 37.
Revising the Foreign Currency Conversion Rules for the Equity Transfer of Non-TREs’
Circular 698 stipulated that currencies for equity transfer selling price and cost shall be converted to the currency used in the first capital injection for tax calculation purpose. This rule may lead to multiple conversions. Now PN 37 amends such rules by stipulating that where the income or cost is in a currency other than RMB, they shall be converted into RMB first before calculating the gain. It should be noted that based on such rules, taxpayers should adopt the exchange rate on the day the withholding obligation arises (or the day before the issuance of tax payment certificate or the day before the decision of deadline to settle the tax payment is made) in calculating income and costs of foreign currency, instead of the day the income is obtained or initial investment is made. The change will have a significant impact on equity transfer of non-TREs.
Liabilities of Withholding Agent for Non-Compliance
Under the current Tax Collection and Administration Law (TCAL), there are two types of non-compliance behaviors by the withholding agent, including “failure to withhold tax that is due”, and “tax withheld but not remitted to the tax authority”. These behaviors are subject to different legal liabilities in levying fines and late payment surcharges. However in practice, boundaries between two situations are not clear. PN 37 provides a detailed description list on situations which constitute “tax withheld but not remitted to the tax authority” and specifies that any other situation would be considered to be “failure to withhold tax that is due”.
According to PN 37, if the withholding agent has already made the payment to the non-TRE but has not remitted the WHT to the tax authority within the prescribed timeline and the withholding agent has:
1) informed the recipient that the tax has been withheld; or
2) separately booked the tax to be withheld in its accounting book; or
3) separately deducted or amortized the tax payable in its income tax filing returns;
Then, it would be treated as “tax withheld but not remitted to the tax authority” and the withholding agent would face the risk of being imposed late payment surcharge. However, a variety of transaction patterns could exist in practice where it could still be difficult to determine even with PN37. We suggest the withholding agents to fully consider all possible legal liabilities in arranging their transactions and enhance communication with their in-charge tax authorities.
Whether the Non-TRE Payer Shall Undertake the Withholding Obligation
The payer of dividends, interests and royalties is generally the domestic enterprise and individual, but the payer of equity transfer proceeds can be located either domestically or overseas. PN 37 and the previously released Circular 3 have not clarified whether the withholding obligation would be applicable to overseas entity or individual. Theoretically, under the CIT Law, the payer is designated as the withholding agent under the WHT regime and non-resident payer is not being excluded under the concept of payer. Besides, the SAT Public Notice [2015] No.7 (PN 7) has also stipulated the non-TRE transferee of indirect equity transfer to be the withholding agent. As such, although the overseas transferee would face difficulties in discharging its withholding obligations, they should still pay close attention to their withholding obligations and relevant legal liabilities.
Relaxed Timeline for the Non-TRE’s Self-Reporting
Circular 3 has stipulated that where the withholding agent has not performed withholding obligation according to the tax law, the non-TRE shall, “within 7 days from the payment date or payment due date of the withholding agent”, file and settle the CIT with the in-charge tax authority at the location where the income is derived. This means that if both the withholding agent and the non-TRE fail to settle taxes, surcharge will arise after 7 days from the date the withholding obligation arises. Given the short 7-day timeline, it could be anticipated that this will be a huge challenge for the non-TREs, who are unfamiliar with the taxation mechanism in China, to contact their in-charge tax authority, prepare the reporting documentations and successfully settle tax during such a short period of time.
Considering these difficulties for the non-TRE taxpayers, now PN 37 abolishes such timeline by stipulating that non-TRE which has self-reported and paid relevant taxes before the imposition of a prescribed payment deadline by tax authorities or who has paid the relevant taxes before the tax authority prescribed payment deadline shall equally be regarded as having made the tax payment on time and no additional surcharge would be imposed. This new provision will certainly be welcomed by non-TREs and relieve their compliance burden accordingly.
Simplifying Tax Collection and Administration Procedures and Clarifying the Competent Authority
Under PN 37, the provision in Circular 3 requiring the withholding agent to perform contract registration with its competent tax authority within 30 days from the date the contract is concluded is removed. In addition, for contracts involving multiple payments, it has cancelled the provision requiring the withholding agent to settle all taxes within 15 days prior to the last payment. These revisions generally simplify the taxpayer’s withholding procedures.
PN 37 also provides a more flexible and accommodating reporting method for reporting of the same nature of income deriving from various locations and involving multiple in-charge tax authorities. Under this method, where the withholding agent has failed to withhold taxes, the non-TRE can select one location to self-report and settle the tax and the in-charge tax authority of the reporting location has to communicate with the competent tax authorities at the withholding agent’s location and the location of where the relevant income is derived. This provision will be beneficial to non-TREs.
However, PN 37 has not clarified what “the same nature of income” is. It is worthy to note that the SAT’s interpretation1 on the public notice has mentioned that income derived from indirect transfer of more than two Chinese taxable properties resulting from the transfer of an overseas enterprise by a non-TRE shall not be regarded as income of the same nature and the provision of “tax settlement at one location instead of multiple ones” would not apply even though this equity transfer is, in form, one single transaction.
Meanwhile, PN 37 also clarifies the respective duties of tax authorities at the withholding agent’s location and the location where the income is derived to enhance their coordinated administration. For withholding agents, they shall report and withhold tax to the tax authority at their location. In case where the withholding agent fails to withhold taxes, non-TRE shall report tax to the tax authority at the location where the income is derived. PN 37 also clarifies how to determine the competent tax authority of the location where the income is derived, which applies the same principle as that in the CIT Law for determining the income sources.
The Takeaway
PN A takes into account the practical problems of the WHT regime, clarifies controversial issues, simplifies withholding procedures, and defers the date on which the withholding obligation arises for dividends payment and equity transfer with instalment payments, etc. which brings along positive changes to both transaction parties.
On one hand, PN 37 further reiterates the withholding agent’s obligations and legal liabilities. Withholding agents as the designated payer in the business contracts may not be able to perform their withholding obligation in practices due to reasons such as commercial secrets, etc. (e.g., unable to obtain information on equity cost and other relevant information). However, PN 37 has not set forth any provision to waive the withholding agent’s legal liabilities in this regard. As such, it is recommended that the payer should consider relevant requirements in fulfilling their withholding obligations and add in relevant protection articles in drafting business contracts.
On the other hand, from the point of view of the non-TRE taxpayers, although the primary obligation lies with withholding agents under the WHT regime, nevertheless in cases where the withholding agent has not or fails to settle the taxes, the non-TRE taxpayers should self-report their taxes. As such, the non-TRE taxpayers should have sufficient knowledge of China’s tax law and benefits provided under the relevant tax treaties so that their Chinese tax liabilities have been properly cleared.
Moreover, PN 37 abolishes a series of circulars regulating non-TRE’s tax administration, including the whole Circular 698. It is important to note that most of the articles in Circular 698 have been replaced by subsequent circulars except for article 1 and 82, and these two articles have significant impact on the relevant non-TREs. We will keep an eye on the development and follow up policies in this area and share our observation with you from time to time.
PN 37 shall take effect from 1st December 2017. Unpaid dividends and instalment payments on property transfer where WHT has not been settled prior to the effective date are eligible for the treatments under PN 37. It is recommended that enterprises review and arrange their relevant transactions and payment procedures according to this newly released public notice so as to enjoy the benefits provided.
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