Recently, the State Administration of Taxation of China (SAT) released two new regulations (Guoshuifa [2010] No. 18 and Guoshuifa [2010] No. 19) on February 20, 2010 related to the tax administration on representative offices (ROs) in China and non-resident companies. The highlights of the two regulations are as follows:- Guoshuifa [2010] No. 18 (Circular 18) Circular 18, which abolishes previous tax administration on Representative Offices (ROs), with effective date of January 1, 2010 retrospectively, provides certain new tax policies on ROs:- Ø ROs should submit quarterly corporate income tax (CIT) returns based on actual taxable profits and quarterly business tax (BT) returns based on actual taxable revenue within 15 days after the end of each quarter, and submit value-added tax (VAT) returns and pay VAT in accordance with the deadlines stipulated in the VAT laws and its implementation rules; Ø If ROs cannot provide complete accounting records or if they cannot accurately calculate their turnover and expenses (actual amount method), the tax authorities can use one of the following methods to verify their taxable turnover and profits: a. Cost plus method – for ROs that can provide their accurate expenditure, but cannot provide their correct turnover or costs: · Calculation formula:
Deemed revenue = Expenditure / (1 – Deemed profit rate – BT rate)
CIT = Deemed revenue x Deemed profit rate x CIT rate · The expenses of ROs includes: salary, bonus, allowance and welfare paid to the staff inside and outside of China; assets (including cars, office equipments and etc) purchasing expense; communication expenses; traveling expenses; office rental expenses; equipment releasing expenses; transportation expenses; entertainment expenses; and other expense. b. The deemed profit method based on actual turnover – for ROs that can provide accurate turnover, but cannot provide their correct costs and expenses. The calculation formula is as follows:
CIT = Revenue x Deemed profit rate x CIT rate
Ø The deemed profit rate should not be less than 15%, higher than the previous 10%;
Ø ROs that are taxed based on one of above mentioned methods may apply to the tax authorities to use the actual amount method if they can prove to maintain accounting books and records to accurately calculate taxable turnover and profits.
Ø The local tax bureaus should no longer accept applications for CIT exemption and they should clear the taxabilities of ROs that were verified to be exempt from CIT by the local tax bureaus under old regulations. Guoshuifa [2010] No. 19 (Circular 19) Circular 19, which takes affect immediately when it is issued, is applicable to non-resident companies that have set up establishments in China and have China-source incomes obtained by their establishments, and derive incomes outside of China which are actually in connection with the establishments in China. Ø If non-resident companies cannot accurately calculate their CIT taxable profits and pay CIT because of incomplete accounting books, or lack of information, or for any other reasons, the tax authorities have the right to use one of the following methods to verify their taxable profits: I. Deemed profit based on revenue – for non-resident companies can accurately calculate their revenue, but cannot correctly calculate their costs and expenses. The calculation formula for taxable profit is as follows: Taxable profit = Revenue x Deemed profit rate II. Deemed profit based on costs and expenses – for non-resident companies can accurately calculate their costs and expenses, but cannot correctly calculate their revenue. The calculation formula for taxable profit is as follows:
Taxable profit = Costs and expenses / (1 – Deemed profit rate) x Deemed profit rate III. Deemed profit based on expenditure – for non-resident companies can accurately calculate their total expenditures, but cannot correctly calculate their total revenue or costs and expenses. The calculation formula for taxable profit is as follows:
Taxable profit = Expenditure / (1 – Deemed profit rate – BT rate) x Deemed profit rate Ø Deemed profit rate – the tax authorities can verify the deemed profit rate for non-resident companies based on the following ranges: ü For the provision of construction, design and consulting services: 15%-30%;
ü For the provision of management services: 30%-50%;
ü For the provision of other services or other business activities: not less than 15%. The tax authorities can verify a higher profit rate if they think that the actual profit rate is significantly higher than the ranges mentioned above. Ø If one contract between a resident company and a non-resident company involves the sales of machines, equipment or other goods as well as the provision of services, such as installation, assembly, technology training, guidance, supervision, etc, the contract should clearly list and allocate the income attributing to the sale of goods and the provision of services. If an allocation is unreasonable or unclear, the tax authorities have the right to verify services income based on other similar activities or verify the services income to be not less than 10% of the contract value. Ø If a contract involves the provision of two or more services for which different deemed profit rates apply, income for different services should be calculated separately; otherwise, the tax authorities will verify the highest applicable deemed profit rate. Ø If non-resident companies provide services for domestic clients and the services are wholly performed in China, the total income derived from the services should be subject to CIT in China. If the services are performed both in and outside of China, the service income will be allocated according to where the services are performed and the portion derived from the services performed in China should be subject to CIT in China.
If the tax authorities doubt the rationality and authenticity of the allocation, information will be required to support the proposed allocation. If the information cannot be provided to support, the tax authorities can deem the services as services which are wholly performed in China. | 
