PNI1403--New Regulation lssued by Chinese Tax Authorities on Collection of Tax on Non-resident Taxpayers Engaged in International Transportation Business
Circular Ref No.: PNI 1403

Date: 23 Sep 2014

Dear Sir or Madam,

Subject: New Regulation Issued by Chinese Tax Authorities on Collection of Tax on Non-resident Taxpayers Engaged in International Transportation Business

Since the issuance of Provisional Measures on the Collection of Tax on Non-resident Taxpayers Engaged in International Transportation Business by the State Administration of Taxation in China which has come into effect as of 01 Aug 2014, this new regulation has attracted increasing attention and concern from international shipping community.

To help our clients to learn more details about this new regulation, we enclose herewith our free translation for your ready reference. In the meantime, we further summarize the main points of the regulation and the changes it brings about as follows:

Applicable Tax Category

The new regulation applies to Enterprise Income Tax (EIT), which shall be levied on income of non-resident enterprises gained from international transportation business in China.

EIT has haunted foreign ship owners having business with Chinese charterers who were held as withholding agent of EIT by tax authorities in the past few years, although such tax requirements were not always strictly enforced.

Range of Application

This new regulation expanded the range of income that is subject to tax in China. Previously EIT was only to be levied on income gained from transportation business originating from Chinese ports. With the introduction of the new regulation, this is extended to include income gained from all kinds of commercial activities related to transportation both to and from Chinese ports, together with loading, discharging, and warehousing services.

Furthermore, this regulation put an end to the confusion over whether charter hire falls into the income of EIT or property lease by making specific clarification that non-resident enterprises chartering out vessels or aircrafts in the manner of voyage charter, time charter or wet charter belongs to international transportation business and the income gained thereby are subject to EIT instead of the tax regime for property lease.

Calculation of Tax

Tax amount = Taxable income X Tax rate.

  • Taxable Income

Taxable income = Total income ― Deductible Expenses.

Total income represents the sum of passenger transportation income or cargo carriage income obtained from carrying passengers, cargo or post to and from Chinese ports. Passenger transportation income includes passenger ticket revenues, excess baggage charge, meals, insurance fee, service fee and entertainment fees, etc.; and cargo carriage income includes freight and surcharges, etc.

The expenses to be deducted from total income shall be related to obtaining such income and be reasonable. The tax authorities would usually require supporting documents for these deductible expenses.

In case the non-resident enterprises cannot accurately calculate and declare taxable income, Taxable income = Total income X Assessed Profit Rate. For service businesses, the profit rate shall not be less than 15%.

  • Tax Rate

Under current Chinese tax regulations, the standard tax rate for EIT is 25% (such rate can be reduced to 20% for small slight-profit companies, or 15% for high-tech companies which enjoy state support).

Tax Payment and Withholding Agent

Non-resident taxpayers can go through the tax registration formalities with local tax authorities within 30 days after obtaining operation qualification or entering into transportation agreements and thereafter declare and pay EIT by themselves or through agent according to relevant procedures.

If non-resident taxpayers have business at more than one Chinese port, they can choose any port for tax registration at their own discretion.

Apart from the above, the local tax authority where the payer of the income is located can appoint the payer as withholding agent who will be obliged to withhold the tax amount from their payment to the non-resident taxpayers and pay the same to local tax authority.

Tax Treaties

Non-resident taxpayers can apply for tax exemption by taking advantage of tax treaties between their country and China on avoidance of double taxation or on maritime transportation, if such treaties are in place.

It should be noted that such tax treaty treatment are not enjoyed automatically. Taxpayers need to go through application procedures with local tax authorities in order to apply such treaties; otherwise they are still obligated to pay tax.

Taxpayers, who have paid the tax but are actually entitled to tax treaty treatment, can apply for refund of the overpaid tax within three years after payment.

Comments and Recommendations

Obviously this regulation is intended to tighten the collection of tax on non-resident taxpayers engaged in international transportation business in China, who are expected to face higher tax burden from Chinese tax authorities, unless they are protected by applicable tax treaties.

However, there are many detailed issues that are yet to be clarified by the authority on implementation of this regulation. Among many other things, it remains to be answered if owners time charter hire is subject to EIT in case the vessel is chartered to non-Chinese companies but occasionally calls Chinese ports and if so, how taxable income of such time charter hire shall be calculated. We shall closely follow up with any development and issue further circulars as necessary.

In the meantime, foreign companies that may be influenced by this regulation are recommended to check if their registered country has any tax treaty with China by which they can be protected from new tax burdens. Furthermore, they are also suggested to carefully examine the terms concerning tax payment obligation when entering into transportation agreements to seek best protection of their interests.

We hope the above is of assistance. Should you have any query, please do not hesitate to contact us.

Sincerely yours,

Shan Hong
Vice President

Encl.: Provisional Measures on the Collection of Tax on Non-resident Taxpayers Engaged in International Transportation Business (Free Translation
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