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New Measures for Assessing EIT on Non-residents on Deemed Basis
On 20 February 2010, the SAT issued the Administrative Measures for the Collection of EIT on Deemed Basis for Non-Resident Companies to lay out the fundamentals of how a non-resident having a permanent establishment (PE) within China is liable to EIT.
Non-resident entities with PEs or ROs in China typically have applied a deemed taxation method and Circular 19 adopts the similar methods that have been used in the past. However, the difference is that the deemed profit rates have substantially been increased as compared to previous rates used by the tax authorities. The detailed rates are summarised as follows:
contracted construction, design and consulting contracts: change from "at least 10% (15% for design services)" to "15%-30%"
management services: change from "20%-40%" to "30%-50%"
other services and operations: change from "no specific rule" to "at least 15%".
Another significant change of Circular is that the 60/40 compulsory allocation ratio for onshore and offshore service income is no longer applicable. In the former regime, for a consulting service project for a Chinese customer where services are rendered both in and outside China, at least 60% of the contract amount should be allocated as onshore service income. Furthermore, Circular 19 stipulates that Chinese tax bureau is eligible to request non-resident entities to provide evidence to substantiate the allocation if they have doubt about the reasonableness and truthfulness of the onshore/offshore service income allocation. In other words, the entire service income may be deemed as onshore service income and subject to EIT, if no evidence is able to be provided in extreme cases.
We consider the changes in the tax treatments brought by Circular 19, mainly regarding the increased deemed profit rates and allocation policy of onshore/offshore income, will have an immediate and significant impact on non-resident entities and their tax costs. Here are three actions that can be taken to alleviate the impact:
communicate with the tax authority on the tax filing basis for existing projects or PEs with an already agreed rate
review the tax filing basis, deemed profit rate and the onshore/offshore allocation for the on-going projects in China
set up a protocol to assess and choose the most tax efficient and effective way of tax reporting for any potential new project in China
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