On 8 November 2017, China’s State Administration of Taxation (the SAT) released Public Notice [2017] No. 40 (PN 40) to expand the scope of qualifying research and development (R&D) expenses eligible for a super deduction and to clarify certain related issues. The super deduction means an additional 50% deduction of the actual R&D expenses.

Pursuant to PN 40, the expanded scope of qualifying R&D expenses includes the following:
• Equity incentives granted to R&D personnel
• Personnel expenses such as salaries and wages included in a payment made to contract a human resource agent that loans R&D personnel
• Employee welfare expenses, supplementary pension funds and supplementary medical insurance premiums
• R&D expense incurred for “failed” projects

PN 40 also clarifies that for outsourced R&D projects, the R&D expenses of the principal and not the subcontractor will be eligible for the super deduction.

PN 40 applies to annual corporate income tax returns for taxable years beginning in 2017. PN 40 is also applicable to any new and pending cases to which retroactive preferential tax treatment is available.

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One of the most common challenges facing foreign companies active in China is how to repatriate successfully their profits outside of China. Since China’s policies regarding foreign exchange are strictly regulated, repatriating funds is generally considered to be a difficult task. Issuing (1) dividends to the parent company, (2) making payments for service fees, royalties and reimbursements, and (3) making outward intercompany loans can quickly become complicated and very time-consuming.

To provide a better understanding how these procedures work in China, Moore Stephens has prepared a detailed white paper explaining all the different steps, considerations and procedures involved. In order to receive your copy, please click on the link ‘Read More’ to send us your request.

We are also happy to share with you our latest article on Transfer Pricing in China and what are the 5 things every foreign business certainly should take in mind when doing business in China.

We also prepared in cooperation with CBI Consulting the article Why should foreign companies in China be ready to expect the unexpected?

If you have any further questions or would like to get in touch with us, please do not hesitate to contact us at info@msadvisory.com

In the Executive Meeting of the State Council held on 28 July 2017, China’s Premier Li Keqiang announced a new plan (the Plan) to further attract foreign investments, including tax deferral/exemption treatment on dividend income reinvested into China.

Highlights of the Plan are:

• Deferral or exemption of withholding tax on dividend income if a foreign investor reinvests the dividend directly in “encouraged” projects in China. Under the current Corporate Income Tax (CIT) Law, a dividend declared to a foreign investor is subject to a 10% withholding tax, unless otherwise reduced by a tax treaty. However, no details have yet been issued to clarify how the deferral or exemption applies and what projects would qualify as “encouraged” projects. China’s State Administration of Taxation (the SAT) may issue clarification and guidance on this topic.
• The tax incentives for a technology advanced service company (TASC) will be rolled out nationwide in China with the following tax incentives:
  ◦ A reduction in the CIT rate from 25% to 15%.
  ◦ An increase in the employee education expense deduction limitation of total salaries and wages from 2.5% to 8%.
• China will issue further guidance to eliminate or reduce the investment restrictions for foreign investors in certain manufacturing and service industries. The local government will be encouraged to enact measures to attract the regional headquarters of multinational companies.
• To make China more appealing to foreign talent, the Government will simplify the work permit requirements and extend a validity period.

According to the State Council Executive Meeting, the Plan would be implemented by the end of September 2017. Companies are recommended to closely follow the developments and take action accordingly, in particular, companies that have a reinvestment plan in China may consider holding off the implementation until the SAT issues clarifications.

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The Auditing Bureau of the State Administration of Taxation (SAT) issued Shuizongjibianhan [2017] No. 29 (Circular 29) to provide the 2017 tax investigation plan (the Plan). Circular 29 is dated 13 February 2017 but it was only recently released to the public domain.

Highlights of the Plan include:

Value Added Tax (VAT)

• The SAT will select 30 VAT cases to investigate invoices issued without business substance or potential export tax frauds, to be jointly conducted by the SAT and the local tax authorities.
• The SAT will choose the following cases for local tax authorities’ investigation purposes:
  – 500 cases for export tax frauds in textile, garment, furniture, mobile phone and gold industries
  – 1,000 cases for VAT invoices (including import VAT invoices) in gold, products and refined oil industries
  – 720 cases for VAT invoices issued without business substance in the VAT pilot industries in construction, real estate, life-style services and transportation industries

Regional and industrial investigations:

• The SAT will select five integrated foreign trade service enterprises to gather information on possible tax fraud risks in the industry and provide guidance.
• Other target industries and regions include:
  – The medical care and pharmaceutical industries in Tibet and Anhui
  – The agricultural industry in south-west regions
  VAT invoices related to gold transactions in Guangxi and Guizhou
  – VAT invoices issued without business substance or tax fraud of newly established trading companies in Beijing
  – The SAT will choose 30 individual income tax and corporate income tax returns on share transfers and investment income for high-level executives and artists.

To prepare for the coming tax investigations, US multinational companies with Chinese operations in the industries and specified in Circular 29 should assess their current Chinese operations’ compliance risks and develop strategies and documentation to manage the potential tax exposure.

EY Global Tax Alert Library: www.ey.com/taxalerts

An increase in transfer pricing controversy was always anticipated to result from the OECD BEPS program of work. Which Revenue Administrations in Asia Pacific have got on the front foot with new compliance activities? Which continue with previous areas of focus? We’ll discuss:

• New audit procedural approaches introduced by Revenue Administrations.
• Practical options and guidance on best practices for resolving disputes.
• Mutual Agreement Procedure.
• The way forward.

Gain insights from Deloitte experts on the best practices for transfer pricing disputes.

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