State Council introduces six tax cut measures for 2017
At the executive meeting of the State Council last week, a series of six tax cuts were introduced. The following details the plans:
(I) A continuation of the Business Tax to value-added tax (VAT) reform, in the form of simplification of VAT rates from four brackets to three. As of July 1, 2017, the 13 percent bracket will be eliminated, leaving only the 17 percent, 11 percent and 6 percent brackets. Furthermore, agricultural products and natural gas VAT rates will be reduced from 13 percent to 11.
(II) The scope of small and micro profit enterprises entitled to preferential enterprise income tax (EIT) rates will be widened. From January 1, 2017, the upper limit of taxable income has been increased from RMB 300,000 to RMB 500,000, valid until December 31, 2019.
(III) The proportion of weighted pre-tax deduction of R&D expenses of high-tech SMEs will be increased. From January 1, 2017 to December 31, 2019, the proportion of R&D expenses deducted before EIT will be increased from 50 percent to 75 percent.
(IV) A pilot program in eight comprehensive innovation and reform zones, including in Beijing, Tianjin, Shanghai, and Guangdong. Beginning on January 1, 2017, venture capital enterprises and individual investors that invest in the science and technology enterprises during the startup stage can enjoy taxable income deducted at 70 percent of the investment amount.
(V) A pilot policy of pre-tax deduction for IIT expenditures on health insurance products across the country beginning July 1, 2017.
(VI) For polices which were set to expire in 2016, such as the 50 percent cuts to Urban and Township Land Use Tax on bulk commodity warehouse facilities owned by logistics enterprises, and the VAT exemption on the interest on income derived by the financial institutions from small loans to farmers, a three-year extension will be applied.
Key tasks for the economic system reform listed
35 key tasks for realizing the ongoing economic system reform in 2017, published by the National Development and Reform Commission (NDRC), have been released.
Reform pledges include forming a compilation of civil code by revising laws and relevant clauses; reforming the mixed ownership of SOEs in the electricity, petroleum, natural gas, railway, civil aviation, telecommunication, and defense industries; fully implementing the negative list management model and pre-access national treatment for foreign invested companies; launching overseas RMB cooperation funds; reviewing the blacklist for overseas investment; developing the improvement scheme of local tax and accounting systems; and expanding the scope of the current water resource tax reform.
Development and support for China’s new pilot free trade zones
The General Administration of Customs has issued 25 measures for supporting the development of the seven new pilot free trade zones in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi.
The measures include developing tax collection and administration at customs bureaus; improving the integration and optimization of customs’ special and bonded supervision zones; supporting the development of areas such as foreign trade of culture, cross-border e-commerce, service outsourcing, production-oriented service sector, and finance leasing, etc.; and implementing legal protection of intellectual property to safeguard the innovation of enterprises operating in those areas.
The new free trade zones started operation on April 1 this year, mostly located away from coastal areas to promote more inland trade. China hopes to attract further investment to spur growth in its less wealthy inland areas, especially in its western regions.
Circular No. 40 states that an applicant may apply for a CTR “in any calendar year in which it qualifies as a Chines tax resident”, meaning that a certificate can only be granted for a specific year.
Obtaining the certificate officially takes around 20 working days. However, in practice the application timeline may be shorter if everything runs smoothly, or longer if the applicant does not provide all the documents required or if the Tax Authority requests additional material.
Optimizing DTA benefits
As the CTR is often a mandatory document when filing for WHT exemption, an overseas company making payments into China may be subject to double taxation until it has obtained the CTR. However, CTR application must be filed in the name of the Chinese party. If it is not inclined to cooperate or is otherwise unable to effectively handle the procedures, any delays or rejections that result could mean an effective double taxation.
The CTR application timeline might also impact the overseas company’s cash flow while it is waiting for the neutralization of the double taxation. Indeed, in some instances the company may have to settle the tax bill first and then, once in possession of the Chinese CTR, claim reimbursement. In this situation, and depending on the amounts involved, the temporary tax bill could be detrimental.
Most problematic, should the Chinese party fail to provide the CTR before the application submission deadline in the home country, the overseas company could lose the withheld tax amount.
Furthermore, the wait for the CTR can interfere with routine financial reporting and tax filing in the home country of the company needing the CTR. If the overseas company has to declare its taxable income before a certain date, it can be difficult to precisely determine this amount without assurance that the CTR and subsequent tax credit will be granted.
Working with a competent advisor in China can be the key to ensuring a smooth filing of the application and a timely issuance of the CTR. Dezan Shira & Associates can help clients to obtain a CTR by providing advice to the Chinese party, communicating with the local Tax Bureau at various steps of the application, and, if required, by filing the application on the Chinese party’s behalf.
Source: China Briefing on April 24