1China tax bulletin

Issue 1 January 2015

Corporate Income Tax (“CIT”)New CIT annual filing tax return package has been launchedRecently, the State Administration of Taxation (“SAT”) issued Public Notice [2014] No.63, introducing a new set of annual CIT tax return package and relevant explanatory notes for completing the forms. The new return package will come into force on Jan 1st, 2015 and first to be adopted by resident CIT taxpayers in the coming 2014 annual CIT filing.

China tax bulletin

The new package is consisted of 41 forms including a basic information form, one lead return and 39 supplementary forms. Among the 39 supplementary forms, there are 6 forms of income and expense breakdown, 15 forms of tax adjustment, one form of loss for compensation, 11 forms of tax preferences, 4 forms of foreign tax credit and 2 forms of tax payment on consolidated basis.

Compared with the current package, the key changes in the new return package would be as follows:

• Basicinformationform:This is a new form. In addition to the basic company information, the form also requires certain accounting and business information such as main shareholders of the company, the company’s main overseas investments, etc.

• Breakdownofexpenses:This new form requires a set of expense items that should be filled in accordance with accounting books. Also, there is a column in this form for disclosing the outbound payments of the expenses.

• Formsontaxadjustment:These forms are much more elaborate and comprehensive on the adjustment items as compared with the corresponding schedules in the old package.

• Formsontaxpreferences:Different types of tax incentives should be supplemented with

2China tax bulletin

additional information. Specifically for New/High Tech Enterprises (“HNTE”), software and integrated circuit (“IC”) enterprises, taxpayers are required to disclose a significant amount of information to substantiate and fulfill the key assessment criteria.

• Formsonforeigntaxcredit(“FTC”):This new set of FTC forms requires more information disclosure from taxpayer with outbound investment and helps tax authorities to trace the details of foreign-sourced income more easily than before.

In general, the new package is more comprehensive in terms of the number of forms and the level of information disclosure. Nevertheless, there still remain some uncertain areas to be further clarified. Also, by requesting the tax payer to provide significant information to the most detailed ever level, the tax authority demonstrates their determination to more effectively evaluate the compliance status of the tax payers through the annual filing and screen for tax audit target collect. Therefore, it will be critical that tax payers understand well those changes in the filing package and make sure the accuracy, consistency and completeness of the data to be presented with the additional forms. It is not only an increase of workload but undoubtedly a new challenge for the tax payers when fulfilling the reporting obligation in China. It is foreseeable the tax authority will pay more scrutiny to the deductibility of the expense, the effectiveness of book-to-tax adjustment and the applicability of any tax concession during the review of the annual CIT package and raise more questions.

New CIT accelerated depreciation policy for fixed assets has been releasedIn order to facilitate the State Council’s decision on the improvement of fixed assets (“FA”) accelerated depreciation policy under the CIT law, the Ministry of Finance (“MoF”) and SAT jointly issued Caishui [2014] No.75 (“Circular 75”) in late October 2014, providing guidelines for the detailed CIT treatment of the new policy.

Circular 75 mainly provides following points in relation to the implementation of the accelerate FA depreciations:• Fixed assets purchased after 1

January 2014 by enterprises in six industries could adopt a shorter depreciation period or adopt the accelerated depreciation method. The six industries including the biopharmaceutical manufacturing industry, special equipment manufacturing industry, railway, vessel, aviation and aerospace and other transportation equipment manufacturing industry, computer, communications and other electronic equipment manufacturing industry, instruments manufacturing industry, information transmission, and software and information technology services industry.

• Costs for equipment with unit value below RMB1 million purchased after 1 January 2014 by small enterprises with low profit in the aforesaid six industries for usage of research and development (“R&D”) and operation could be deducted in one lump sum for CIT purposes. Where the unit value exceeds RMB1 million, a shorter depreciation period or the accelerated depreciation method could be adopted.

• Costs for equipment with unit value below RMB1 million, which are purchased after 1 January 2014 by enterprises in all industries and used specifically for R&D purposes, could be deducted in one lump sum for CIT purposes. Where the unit value exceeds RMB1 million, a shorter depreciation period or the accelerated depreciation method could be adopted.

• For the FA held by enterprises before 1 January 2014 with a unit price not exceeding RMB 5,000, the tax depreciation value can be deducted in one lump sum for CIT purposes.

• For enterprises which adopt a shorter depreciation period pursuant to Circular 75, the minimum depreciation period shall not be less than 60% of the depreciation period stipulated in the CIT Law. Enterprises adopting the accelerated depreciation method may adopt the double declining balance method or the sum of the years digits method.

Overall, the release of Circular 75 allows enterprises to enjoy CIT accelerated depreciation policy for FA. As the new policy exerts impacts on most enterprises in all industries, it is necessary for enterprises to assess their current operation status and future investments so as to utilize the new policy in an efficient way.

3China tax bulletin

Turnover taxNotice regarding simplified and consolidated VAT rates has been issuedIn accordance with the decision of the State Council on simplifying and consolidating value-added tax rates, MoF and SAT jointly issued Caishui [2014] No.57 (“Circular 57”) to adjust the simplified VAT rates for goods sales from 6% or 4% to 3%.

According to Circular 57, the following detailed adjustments would be made to the simplified VAT rates:• The provision that "to collect VAT

at the halved rate of 4% under the simplified method" in Item 1 and 2 of Article 2 of Caishui [2009] No.9 is changed to "to collect VAT at a rate of 2% reduced from the original rate of 3% under the simplified method".

• The provision that "to collect VAT at the halved rate of 4% under the simplified method" in Item 2 and 3 of Article 4 of Caishui [2008] No.170 is changed to "to collect VAT at a rate of 2% reduced from the original rate of 3% under the simplified method".

• The provision that "the VAT payable shall be calculated at the rate of 6% under the simplified method" in Item 3 of Article 2 and Article 3 of Caishui [2009] No.9 is changed to "the VAT payable shall be calculated at the rate of 3% under the simplified method".

• The provision that "the VAT payable shall be calculated at the rate of 4% under the simplified method" in Item 4 of Article 2 of Caishui [2009] No.9 is changed to "the VAT payable shall be calculated at the rate of 3% under the simplified method".

The consolidating of the VAT rates under simplified method has standardized the tax system and fine-tuned the tax burden to certain extent. Taxpayers engaged in relevant taxable activities (i.e. selling used fixed assets) should be familiar with the

new applicable tax rate and report related VAT in accordance with the notice.

OthersNew double taxation agreement signed between China and Russia to further enhance cooperationOn 13 October 2014, China and Russia concluded a new double taxation agreement (“DTA”) and protocol. The new DTA embodies the new trends in the development of international tax treaty.

Main changes in the new DTA include:• Time threshold for service

permanent establishment (“PE”) decreased from 18 months to 183 days within any 12 month period;

• Withholding tax rate on dividends, interest and royalties reduced from 10% to 5%, 5% and 6% respectively;

• A standalone limitation of benefits (“LOB”) article enforced to tackle treaty shopping.

Upon entry into force, the new DTA will replace the currently applicable treaty signed in 1994 and is expected to further enhance economic cooperation between China and Russia.

Notice regarding the improvement of CIT policies for Technology Advanced Service Companies (“TASEs”)To promote the development of TASEs, the MoF and SAT, National Development and Reform Commission (“NDRC”), Ministry of Commerce (“MOFCOM”) and Ministry of Science and Technology (“MOST”) jointly released Caishui [2014] No.59 (“Circular 59”) to specify preferential CIT policies for qualifying TASEs located in Beijing, Tianjin, Shanghai, Chongqing, Dalian, Shenzhen, Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi’an, Ji’nan, Hangzhou, Hefei, Nanchang, Changsha, Daqing, Suzhou, Wuxi and Xiamen (hereinafter referred to as the “21

model cities’) from 1 January 2014 to 31 December 2018.

Tax preferential policies for recognized TASEs located in the 21 model cities include:• CIT rate is reduced to 15%; and• Annual deduction limit for

employee education expenses is up to 8% of total salaries and wages.

Compared to the old CIT policy for TASEs, i.e., Caishui [2010] No.65 (“Circular 65”), Circular 59 has loosened the criteria for qualifying TASEs by removing the criterion of “a TASE” must be in full compliance with all administrative requirements in various aspects including, but not limited to import and export, finance, taxation, foreign exchange and Customs during the preceding two years”.

In addition, while Circular 65 required that a qualifying TASE must have no less than 50% of its annual total income derived from outsourcing services, Circular 59 has reduced the ration of offshore outsourcing service income from 50% to 35%.

Also, apart from the CIT preferential treatments, as prescribed in attachment III of Caishui [2013] No.106, offshore ITO, BPO and KPO services are exempt from VAT from 1 January 2014 to 31 December 2018. Companies that intend to apply for the TASE status and relevant preferential treatments should study Circulars 59 and 106 carefully to explore the possibility to enjoy the tax benefits.

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Expansion of Free Trade Pilot Zone (“FTPZ”)Recently, the committee of National People’s Congress has held a meeting and decided to promulgate the pilot program for Free Trade Zones.

The newly included provinces for the pilot zones are Tianjin, Guangdong and Fujian provinces. Apart from the add-in provinces, areas for the existing Shanghai Free Trade Pilot Zone (“SFTPZ”) have been expanded to include the Lujiazui Finance areas, Jinqiao Development Zone and Zhangjiang High-tech districts.

Along with the establishment/expanding of the FTPZs located in four provinces, detailed regulations would be later issued/amended to accelerate the development and deepen the convenience and benefits of the special zones.

Undoubtedly, more opportunities would be accessible within the pilot areas. Companies should closely follow up with the preferential treatments/policies in these areas and seek the opportunities to plan business and taxes in an effective and efficient way.

China tax bulletinChina tax bulletin are issued in summary form exclusively for information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed professional advice. Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with us.

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