1 August 2014 marked the implementation date for the PRC's new "Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business" 2014 No. 37 Notice. This Notice likely signals the beginnings of a shift from theoretical fiscal liability imposed upon foreign shipping owners and operators, to a very real risk that they will be forced to pay Enterprise Income Tax (EIT).
What is Notice 2014 No. 37?
The Notice is wide reaching, repealing a number of existing tax regulations (dating from 1993 to 2008) and replacing them with a unified, extensive regime. It sets out various tax registration requirements for parties engaged in the "international transportation business" and specifies provisions allowing for the withholding of tax by PRC contractual counterparties. As alluded to above, most international ship owners have theoretically been subject to the PRC EIT regime in one form or another for a long period of time. However, the Notice should be viewed by affected parties as a renewed declaration of intent by the PRC authorities to clamp down on affected non-resident companies.
The Notice should be viewed by affected parties as a renewed declaration of intent by the PRC authorities to clamp down on affected non-resident companies.
– Lianjun Li, Partner, Reed Smith
The Notice encourages PRC tax authorities to increase their surveillance of non-resident companies operating in PRC ports to ensure tax obligations have been fulfilled. It includes provisions allowing for the escalation of enquiries to the State Administration of Taxation who in turn can authorise further investigations into any entity suspected to be in breach.
Who is affected?
"International Transportation Business" is defined to include the carriage of cargo and passengers in and out of PRC ports by non-resident companies through vessels and charter slots. The chartering of ships on both a time and voyage charter basis is caught under the Notice. We note, however, that it appears demise charters are excluded from the purview of the Notice.
What does the Notice require?
Foreign companies seeking to provide international transportation services to PRC counterparties are required to register with local tax authorities within 30 days of signing any transportation agreement. Where the company has operations in more than one PRC port, they may elect which port they decide to register with. Supporting documentation will also be required, including a "Certificate of Operating Qualifications" and the charterparty or transportation contract. Should a foreign company fail to register, the PRC counterpart is required to deduct tax from the invoice amount. It should be noted that such deductions may also apply to payments made by PRC counterparties through overseas subsidiaries.
How is EIT calculated?
EIT is calculated from actual income received by a foreign company as a result of an international transportation contract concluded with a PRC counterparty, less any expense incurred. "Income" will include freight and, for passenger transport, ticket revenues, excess baggage charges, insurance fees and any fees for on-board entertainment and meals. An EIT rate of 10% to 25% will then be applied, depending on the nature of the foreign company's presence in the PRC.
For those companies that cannot accurately calculate their taxable income, a "deemed profit ratio" will be assessed by the relevant tax authority, which is usually not less than 15% of gross income.
Are there any exemptions?
Foreign companies may be able to benefit from a bilateral tax treaty, entered into between the PRC and the foreign company's country of tax residency. If such an arrangement exists, the foreign company must apply for confirmation of the application of that treaty from the relevant PRC tax authority. This will again need to be supported with documentation, including corporate incorporation documents and any relevant services agreements entered into with the PRC company.
What should owners/charterers do?
It is unclear how the Notice will be implemented and with how much vigour. With regards to the former, the following issues (among others) remain key and unresolved:
- Will the tax attach if a foreign owner charters a vessel to a PRC charterer, but the transportation is confined to non-PRC ports?
- Will the tax apply if a foreign owner charters a vessel to a foreign charterer but the vessel calls at a PRC port?
- Will two (or more) companies be taxed for the same transaction, i.e. headowners and disponent owners, who both make a profit by collecting hire or freight?
It is expected that the State Authority will publish detailed guidance to accompany the Notice in the near future and that light will be shed on these questions.
With regards the degree of enforcement of the Notice, we shall continue to monitor developments with keen interest.
In the meantime, affected foreign companies should consider including clearly drafted contractual clauses assigning ultimate liability for tax to PRC charterers. With regards to those contracts already concluded, owners and charterers should consider appointing PRC accountants to seek to minimise exposure and to ascertain whether any exemptions apply.
Affected foreign companies should consider including clearly drafted contractual clauses assigning ultimate liability for tax to PRC charterers.
– Cheryl Yu, Legal Manager, Reed Smith
Owners and charterers should also be aware that the Notice may signal a more robust approach by PRC tax authorities generally. Particularly with regards to EIT and VAT liability, owners and charterers should consider whether they may be exposed and if they have concerns, they should seek the advice of local accountants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.