Effective 1 January 2009, the levying principle of business tax
("BT") on services in the People's Republic of China
("PRC") has been changed from where the service is
performed to where the service provider or the service recipient is
located. This change may have a substantial impact on the BT
liabilities of foreign service providers who provide services
outside the PRC to PRC clients.
Similar to the repealed Tentative Regulations on Business Tax
(1993 Version), the Tentative Regulations on Business Tax (2008
Revision) provide that any unit or individual that provides
services, transfers intangible assets or sells immovable property
in the PRC is liable for BT and must pay it in accordance with the
Article 4 of the Implementation Rules of the Tentative
Regulations on Business Tax (2008) ("New BT Implementation
Rules") further explains that "providing services in the
PRC" refers to "units or individuals who provide or
receive services as prescribed in the Regulations who are in the
PRC". This is substantially different from the provision of
the Implementation Rules of the Tentative Regulations on Business
Tax (1993) ("Old BT Implementation Rules"), under which
the service provider was liable for BT only if the taxable services
were rendered within the PRC. Services rendered outside the PRC
were not subject to BT.
The new regulations imply that as long as the service provider
or the service recipient (including foreign invested enterprises)
is located in the PRC, the service income shall be subject to BT,
regardless whether the services are rendered in the PRC or
elsewhere. In this regard, BT may now be imposed on fees such as
interest on loans paid by a PRC entity or individual to a foreign
company and payments to a foreign lessor by a PRC lessee for the
lease of tangible assets.
It is uncertain whether the New BT Implementation Rules govern
the taxability of services provided by a foreign entity to a PRC
client in 2008, but paid for in 2009. If applicable, then the
services are subject to BT. But if the Old BT Implementation Rules
govern, then the services rendered in 2008 are exempt from BT. Oral
enquiries with some local tax bureaus indicate that most hold that
services provided by a foreign enterprise to a PRC enterprise
outside of the PRC in 2008 may not be subject to BT. But such cases
should be supported by documentation that satisfies the responsible
tax official. Communication with the competent local tax bureaus to
understand their position and documentation requirements is
Without a doubt, the modified BT levying principle on taxable
services will have a significant impact on many foreign service
providers. It is advisable for them to immediately assess the BT
exposure arising from services related to the PRC and be prepared
to deal with potential BT costs.
Place of Tax Declaration and Withholding Agent
Under the New BT Implementing Rules, a taxpayer that provides
taxable services shall declare and pay tax at the place where the
taxpayer is located or resides (instead of the place where the
service is rendered, as formerly required). However, for
construction services, taxpayers shall declare and pay tax at the
place where the services are rendered.
Where a foreign enterprise that provides taxable services,
transfers intangible assets or sells immovable property in the PRC
has no operating institution within the PRC, its agent in the PRC
shall be the BT withholding agent; if the foreign enterprise has no
agent in the PRC, the transferee or purchaser shall be the BT
withholding agent. The new rules also clarify withholding time,
withholding location and withholding deadline.
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.
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