China: Strengthening Tax Administration Of Contracted Engineering Operations And The Provision Of Labour Services By Non-Residents

Last Updated: 21 September 2009
Article by Daisy Duan

This article was first published in Asian Counsels country files,

Tax authorities in the People's Republic of China ("PRC") are strengthening their oversight of non-resident enterprises. As of 1 January 2009, for example, domestic enterprises must obtain tax certificates from tax authorities before making any external foreign exchange payment of USD 30,000 or more for services, income, current account transfers or capital items. Furthermore, non-resident enterprises will be targeted for tax audits starting this year.

In addition, administrative measures that target non-resident enterprises engaged in contracted engineering operations and the provision of labour services came into effect on 1 March 2009. These measures, the Provisional Measures for Tax Administration of Contracted Engineering Operations and the Provision of Labour Services by Non-residents, were issued by the State Administration of Taxation ("Provisional Measures").

"Contracted engineering operations" refers to contracted construction, installation, assembly, refurbishment, decoration, exploration and other engineering operations. "Providing labour services" refers to engaging in processing, repair and fitting, transportation, warehouse leasing, consultation agency, design, culture and sports, technology services, education and training, tourism, entertaining and other labour services in the PRC. We refer to these below as "Covered Operations and Services" and "Covered Operations or Services", as appropriate.

The Provisional Measures require a non-resident enterprise engaged in Covered Operations or Services to carry out tax registration and tax filing in the PRC. Salient points of the Provisional Measures are as follows:

Tax Registration

  • Non-resident enterprises

    A non-resident enterprise engaged in Covered Operations or Services in the PRC must register with the tax authorities in the place where the project is located within 30 days after the relevant agreement is concluded. It must also, within 15 days after completing the project, submit photocopies of the project completion certificate and verification certificate to competent tax authorities and go through de-registration procedures.
  • PRC enterprises and individuals

    PRC enterprises and individuals obliged to withhold taxes for a non-resident enterprise shall register with competent tax authorities within 30 days after their withholding obligation commences.

PRC enterprises and individuals which outsource projects or services to non-resident enterprises shall submit relevant documents to competent tax authorities within 30 days after concluding the relevant agreement and within 10 days after any revision. They shall also report the payment status to the tax authority within 30 days after obtaining relevant invoices. A contracting domestic enterprise or individual that is not responsible for paying the non-resident enterprise must report the following information to the tax authority in the place where the project is located: project implementation progress, payer's name, payment amount and payment date.

Tax Filing

The Provisional Measures also govern tax filing of the non-resident enterprises concerning enterprise income tax ("EIT"), business tax ("BT") and value-added tax ("VAT").

  • EIT

    A non-resident enterprise that provides Covered Operations or Services in the PRC must pay its EIT in advance on a quarterly basis, and such tax must be calculated and settled at the end of the year. The final tax settlement shall be made upon completion of the engineering project or fulfillment of the labour service agreement. Failure to submit tax returns and relevant documents as required may lead to inability to enjoy preferential treatment under relevant tax treaties.

    An exemption from the annual EIT filing obligation is applicable to a non-resident enterprise engaged in Covered Operations or Services for a project that lasts for under one year, is completed before the year-end and for which the non-resident enterprise has already settled the tax payment (Article 1, Circular Guoshuifa [2009] No.6).
  • BT and VAT

    A non-resident enterprise engaged in activities subject to BT or VAT that has established an operating organisation in the PRC must declare and pay BT or VAT by itself. If it has no operating organisation in the PRC, its agent shall be the withholding agent; if it has no agent in the PRC, the contractor, recipient of the services or the purchaser must withhold the tax.

When filing the EIT, BT and VAT returns, detailed information about foreign personnel involved in providing Covered Operations and Services (amongst other things) must be submitted that includes the name, nationality, time of entry and exit, work time in the PRC, location, contents, remuneration standards, payment method and relevant expenses.

Non-resident enterprises engaged in Covered Operations and Services should understand the Provisional Measures as well as local practices to ensure full compliance. This is especially important for those listed as key targets for supervision by authorities, for instance, non-resident enterprises that participate in key construction projects at state, provincial and prefectural levels, including construction of basic civil works, energy projects, projects that introduce technological equipment and other non-resident enterprises that participate in a contract whose value exceeds RMB 50 million.

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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