APAC Tax Matters: 12th edition

China

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At a glance

  • Issues relating to “Capital Gains” in the China-Singapore income tax treaty
  • Adjustment of the “Catalog of imported commodities without Tax Exemption for domestic investment projects”
  • Commencement of inspection on the recognition and administration of High-and-New Technology Enterprises (“HNTEs”)
  • Implementation measures in respect of customs duties for 2013

Notice regarding certain issues relating to the article on “Capital Gains” in the China-Singapore income tax treaty (SAT Announcement [2012] No. 59)

On 31 December 2012, the State Administration of Taxation (SAT) released SAT Announcement [2012] No. 59 (“Announcement 59”) clarifying certain issues related to the double tax agreement (DTA) entered into between China and Singapore (the “China-Singapore DTA”) and Guoshuifa [2010] No. 75 (“Circular 75”) regarding the interpretation of provisions in the China-Singapore DTA.

Key features of Announcement 59

  • Scope of immovable property
    The immovable property stipulated in paragraph 4 of Article 13 in the China-Singapore DTA and Circular 75 should include land use rights and structures such as buildings for operational or non-operational purposes as well as the property attached to the immovable property.

  • Determination of 50% share value threshold from immovable property situated in China
    The meaning of “more than 50% of an enterprise’s share value coming directly or indirectly from immovable property situated in China” refers to the situation where an enterprise held China immovable property that accounts for 50% or more of the value of all the property it owns at any time during a certain period before the transfer (no specific provisions on the exact period have been promulgated; a three-year period shall be tentatively adopted). The above three-year period shall refer to a consecutive 36 calendar months prior to the alienation of shares of the enterprise, excluding the month when the shares are alienated.

  • Determination of the value of assets and immovable property of an enterprise
    The value of assets and immovable property of an enterprise stipulated in paragraph 4 of Article 13 in the China-Singapore DTA and Circular 75 shall be determined and calculated in accordance with the prevailing China accounting principles without taking into account liabilities of the enterprise. However, the value of land or land use rights included in the relevant immovable property shall not be less than the amount calculated according to the market prices of comparable land situated in an area adjacent or with similar features. If the above value cannot be calculated accurately by taxpayers, the tax authorities shall assess according to the above provisions.

  • Revisions to subparagraph 4, paragraph 5 of Article 13 in Circular 75
    Subparagraph 4, paragraph 5 of Article 13 in Circular 75 is superseded by Announcement 59 and revised as follows:

    A Singaporean resident is considered as holding a participation, directly or indirectly, in the capital of a Chinese resident company if:

    ● The Singaporean resident directly holds a participation in the capital of the Chinese resident company.

    ● The Singaporean resident indirectly holds a participation in the capital of the Chinese resident company through its subsidiary which directly holds a participation in the capital of the Chinese resident company provided that 10% or more of the shares of the subsidiary is held directly or indirectly by the Singaporean resident.

    ● The Singaporean resident indirectly holds a participation in the capital of the Chinese resident company through:

    a) Other group member which has significant interest relationship with the Singaporean resident and directly holds a participation in the capital of the Chinese resident company; or

    b) A subsidiary of the above group member which directly holds a participation in the capital of the Chinese resident company, provided that 10% or more of the shares of the subsidiary are held directly or indirectly by the group member.

Announcement 59 also specifies the calculation of the percentage of a participation in the capital of a Chinese resident company as well as the scope of group members which have significant interest relationships with the Singaporean resident.

Our observations

On 26 July 2010, the SAT issued Circular 75 which sets out interpretations for the provisions (including the article on capital gains) in the China-Singapore DTA. Announcement 59 makes certain changes to the interpretation of the provisions related to capital gains in Circular 75 and are worth the attention of taxpayers from the following perspectives:

  1. Scope of applicability of Announcement 59
    Pursuant to the interpretations of Announcement 59 by the SAT, Announcement 59 is also applicable to other DTAs that China has entered into if their articles of capital gains are consistent with that of the China-Singapore DTA.

  2. Difference regarding immovable property stipulated in the China-Singapore DTA and Circular 75
    There is no difference in the definition of immovable property stipulated in Articles 6 and 13 of the China-Singapore DTA and Circular 75. Such immovable property shall include land use rights and structures such as buildings for operational or non-operational purposes as well as the property attached to the immovable property.

  3. Calculation of the percentage of share value coming from immovable property situated in China
    Pursuant to Announcement 59, the accounting value shall generally be adopted in determining the value of assets and immovable property. However, adjustments to the above value according to the comparable market price of land or land use rights are required if their accounting value is less than the comparable market price. An example of how to calculate the percentage of share value coming from immovable property situated in China is illustrated as follows:
    Items Figures Remarks
    Total assets 68,800 A = B+C+D
    ►  Buildings 15,000 B
    ►  Land use rights 13,800 C*
    ►  Non- immovable property 40,000 D
    The percentage of value of shares deriving from immovable property situated in China 42% (B+C)/A×100%
    *Accounting value of land use rights is calculated according to the following data:

    Items Figures Remarks
    Purchase price 1/m2 E
    Area 15,000 m2 F
    Depreciable life 50 years G
    Depreciated years 4 years H
    Carrying value 13,800 C = E×F(1-H/G)

    Calculation of the percentage of share value deriving from immovable property according to the following adjusted data:

    Items Figures Remarks
    Market price of comparable land 2/m2 I
    Adjusted carrying value of land use rights 27,600 J = I×F(1-H/G)
    The percentage of value of shares deriving from immovable property situated in China 52% (B+J)/(B+J+D)
    ×100%

    Note: figures in the above tables are expressed in RMB’000 unless otherwise specified.

  4. Calculation of a percentage of a participation in the capital of a Chinese resident company
    Pursuant to the China-Singapore DTA, gains derived by a Singapore resident from the alienation of shares, participation, or other rights in the capital of a Chinese resident company may be taxed in China if the recipient of the gains, at any time during the 12-month period preceding such alienation, had a participation, directly or indirectly, of at least 25% in the capital of the Chinese resident company.

Foreign investors and foreign investment enterprises which are conducting or intend to conduct share transfer transactions should study Announcement 59 carefully and consider its impact and how it would affect their possible restructuring plans. When calculating the percentage of the value of shares deriving from immovable property situated in China and the percentage of participation in the capital of a Chinese resident company, provisions in Announcement 59 and Circular 75 should be observed.

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Adjustment of the "Catalog of imported commodities without Tax Exemption for domestic investment projects"

In order to encourage the importation of advanced technology equipment which cannot be manufactured domestically, on 24 December 2012, the MOF, the National Development and Reform Commission (NDRC), the General Administration of Customs (GAC) and the SAT, jointly released MOF/NDRC/GAC/SAT Announcement [2012] No. 83 (“Announcement 83”) announcing the catalog of imported commodities without tax exemption for domestic investment projects (2012 revision) (“the 2012 Catalog”).

The 2012 Catalog made the following adjustments to the 2008 Catalog:

  • Technical specifications in certain articles are adjusted to cope with the changes of domestic equipment manufacturing and relevant industrial development.
  • The HS codes and names of certain commodities indicated in certain articles are adjusted according to the Import and Export Customs Tariff (进出口税则).

The 2012 Catalog took effect on 1 January 2013 and applies to  imported equipment for domestic investment projects that are newly approved on or after 1 January 2013.

In order to ensure a smooth implementation of existing projects, Announcement 83 provides for the following transitional treatments:

  • For domestic investment projects that were approved before 1 January 2013, the 2008 Catalog should still apply to the imported equipment provided that they are declared on or before 30 June 2013.
  • Where the above imported equipment does not qualify for tax exemption according to the 2008 Catalog but qualifies for tax exemption according to the 2012 Catalog, the 2012 Catalog should be applied from 1 January 2013.
  • No adjustment shall be made for import taxes that have been levied on the above equipment.
  • Starting from 1 July 2013, all the importation of equipment for domestic investment projects should be in accordance with the 2012 Catalog.

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Commencement of inspection on the recognition and administration of High-and-New Technology Enterprises ("HNTEs")

On 28 December 2012, the MOF, the SAT and the Ministry of Science and Technology (MOST) jointly released Guokefahuo [2012] No. 1220 (“Circular 1220”).  Circular 1220 launches an inspection on the recognition and administration of HNTEs and is intended to improve  HNTE recognition and implement relevant preferential policies.

The main points of Circular 1220 are as follows (Please click the circular no. in the table below to access the full content of the relevant circulars):

Items of inspection Requirements
Target ►HNTE recognition institutes at the local level ("recognition institutes")

►Qualified agents participating in the HNTE recognition ("qualified agents")

►Experts participating in the HNTE recognition ("experts")

►HNTEs whose HNTE status is still valid
Circular reference Guokefahuo [2008] No. 172 ("Circular 172") regarding the Administrative Measures on HNTE Recognition

Guokefahuo [2008] No. 362 ("Circular 362") regarding the Guidelines on HNTE Recognition and Management

Guokefahuo [2008] No. 705 regarding the implementation of HNTE recognition and administration in 2008

Guokefahuo [2011] No. 90 ("Circular 90") regarding the improvement of the pilot run of HNTE recognition and administration in the Zhongguancun National Innovation Demonstration Zone

Guokehuozi [2011] No. 123 ("Circular 123") regarding certain issues related to the re-name and re-assessment of HNTEs

Guoshuihan [2009] No. 203 ("Circular 203") regarding the implementation of CIT preferential treatments for HNTEs

Caishui [2011] No. 47 ("Circular 47") regarding applicable tax rate and foreign tax credits for overseas-sourced income of HNTEs

 

Content ►Implementation and results of HNTE recognition performed by recognition institutes

►Audit reports issued and service fees charged by qualified agents

►Assessment opinions issued by and work discipline of the experts

►Application documents submitted and preferential tax treatments enjoyed by HNTEs

* Key areas of inspection are included in Circular 1220 as an appendix.
Form Phrase I:
Self-inspection and self-correction performed by recognition institutes

Phrase II:
Special inspection performed by the administrative office of the working group ("office of working group") in charge of nationwide HNTE recognition and administration, according to the results of Phase I
Timeline Phrase I: From 1 January 2013 to 30 April 2013
Phrase II: Not specified
Deadline of reporting the results of self-inspection and self-correction to the office of working group by recognition institutes 15 May 2013

Our observations

Circular 1220 indicates that recognized institutes should keep relevant documents related to the self-inspection and self-correction, correct problems found in the inspection, remove the HNTE status of disqualified enterprises and report major issues to the office of the working group on a timely basis. We strongly recommend that HNTEs satisfy themselves as to their genuine eligibility for HNTE status as soon as possible and that all necessary remedial action be taken to rectify any issues before the recognition institutes initiate the inspection of Phase I. Special attention should be paid to the key areas of inspection as set out in Circular 1220. You may click this link to access the full content of Circular 1220.

Implementation measures in respect of customs duties for 2013

On 18 December 2012, the GAC released GAC Announcement [2012] No. 63 (“Announcement 63”) which sets out certain matters related to the “implementation measures in respect of  customs duties for 2013” (the  “Implementation Measures”). The implementation measures took effect on 1 January 2013.

The implementation measures consist of three sections, namely import customs duties (CD) adjustments, export CD adjustments and CD category adjustments.

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