EU Business Critical Of China's Lack Of Tax Certainty

by Mary Swire, Tax-News.com, Hong Kong

10 September 2010

A critique of the Chinese taxation regime published by the European Union Chamber of Commerce in China (EUCCC) in its "Position Paper 2010-11", bemoans the "dramatic consequences for the financial position of numerous companies" resulting from regulations and guidelines as well as new tax refund rates which took effect in China at short notice, and in some cases retroactively.

Examples were given as follows:

• The new treatment of establishments in China of Non-Resident Entities (NREs) for Enterprise Income Tax (EIT) purposes was promulgated and took effect on February 20, 2010, and the absence of any grandfathering rule caused major difficulties for many NREs who had started projects before that date and had priced their services according to out of date tax liability assessments;
• Many new tax regulations or circulars implementing the new EIT Law took effect retroactively to the effective date of the Law on January 1, 2008 and no official clarifications were released on whether earlier tax regulations and circulars implementing the former foreign enterprise income tax law (FEIT Law) were still effective;
• Exporters' entitlements to full or partial refunds of VAT incurred on the purchase of domestic goods varied according to product category and were frequently changed to respond to the macro-economic situation, causing great commercial uncertainty; and
• Guoshuifa [2010] Circular 18, setting out a new framework for computing the EIT and Business Tax of representative offices established by NREs in China was issued on February 20, 2010 and effective retrospectively on January 1, 2010, causing much confusion. Although the Circular explicitly provided for tax treaty benefits, local tax authorities denied the application for this benefit for lack of further internal guidance on the implementation of this option.

• Reasonable prior notice and/or grandfathering periods before implementing any substantial changes in tax laws and regulations;
• A transitional regime for NREs for projects in China that commenced before the new measures on EIT collection took effect (on February 20, 2010);
• No promulgations and enforcement of tax regulations and circulars retroactively;
• Stable export VAT refund rates, and prior notices and grandfathering periods before any reduction in the rates becomes effective; and
• Adequately briefed local tax authorities when new rules are issued.

Recommended