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China: Tax clearance procedure for certain outbound remittances overhauled

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Khoonming Ho and Lewis Lu, KPMG China

On July 9 2013, the State Administration of Taxation and the State Administration of Foreign Exchange (SAFE) jointly issued Announcement 40 to prescribe a new tax registration requirement for Chinese residents making certain payments overseas, effective from September 1 2013. Only a few days later, on July 18, the SAFE issued Hui Fa [2013] No.30 (Circular 30) to provide detailed guidance on remittance procedures. The conversion from the previous advance tax clearance system to the tax recordal filing system could significantly accelerate the outbound remittance process. The scope of Announcement 40 covers cross-border service fees as well as other current account and capital account items under China's foreign exchange regulations.

China has maintained a strict foreign exchange control system that regulates funds flowing in and out of China. Historically, a Chinese payor needs to obtain various tax clearance documents before a remittance application can be accepted by a bank in China. A tax certificate is required for each foreign currency payment exceeding $30,000. Such tax clearance system creates inefficiency in commercial arrangements and slows down legitimate business transactions.

Announcement 40 comes as a government response to promote international service flows. For each covered remittance that exceeds $50,000, the Chinese payor needs to perform a tax recordal filing with its in-charge state tax bureau (ISTB), unless the remittance falls into an exemption list. The ISTB will not review the tax position associated with the remittance during the recordal filing. The purpose of the filing is not to report the Chinese tax position on the remittance, but to notify the ISTB regarding the underlying transaction. Within 15 days ensuring the issuance of the stamped tax recordal filing form, the ISTB will examine the reporting package submitted by the Chinese payor as part of the reocrdal filing and may request additional supporting documents. In the post-filing examination, if the ISTB discovers that the Chinese taxes have not been properly paid, it will issue a notice of tax deficiency to the taxpayer or the withholding agent, and may impose a penalty as well as late payment surcharges.

It is worthy noting that Circular 30 provides that where the Chinese payor need reimburse its overseas affiliate for advances made by the affiliate, the term of the advance payment shall not exceed 12 months. Multinational companies are encouraged to review the term of their impending remittances, proactively communicate with the local SAFE offices and their ISTBs and to understand local practices, prepare tax computations and collect documents to support their tax positions.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG

Tel: +86 (21) 2212 3421

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