New PRC Enterprise Income Tax (EIT) for Non-Resident Tax Payers
The Chinese tax authorities have recently issued a new regulation with respect to non-resident tax payers engaged in the International Transportation Business. Formally titled the Provisional Measures on the Collection of Tax on Non-resident Enterprises Engaged in International Transportation Business it came into effect on 1 August 2014.
Why the new regulations?
Before 1 August 2014 numerous PRC tax laws and by-laws required non-resident enterprises (NREs) including ship owners and charterers incorporated outside China to pay Enterprise Income Tax (EIT). In theory, that tax was deducted from freight or hire payments etc. made by any PRC entity with which the NRE was conducting business. However, the regulations were never strictly enforced. The current regulation appears to be a much more focused attempt by the PRC State Administration of Taxation (SAT) which is tightening its remit for levying and collecting tax.
How is the International Transport Business (ITB) defined?
The regulation is aimed at the income received by ITBs. ITB is defined as transportation of passengers, cargoes etc. into or out of the PRC by ship, plane, slot arrangements on ship or by air owned or leased by an NRE including transportation-related side business such as loading, unloading or warehousing. Voyage and time charterers are considered as part of ITB for the purposes of the new regulation while bareboat charterers are not.
Who are NREs for the purposes of EIT?
Any company registered outside the PRC which has not set up branches in the PRC but which earns income from the PRC is deemed to be a NRE for the purposes of the EIT. This will most commonly affect ship owning companies. As far as charterers are concerned, both time and voyage charterers are included as NREs.
Registering for EIT:
NREs must register with a local Chinese SAT bureau or can seek the assistance of a local agent to complete the registration formalities.
Effects of the new regulations:
While it might be relatively straightforward for SAT to calculate profits on a voyage charter hire, it is not clear how easily the new regulations will be applied to profits derived from other contracts such as time charters as deductions may be permitted for amongst other things, the running costs, bunkers, port expenses and crew costs. For instance, it may be impractical to expect NREs which own or lease a large number of ships to be able to calculate easily what their profit on any particular ship might be particularly in the context of time charter hire.
Double taxation treaties:
The PRC has entered into bilateral tax agreements on double taxation exemption with over 96 countries including the UK, Greece and Japan to name but a few, so the NRE may apply for a tax exemption as provided for by the relevant tax treaty.
Tax withholding obligation:
PRC business partners have an obligation to withhold funds equivalent to the EIT in the event that the NRE fails to register with a SAT. Consequently, NREs wishing to protect themselves against this tax burden need to ensure that their contracts include an appropriate clause making the other party to the contract liable for shouldering the EIT. Before deciding on concluding any charter parties, Members are best advised to consult with their PRC trading partners to assess their exposure to EIT. It is recommended that Members take advice from accountants or lawyers before concluding any fixtures or drafting clauses to re-allocate the responsibility and/or ultimate liability for this tax to ensure that measures taken are in line with PRC law and may not be considered as tax evasion. Failure to comply with the regulation may result in the payment of overdue sums, fines, penalties and delay.