The Chinese Vodafone
WHILE the Vodafone issue was doing the rounds in the Indian Courts, China's State Administration of Taxation (SAT) solved the problem by issuing a retrospective Notification on December 10, 2009, making the Vodafone kind of deals taxable in China with effect from January 1, 2008. Perhaps the Chinese Tax Administration was watching the Indian case closely and came up with this retrospective Law. The Indian Income Tax authorities seem to be confident on getting their revenue through the existing Law. And retrospective legislation is not unique to India.
China's Notification No. 698 dated 10.12.2009, reads as,
1. The equity transfer income mentioned in this notification refers to equity transfer income of Chinese resident enterprise shares from a non-resident enterprise. (Buying and selling Chinese resident enterprise shares listed on a stock exchange are not included).
2. If a withholding agent is unable to perform withholding obligations or does not pay according to the Law, the non-resident enterprise shall declare and pay corporate income tax with the relevant tax administration authority where the Chinese resident enterprise registered at (the authority who is in charge of the corporate income tax collection and management of the Chinese resident enterprise) within 7 days after the agreed share transfer date according to the equity transfer contract or agreement (if the transferor obtains income from the transfer in advance, then the date should be the actual date when the equity transfer income occurs). Non-resident enterprise that does not declare truthfully or /and pay their tax on time will be dealt with according to the relevant tax collection and management laws and regulations.
3. Equity transfer income refers to the difference between the equity transfer price and the actual share cost. The equity transfer price refers to the income the share transferor received which may be in the form of cash, non-monetary assets or equity. If the invested enterprise has undistributed profit or holds various after-tax funds, the amount from stockholders retained earnings that is transferred together with the equity from the transferor will not be deducted from the equity transfer price. The actual share cost refers to the actual investment amount paid by the transferor to the Chinese resident enterprise at the time it invested in the shares, or the actual equity transfer price paid to the original transferor at the time buying those transferred shares.
4. When calculating the equity transfer income, the currency used when the non-resident enterprise invested in the Chinese resident enterprise or purchasing the equity from the original investor will be used to calculate the equity transfer price and the equity transfer cost price. If the same non-resident enterprise invested capital multiple times, the currency used in the first calculation will be used to calculate the equity transfer price and the equity cost price. The weighted average method will be used to calculate the equity cost price; if the currencies of each investment are not the same, the amount should be calculated in the currency used the first time with the exchange rate on the day that each investment occurred.
5. When a foreign investor (the actual controlling party) transfers a Chinese resident enterprise equity indirectly, if the actual tax rate is lower than 12.5% in the country (region) where the transferred offshore holding company is located or the country (region) does not levy income tax to its resident on overseas income, then the enterprise needs to provide the following information to the tax administration authority where the Chinese resident enterprise is registered within 30 days after the signing of the equity transfer contract:
a. The equity transfer contract or agreement;
b. The relationships between the foreign investor and the offshore holding company on funds, management, procurement and marketing;
c. The offshore holding company's conditions on production, management, personnel, finance and property etc;
d. The relationships between the offshore holding company and Chinese resident enterprise on funds, management, procurement and marketing;
e. The proof of a reasonable business purpose on setting up the offshore holding company by the foreign investor;
f. Other relevant information required by the taxation authority.
6. If a foreign investor (actual controlling party) transfers the equity in a Chinese resident enterprise equity indirectly via arrangements such as through the misuse of the corporate form without a reasonable business purpose to avoid corporate income tax liability, the relevant tax authority, after report for investigation from the State Administration of Taxation, holds the right to re-characterise the equity transfer deal according to the economic substance and ignore the existence of the offshore holding company used for the tax arrangement.
7. If a non-resident enterprise transfers the equity in a Chinese resident enterprise to a related party and the transfer price is not in line with the arms length principle for the purpose of reducing taxable income, the relevant tax authority holds the right to make adjustment according to general practice.
8. If a foreign investor (the actual controlling party) transfers the equity in several native or offshore holding companies' simultaneously, the Chinese resident enterprise whose equity is transferred should provide the whole transfer contract and supplementary contract to the relevant taxation authority. If there is no supplementary contract, the Chinese enterprise should provide detailed information on each transferred holding company to the relevant taxation authority, the transfer price for each native enterprise need to be clarified. If the price cannot be separated, the taxation authority holds the right to choose a reasonable approach to make adjustment to the transfer price.
9. If a non-resident enterprise who has obtained equity transfer income is eligible for special tax treatment according to the special organization restructuring requirement (Tax No. 59 (2009)), the enterprise should submit information in writing that provide proof of meeting the whole requirement for record-keeping purpose to the relevant taxation authority and get approval from provincial taxation authority.
10. Implementation of this notification starts on January 1, 2008. If you encounter any problem regarding implementation, please report to the State Administration of Taxation (International Taxation Division).
Issued on December 10, 2009
Tax Laws are complicated everywhere and in China, they are written in Chinese and people will do business anywhere, even China, if there is money in it! The fact that Indian Laws are written in English does not make any difference.