China-Chile Investment Agreement
On September 9th, 2012, China and Chile signed the Supplementary Agreement on Investment to the Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Chile (China-Chile Investment Agreement).
Key Outcomes
China-Chile Investment Agreement consists of 33 articles and 4 annexes. It covers substantive provisions on investment and treatment as well as procedural provisions on dispute settlement which are divided into the following 5 sections:
- Definitions of applicant, investment commission, both parties to the dispute, one party to the dispute, China-Chile FTA, freely usable currency, additional facility rules by the International Center for Settlement of Investment Disputes (ICSID), the ICSID Convention, investment, investor, China-Chile Supplementary Agreement on Trade in Services, arbitral tribunal, arbitration rules, etc.
- Substantive provisions involving market access for investment, national treatment, requirement of achievements, most-favored nation treatment, minimum standard of treatment, loss compensation, expropriation and compensation, transfer, subrogation, refusal to provide preferential treatment, etc.
- Procedural provisions on the rules and procedures for investor-state dispute settlement, including consultations and negotiations, submission of the applications for arbitration, consent to arbitration, limits and conditions of consent to arbitration, appointment of arbitrators, preliminary objection, applicable law, arbitration award, etc.
- Exceptions regarding national security, taxation, measures to maintain balance of payment, etc.
- Provisions related to transparency, dispute settlement, investment commission, annexes, footnotes, the relationship between China-Chile Investment Agreement and China-Chile FTA, amendment, implementation, period, termination, etc.
General Comment:
China-Chile FTA, covering mainly trade in goods and cooperation, was signed in November 2005, and entered into effect as of October 2006. Significant effects can be seen since its enforcement, bilateral trade rapidly going up. In April 2008, China and Chile signed the Supplementary Agreement on Trade in Service which implemented on August 1, 2010.
At present, Chile is China’s third largest trading partner in Latin America, while China is Chile’s largest trading partner in the world. The signing of China-Chile Investment Agreement completes the full establishment of Sino-Chilean Free Trade Area. It’s set to contribute greatly to improving the environment and expanding the areas for investment.
Hong Kong and Chile Sign Free Trade Agreement
On September 7th, 2012, Hong Kong and Chile signed a bilateral Free Trade Agreement (the Agreement), marking a new milestone in the furtherance of trade and investment co-operation between the two economies. The Agreement will enter into force on a date to be mutually determined by Hong Kong and Chile after completing necessary domestic procedures.
Key Outcomes
The Agreement consists of 19 Chapters and covers a wide range of areas of mutual interest to Hong Kong and Chile. The major features and liberalization measures of the Agreement are summarized below.
- On trade in goods, for goods originating from Hong Kong, Chile will abolish import tariffs on around 88 per cent of its tariff lines, and will phase out the tariffs on an additional 10 per cent over three years.
- On trade in services, Hong Kong service providers will enjoy legal certainty in market access and national treatment for a comprehensive range of services in the Chilean market.
- On investment, Hong Kong investors will have legal certainty on national treatment in respect of their investments in specified non-services sectors in Chile. To enhance investment flows between the two economies, Hong Kong and Chile agreed to further negotiate a more comprehensive agreement on investment promotion and protection.
- The Agreement also contains provisions to promote competition, facilitate access to each other's government procurement market, enhance co-operation in customs procedures and protect the environment. Under the Agreement, Hong Kong and Chile will co-operate in the areas of sanitary and phytosanitary measures and technical barriers to trade, with the objective of reducing trade barriers and facilitating bilateral trade as far as possible.
General Comment:
Total merchandise trade between Hong Kong and Chile was HK$7,058 million (US$904.87 million) in 2011 while total service trade was HK$950 million (US$121.79 million) in 2010. On trade in goods, Chile ranked 29th among Hong Kong’s worldwide trading partners and fourth among those in Latin America in 2011. On trade in services, Chile ranked 32nd among Hong Kong's worldwide trading partners and fourth among those in Latin America in 2010.
The Agreement will help Hong Kong businesses tap the Chilean market, which offers potential opportunities as an emerging market in itself, as well as opportunities as a gateway to the South American region. It will also expand Hong Kong's free trade agreement network to the American region, in addition to the existing linkage with the Asia-Pacific and European regions.
As regards to Chile, with the addition of this agreement, it now has 60 FTAs with various countries and regions representing more than 90% of the world GDP, making it the most open economy in the world.
Dispute between China International Economic and Trade Arbitration Commission (CIETAC) and its Shanghai and South China Sub-commissions
On August 1st, 2012, China International Economic and Trade Arbitration Commission (CIETAC) issued Announcement On the Administration of Cases Agreed to be Arbitrated by CIETAC Shanghai Sub-commission and CIETAC South China Sub-commission (hereinafter referred to as “Administrative Announcement”), suspended its authorization to the CIETAC Shanghai Sub-commission and CIETAC South China Sub-commission (renamed from the CIETAC Shenzhen Sub-commission) for accepting and administering arbitration cases.
On August 4th, 2012, the CIETAC Shanghai Sub-commission (CIETAC Shanghai) and the CIETAC South China Sub-commission (CIETAC South China) made a Joint Statement, saying that they “will overcome all the improper disturbances from CIETAC, as independent arbitration institutions and subject to the Arbitration Law, continue to accept and manage arbitration cases as agreed upon by the parties.”
By now, the relationship between CIETAC and its Shanghai and South China Sub-commissions has officially broken up.
Background
In 1954, CIETAC was set up by the China Council for the Promotion of International Trade (CCPIT) with the approval of the Administration Council of the Central People’s Government.
In 1982, the CIETAC Shenzhen Office was approved by CCPIT to be set up in Shenzhen following approval by the State Council of an application jointly submitted by CCPIT, the Ministry of Foreign Economic Relations and Trade and the Ministry of Foreign Affairs. The Shenzhen Office was renamed the Shenzhen Sub-commission in 1989 and the South China Sub-commission in 2004.
In 1988, the CIETAC Shanghai Sub-commission was approved by CCPIT to be set up in Shanghai after it obtained the approval from the State Council.
From 2009, CIETAC initiated a “reform” by amending the arbitration rules and the articles of association. CIETAC Shanghai and CIETAC South China expressed their clear objection to CIETAC on several occasions.
In 2010, the Shenzhen Municipal Government approved CIETAC South China to use the name as “Shenzhen Court of International Arbitration” (SCIA) to operate as an experimental legal institution which was highly supported by Guangdong Provincial Office of Justice.
On April 24th, 2012, CIETAC published CIETAC Arbitration Rules (2012) which had been previously reviewed and approved by the Commission Meeting of CIETAC and then approved by CCPIT.
On April 30th, 2012, CIETAC Shanghai declared in an announcement to have set up its own commission, published its own arbitration rules and adopted its own Panel of Arbitrators.
On May 1st, 2012, CIETAC issued a statement and an open letter on its official websites, reiterate that the sub-commissions are only its branch offices and declared that the commission establishment, constitution and rule formulation as well as the selection of arbitrators of CIETAC Shanghai were all null and void.
On May 2nd, 2012, CIETAC Shanghai issued a statement as a response to CIETAC, saying that CIETAC Shanghai has always been an independent arbitral institution and shall not use CIETAC Arbitration Rules (2012) which are invalid procedurally, and contain many illegal provisions that are substantively ineffective and gravely harmful.
On June 16th, 2012, the Opening of the Shenzhen Court of International Arbitration (SCIA) was launched. CIETAC South China officially started to use the concurrent name as SCIA.
Main Issues
The disagreement between CIETAC and its Shanghai and South China Sub-commissions mainly involves the following issues:
1. Nature of CIETAC Shanghai and CIETAC South China
CIETAC emphasizes that CIETAC Shanghai and CIETAC South China are only branch offices of CIETAC. According relevant regulations and public documents, CIETAC South China is under the direct leadership of CCPIT in respect of its arbitration business and it is under the leadership of the Shenzhen Municipal Government in terms of personnel and administrative affairs; CIETAC Shanghai is under the direct leadership of CIETAC in its business and is administratively attached to the Shanghai Sub-Council of CCPIT.
CIETAC Shanghai and CIETAC South China claimed that both sub-commissions are independent arbitration institutions, which were sponsored, approved and organized by the Shanghai Municipal Government and the Shenzhen Municipal Government respectively, and are independent legal persons. Both institutions have completed their judicial registrations respectively with the Shanghai Municipal Bureau of Justice and Department of Justice of Guangdong Province according to the Arbitration Law of the People’s Republic of China (the “Arbitration Law”).
2. Application of Arbitration Rules
According to CIETAC, CIETAC Shanghai and CIETAC South China shall follow the Arbitration Rules (2012) as branch offices of CIETAC.
However, CIETAC Shanghai and CIETAC South China did not recognize or use the Arbitration Rules (2012) and articles of association from the very beginning. They claimed that the amendment to arbitration rules and articles of association made by CIETAC in 2012 violated the relevant procedures and the Arbitration Law, as well as went contrary to the generally accepted practice of international commercial arbitration. Therefore, they refused to apply the Arbitration Rules (2012).
3. CIETAC’s “Authorization” and its Nature
CIETAC suspended its authorization to CIETAC Shanghai and CIETAC South China for accepting and administering arbitration cases based on the Arbitration Rules (2012) and articles of association which provided that CIETAC and its sub-commissions form an integrated arbitration institution and that the sub-commissions conduct arbitration business under the authorization of CIETAC.
CIETAC Shanghai and CIETAC South China argued that, as duly established arbitration institutions, their respective jurisdiction comes from the agreement of the parties, rather than the “authorization” from any other institutions, not to mention the so-called “suspension of authorization”. They claimed that CIETAC violated Article 6 of the Arbitration Law which provides that “the arbitration commission shall be selected by agreement of the parties concerned”, and betrayed the basic principle of “party autonomy” in the arbitration system.
4. Acceptance and Management of Arbitration Cases
According to CIETAC’s Administrative Announcement, as from 1 August 2012, where parties have agreed to arbitrate their disputes by CIETAC Shanghai or CIETAC South China, the parties shall submit their applications for arbitration to CIETAC and the CIETAC Secretariat shall accept such arbitration applications and administer such cases. Without CIETAC’s authorization, no institutions shall have the right to accept and administer the afore-mentioned arbitration cases.
But CIETAC Shanghai and CIETAC South China believe that the so-called Administrative Announcement has no binding effect on them and the parties, and will not affect the acceptance and management of cases or the normal operation. The parties can continue to apply for arbitration with CIETAC Shanghai and CIETAC South China according to their arbitration agreements.
Both CIETAC and its Shanghai and South China Sub-commissions provided their respective contact information for communication or inquiry.
General Comments
The dispute involves not only CIETAC and its two sub-commissions but also the legitimate rights and interests of concrete cases’ parties. It has caused unnecessary confusion to and exerted negative influence on the public and the parties concerned and further damaged the goodwill of China’s arbitration institutions and brought unstable factors to the economic and social development. Neither CIETAC nor its Shanghai and South China Sub-commissions will gain. Since the disagreement will cause uncertainty in respect of the effect of the determination, the parties may choose none of them for arbitration.
The current Arbitration Law entered into force in 1995. Nowhere in the Arbitration Law ever provides the legal status and arbitration authority of the sub-commissions. In order to specify the assets, personnel, finance and arbitration business of the sub-commissions, relevant amendment could be made to the Arbitration Law.
VAT Reform in China Extended to 11 Provinces/Cities
On July 25th, 2012, the State Council of China held its standing meeting and approved to extend the Value Added Tax (“VAT”) reform.
From August 1st to December 31st, 2012, the transformation from Business Tax (“BT”) to VAT in transportation industries and certain modern service industries will be launched in 8 provinces and 2 cities as follows: Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. Therefore, there will be 11 pilot areas at the end of this year, including Shanghai in which the VAT reform was first launched on January 1st, 2012.
Besides the further extension of pilot areas, the State Council also noted that VAT reform in selected industries will be promoted nationwide in the next year.
This approval is part of China's long-term effort to rebalance the economy from one that relies heavily on manufacturing and exports to one dependent on domestic consumption. The detailed implementation rules for VAT reform in the 10 new pilot areas will be issued by local tax authorities.
A Special Zone in the Special Economic Zone: China Officially Approved the Policies for Developing and Opening Qianhai Zone
On June 27th, 2012, the State Council of the People's Republic of China (“PRC”) issued a written Reply concerning the Policies for Developing and Opening the Shenzhen-Hong Kong Modern Service Sector Cooperation Zone in Qianhai, Shenzhen (hereinafter referred to as the “Reply”). The policies provided in the Reply are more special than those that apply to Shenzhen Special Economic Zone (“SEZ”).
The Reply approved 22 advance and trial policies in the following six fields:
1. Finance
- 1.1. Allow Qianhai to explore the expansion of offshore RMB fund flow-back channels, with the support of Hong Kong RMB offshore business development, and establish an innovative experimental zone for cross-border RMB business.
- 1.2. Support the granting of RMB loans for offshore projects by banking institutions established in Qianhai. Under the framework of Mainland-Hong Kong Closer Economic Partnership Arrangement ("CEPA"), conducting studies on the granting of RMB loans by Hong Kong-based banking institutions for enterprises and projects established in Qianhai.
- 1.3. Support qualified enterprises and financial institutions registered in Qianhai to issue RMB bonds in Hong Kong within the quotas approved by the State Council to support the development of Qianhai.
- 1.4. Support the establishment of the fund of equity investment funds in Qianhai.
- 1.5. Support the innovative development of foreign-invested equity investment funds and actively explore new modes of foreign exchange settlement of capital funds, investment and fund management.
- 1.6. Allow Qianhai financial market to open the door wider to Hong Kong.
- 1.7. Support the establishment of innovative financial institutions in Qianhai.
- 1.8. Support the establishment of international or national management headquarters or business operation headquarters by Hong Kong and other onshore and offshore financial institutions.
2. Taxation
- 2.1. Qualified enterprises will be entitled to a reduced enterprise income tax (“EIT”) rate of 15 percent based on the relevant catalogs to be formulated by competent authorities.
- 2.2. Qualified foreign talent who works in Qianhai can enjoy subsidy concerning Individual Income Tax ("IIT") and this subsidy is not subject to IIT.
- 2.3. Qualified modern logistics enterprises registered in Qianhai can enjoy the preferential Policy on Business Tax ("BT").
3. Law Practice
- 3.1. Explore the establishment of branches of Hong Kong arbitration institutions in Qianhai.
- 3.2. Strengthen the cooperation between law firms in Mainland and those in Hong Kong, explore the forms of their joint-operation and implement all the open measures to Hong Kong under CEPA.
4. Talent
- 4.1. Innovate management mechanism and develop relevant measures and policies to provide facilities for all kinds of talent who works in Qianhai
- 4.2. Include Qianhai into the trial areas in Guangdong regarding the mutual recognition on professional qualification.
- 4.3. Allow professionals who obtained Hong Kong practicing qualifications to provide services to Qianhai enterprises and residents in Qianhai.
- 4.4. Allow Hong Kong professionals who obtained the qualification as Chinese Certified Public Accountant ("CPA") to be the partners of Mainland CPA firms in Qianhai.
5. Education and Health Care
- 5.1. Allow Hong Kong service providers to establish international schools in the form of Wholly Owned Foreign Enterprise ("WOFE") in Qianhai after obtain the relevant approval.
- 5.2. Allow Hong Kong service providers are to establish hospitals in the form of WOFE in Qianhai.
6. Telecommunications
- 6.1. Allow Hong Kong and Macao telecommunications service providers to establish joint ventures in Qianhai Zone with Mainland telecommunications service providers under CEPA.
- 6.2. Encourage the Innovation in telecommunications management modes and allow local telecommunications service providers to explore preferential charge schemes based on the practical situation in Qianhai.
- 6.3. Allow the establishment of a special international communication channel in order to meet the demand of Qianhai enterprises.
General Comment:
The Reply officially approved the Qianhai Zone with the aim of making it serve as an experimental business zone for better interaction between Mainland China and Hong Kong in the financial, logistics, and IT services sectors. Therefore, the preferential treatment to Hong Kong is very clear. Besides, financial liberalization is the center piece of the Reply, including the promotion of RMB as an international currency.
However, the detailed regulations and rules for the implementation of the Reply are yet to be developed by different competent authorities. Currently, there are no schedules regarding the issuance of these detailed regulations and rules. Therefore, what kind of influence will the policies in the Reply have, especially on RMB Internationalization, is still an open question.
New Measures on Administration of the Credit Guarantee Funds for Small and Medium-sized Enterprises
On May 25th, 2012, the Ministry of Finance (“MOF”) and the Ministry of Industry and Information Technology (“MIIT”) of the People's Republic of China (“PRC”) jointly issued the Measures on Administration of Funds for Credit Guarantee of Small and Medium-sized Enterprises (hereinafter referred to as the “New Measures”) which shall enter into force as of the date of its promulgation. The Interim Measures on Administration of Funds for Credit Guarantee of Small and Medium-sized Enterprises (hereinafter referred to as the “Interim Measures”) that were issued in 2010 shall be simultaneously annulled.
By comparison with the Interim Measures, the key points of the New Measures are as follows:
1. A New Category of Enterprises
There were only two categories of Small and Medium-sized Enterprises (“SMEs”) in the Interim Measures, one of which is the category of small enterprises and the other is the category of medium sized enterprises. In the New Measures, a new category of “micro enterprises” is included.
2. Scope of Application
Funds for Credit Guarantee of SMES should be exclusively granted to credit guarantee agencies and credit re-guarantee agencies which serve SMEs in order to enhance their professional qualification, further develop their guarantee business and improve the financing environment for SMEs, especially micro enterprises, with preferential treatment to China’s central and western regions.
3. Methods and Limits of Funding
The methods of funding are as follows:
a. Service Subsidy
The limits of financial support under this method of funding vary according to the types of services the agencies provided:
|
Type of Services |
Limit of Financial Support |
| Guarantee services for Medium-sized Enterprises | no more than 1% of the average annual guarantee balance |
| Guarantee services for Small Enterprises | no more than 2% of the average annual guarantee balance |
| Guarantee services for Micro Enterprises | no more than 3% of the average annual guarantee balance |
| Re-guarantee services for Medium-sized Enterprises | no more than 0.5% of the average annual guarantee balance |
| Re-guarantee services for Small and Micro Enterprises | no more than 1% of the average annual guarantee balance |
b. Premium Subsidy
If the rate of credit guarantee fee charged by one agency is lower than 50% of the benchmark lending rate for the same period announced by the People’s Bank of China, without any increase in other standards for fees, the agency can apply for financial support of which the rate should be no more than the difference between the 50% of the above-mentioned lending rate and the actual rate the agency charges.
c. Capital Injection
The agencies, which meet the requirements as set in the New Measures, can apply for financial support in the form of capital injection in particular cases. This form of financial support should be no more than 30% of the increased capital.
d. Others
There are some other ways to support the agencies that provide the guarantee or re-guarantee services to SMEs.
According to the New Measures, the qualified guarantee or re-guarantee agencies can apply for more than one method of funding. However, the total funds for the credit guarantee received by one guarantee agency in one year should not exceed 20 million RMB and such funds received by one re-guarantee agency in one year should not exceed 30 million RMB (except in the form of capital injection).
General Comment:
The New Measures clarified certain issues relevant for the management and utilization of credit guarantee funds for SMEs and provided preferential treatment to micro-enterprises and SMEs in China’s central and western regions. The New Measures also show the Chinese government’s determination to create a better financing environment for SMEs.
New Measures on Administration of Special Funds for the Development of Small and Medium-sized Enterprises
On May 25th, 2012, the Ministry of Finance (“MOF”) and the Ministry of Industry and Information Technology (“MIIT”) of the People's Republic of China (“PRC”) jointly issued the Measures on Administration of Special Funds for Development of Small and Medium-sized Enterprises (hereinafter referred to as the “New Measures”) which shall enter into force as of the date of its promulgation. The Interim Measures on Administration of Special Funds for Development of Small and Medium-sized Enterprises (hereinafter referred to as “Interim Measures”) that was issued in 2008 shall be simultaneously annulled.
By comparison with the Interim Measures, the key points of the New Measures are as follows:
1. A New Category of Enterprises
There were only two categories of Small and Medium-sized Enterprises (“SMEs”) in the Interim Measures, one of which is the category of small enterprises and the other is the category of medium sized enterprises. In the New Measures, a new category of ´micro-enterprises´ is included.
2. Key Industries
Major support will be granted to productive service industries, such as high-tech service industry, commercial service industry and modern logistics industry, in order to strengthen and improve the services for SMEs in entrepreneurship, innovation, quality, management consulting, information service, personnel training, market expansion and so on.
3. Application and Management of Special Funds
´Special Funds for Development of SMEs´ should be managed under the budget of the central government as allocated to SMEs (especially to micro-enterprises) for technological changes, structural adjustment, transformation of development patterns, increase of employment, improvement of service environment and so on.
MOF and MIIT emphasized that the application and management of special funds should be in accordance with the national macro-economic policies, as well as with the preferential policies for China’s central and western regions.
Furthermore, the allocation of special funds will be factor-based rather than item-based according to the New Measures.
4. Methods and Limits of Funding
Special funds will take two modalities of financial support and discount loans of which a SME can only choose one. A SME can only apply for one project in the same year. Besides, special funds are not applicable if the project has obtained financial support from central government otherwise.
Special funds for each project through financial support or discount loans should be, in general, no more than 2 million RMB. The limit of special funds through discount loans will be determined according to the loan limit and lending rate for the same period announced by the People’s Bank of China. Special funds for projects that focus on the improvement of service environment for SMEs, especially micro-enterprises, should normally be no more than 4 million RMB.
General Comment:
The New Measures clarified certain issues relevant for the management and utilization of special funds for the development of SMEs and provided preferential treatment to micro-enterprises and SMEs in China’s central and western regions. The New Measures also show the Chinese government’s determination to promote the productive service industries and enhance the competitiveness of SMEs.
Notice on Individual Income Tax on the Work-related Injury Insurance
The State Administration of Taxation has issued the Notice regarding the Policy of the Individual Income Tax on the Work-related Injury Insurance Treatment (the “Notice”) on May 3rd, 2012, which has retroactively become effective as of January 1st, 2011.
According to the Notice, the work-related injury insurance, which is obtained by the injured employee or his/her relatives according to the ´Regulations of the Work-related Injury Insurance´, is exempted from the individual income tax.
The above-mentioned work-related injury insurance, according to the Regulations of the Work-related Injury Insurance, includes the one-off pension, disability allowance, one-off work-related injury medical pension, one-off disability employment pension, work-related medical treatment, hospital food subsidy, out-of-town medical transportation and accommodation expenses, work-related recovery expenses and nursery expenses obtained by the injury employee, as well as the funeral pension, dependent relative pension and one-off work-related death pension obtained by the employee’s relatives due to the employee’s work-related death.
Due to the fact that the Notice has become retroactively effective as of January 1st, 2011, if the employee or his/her relatives have already paid the individual income tax of the work-related injury insurance, they can apply for the refund of the individual income tax at the competent tax authority.
Notice on the Matters regarding Double Taxation in Mainland China for Hong Kong (and Macao) Tax Resident Employees
The State Administration of Taxation (“SAT”) .of the People's Republic of China (“PRC”) issued Notice on the Matters regarding Individual Income Tax with respect to the Implementation of the Tax Arrangements between the Mainland China and Hong Kong (and Macao) (hereinafter referred to as the "Notice") on April 26th, 2012, which addresses the double taxation problems in favor of the Hong Kong (and Macao) tax residents. The Notice takes effect from June 1st, 2012 (“Effective Date”) and applies to the income obtained after the Effective Date.
The key points of the Notice are as follows:
1. Scope of Application
The Notice is only applicable to those Hong Kong (and Macao) tax residents who are employed by a Hong Kong (or Macao) company or who are concurrently employed by both a Hong Kong (or Macao) company and a Mainland China company. In other words, if a Hong Kong (or Macao) tax resident employee is employed by a Mainland China company and works full time in Mainland China, this Notice should not be applicable.
2. Methods of Calculation
In order to eliminate double taxation in Mainland China for Hong Kong (and Macao) tax resident employees, the SAT now accepts the time apportionment of the salary and bonus income on the “physical presence” basis. In other words, only the days on which the individual is physically present in Mainland China is to be counted when applying the prescribed time apportionment formulae used to calculate the Individual Income Tax (“IIT”) liability in Mainland China.
a. If a Hong Kong (or Macao) tax resident stays in Mainland China for no more than 183 days in any 12-month period, the following formula is applied:
IIT Payable = IIT on Total Income for the Period Concerned × (Number of Physical Presence Days in Mainland China for the Period Concerned ÷ Number of Calendar Days for the Period Concerned) × (Income Paid/Borne in Mainland China for the Period Concerned ÷ Total Income for the Period Concerned)
b. If a Hong Kong (or Macao) tax resident stays in Mainland China for more than 183 days in any 12-month period, the following formula is applied:
IIT payable = IIT on Total Income for the Period Concerned × (Number of Physical Presence Days in Mainland China for the Period Concerned ÷ Number of Calendar Days for the Period Concerned)
“The Period Concerned” in the above formulae refers to the periods over which the relevant salaries and wages, bonuses and similar payments are taxable for PRC tax purposes. The Notice also provides that in calculating the number of physical presence days, the day of arrival, the day of departure and the same day travel will be counted as half a day in Mainland China.
3. Record Filing
The Hong Kong (and Macau) residents bear the responsibility to report and file with the competent tax authorities when paying IIT according to the Notice.
Many Hong Kong (and Macao) tax residents currently suffer double taxation since their work requires extensive travel in Mainland China, that is, the same amount of income may be taxed both in Mainland China as well as in Hong Kong (or Macao) respectively.
The Notice attempts to minimize the impact of such double taxation by clarifying the calculation of IIT under such circumstance. Therefore, it brings great news to many Hong Kong and Macao tax resident employees working cross border in China and their employers.
Clarification on the Implementation of the Enterprise Income Tax Preferential Policies for China's Western Region
The State Administration of Taxation (“SAT”) issued Notice on the Matters regarding Enterprise Income Tax under the Development Strategy for Western Region (hereinafter referred to as “Notice”) which provided certain important clarifications for the implementation of Enterprise Income Tax (“EIT”) preferential policies and set out the relevant applications and approval procedures. The Notice takes retrospective effect from January 1st 2011.
Main Points
1. Scope of Application
The Notice is applicable to the enterprises located in the Western Region. Furthermore, if an enterprise’s branch is located in the West Region but the enterprise’s head office itself is not located in the West Region, the Notice is applicable to the branch but is not applicable to the head office.
2. 15% Reduced EIT
Enterprises in the Western Region can apply for the 15% reduced EIT to the competent tax authorities provided that they fall within the Catalogue of Encouraged Industries in the Western Region (“the Catalogue for the Western Region”) and their aggregate revenue from these projects exceeds 70% of the total revenue.
3. The Catalogue for the Western Region
In fact, the catalogue for the Western Region has not yet been released by the relevant Chinese authorities so far. The Notice clarifies that enterprise may temporarily file the application for the 15% reduced EIT to the competent tax authorities provided that they fall within the encouraged industries under the following four "old" Catalogues:
· The Catalogue for the Guidance of Industrial Structure Adjustment (2005 Version);
· The Catalogue for the Guidance of Industrial Structure Adjustment (2011 Version);
· The Catalogue for the Guidance of Foreign Investment Industries (2007 Version); and
· The Catalogue of Competitive Industries in Central and Western Regions for Foreign Investment (2008 Version).
4. Both Incentives
Enterprises in the Western Region may enjoy both the 15% reduced EIT under the Notice and the half reduction of EIT during tax holiday period under EIT law. Therefore, enterprises may apply for the reduced CIT rate of 7.5% in this case.
Conclusion
The clarification in Notice once again indicates the Chinese government’s determination to boost the economy in the Western Region during the State’s 12th Five-year Plan.
Taxpayers in the Western Region are encouraged to observe and study the clarification provided in the Notice to plan and structure their investment. In addition, they should also stay tuned on the future policy developments in the region, particularly the release of the Catalogue for the Western Region.