C4 International Rules to Constrain Tax Jurisdiction 约束税收管辖权的国际规范

Outline  C4-1 Rules to constrain residence tax jurisdiction 约束居民税收管辖权的规范  C4-2 Rules to constrain income source tax jurisdiction 约束来源地税收管辖权的规范

C4-1 Rules to constrain residence tax jurisdiction  Rules to solve individual’s dual-resident status 自然人双重居民身份的约束规范  If an individual is a resident of both states, his status shall be determined according to the following sequence: 如果一个人是两个国家的居民，他的身份应该按照下列 顺序判定 1. Permanent home ( 永久性住所 ) 2. Centre of vital interest ( 重要利益中心 ) 3. Habitual residence ( 习惯性居所 ) 4. Nationality ( 国籍 ) 5. Mutual agreement ( 协商解决 )

C4-1 Rules to constrain residence tax jurisdiction  Case [4-1] Mr. Xiao has a permanent home in China and works in a Chinese resident company. On Jan.1,1999, Mr. Xiao was appointed to the company’s representative office in UK, and the term would be 2 years. He cancelled his household registration according to Chinese government regulations before he went to UK. His family is still in China and his main economic relationship is closer with China.

 The British government determined that Mr. Xiao was a British resident in both year 1999 and 2000 according to its presence period criterion, since Mr. Xiao lived more than 183 days in the country during a taxable year. At the same time, Chinese government determined that Mr. Xiao was a Chinese resident according to domicile criterion. So there was residence- residence conflict.  There is a “Convention between China and UK with respect to taxes on income and capital”.  See Article 4(2) of the China-UK tax treaty. C4-1 Rules to constrain residence tax jurisdiction

 Rules to solve dual-resident status of a legal entity 法人双重居民身份的约束规范  If a legal entity is a resident of both States, it shall be deemed as a resident only of the State in which its place of effective management is situated.  同一法人被两个国家同时判定为本国居民，则应根据跨国 法人的 “ 实际管理地 ” 来决定行使居民税收管辖权的国家， 或者说，要根据跨国法人的实际管理机构所在地标准来认 定其最终居民身份.  Mutual agreement( 双方协商 ) C4-1 Rules to constrain residence tax jurisdiction

 Case [4-2] A transnational company is incorporated in South Korea, and its place of effective management is situated in UK. Both States have determined the company as their own resident. So there is double taxation problem. There is a “Convention between South Korea and UK with respect to taxes on income and capital”. C4-1 Rules to constrain residence tax jurisdiction

 Case [4 -3] China’s Practice A transnational company has set up its head office in China, and its place of effective management is in France. Both states have determined the company as their own resident. There is a “Convention between China and France with respect to taxes on income and capital”. See Article 4(3) of China-France tax treaty. C4-1 Rules to constrain residence tax jurisdiction

China has taken four different methods to solve dual- resident status of a legal entity in its conventions singed with other countries: 中国在对外签定的税收协定中采取了四种不同的解决双 重法人居民身份的方法 1.Head office criterion: conventions between China and France, Japan, Germany, Australia, Norway 总机构标准 2.If a legal entity has the head office in Contracting state, and the place of effective management in other Contracting state, the states should settle the question by mutual agreement, i.e. conventions between China and UK, Malaysia, Denmark, Sweden. 如果同一法人在缔约国一方设有总机构, 在另一方设有实际 管理机构, 则其居民身份通过缔约国双方主管当局通过协 商确定。 C4-1 Rules to constrain residence tax jurisdiction

3.The states settle the question by direct mutual agreement without any criteria considered, i.e. Convention between China and Singapore, Thailand, Canada 没有确定任何标准，直接通过协商决定 4.If the states cannot settle the question by mutual agreement, the legal entity cannot enjoy the treatment of convention, i.e. Convention between China and USA. 协商不能确定, 不能享受协定待遇 C4-1 Rules to constrain residence tax jurisdiction

4.2 Rules to constrain Source Jurisdiction Business income 营业所得 Criterion of transaction place 交易地标准 Contract signing place 合同签订地 Place of goods produced 货物生产地 Place of goods physically Delivered 货物交付地 Place of money paid 货款支付地 Criterion of permanent establishment 常设机构标准 Anglo-America Law Countries 英美法系国家 Civil Law Countries 大陆法系国家

 Permanent Establishment  Means a fixed place of business through which the business of an enterprise is wholly or partly carried on.  一个企业进行全部或部分经营活动的固定营业场 所。  It should be a business place of an enterprise instead of an individual.  It should be a fixed place instead of mobile.  The business should be real instead of false. C4-2 Rules to constrain Source Jurisdiction

 PE includes especially:  A place of management 管理机构  A branch 分支机构  An office 办事处  A factory 工厂  A workshop 车间  A mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 矿场、油井、气井、采石 场或者其他开发自然资源的场所 C4-2 Rules to constrain Source Jurisdiction

 OECD Model Convention 经合组织范本  A building site or construction or installation project constitutes a PE only if it lasts more than twelve months.  建筑工地、建筑、装配或 安装工程，持续时间在 12 个月以上被视为常设机构。  UN Model Convention 联合国范本  A building site or construction or installation project constitutes a PE only if it lasts more than six months.  建筑工地、建筑、装配或 安装工程，持续时间在 6 个月以上被视为常设机构。

C4-2 Rules to constrain Source Jurisdiction  UN Model Convention  The furnishing services, including consultancy services ， by an enterprise through employees or other personnel by the enterprise for such purpose ， but only if activities of that nature continue （ for the same or connected project ） within a contracting state for a period or periods aggregating more than six months within any twelve-month period.  外国企业通过其雇员或者其他人员为工程项目提供劳务 或咨询，在任何 12 个月中累计居住超过 6 个月为一个项目 或者相关项目提供劳务或咨询的，则应视为常设机构。

C4-2 Rules to constrain Source Jurisdiction  OECD & UN Model Convention  A person other than an agent of an independent status is acting on behalf of an enterprise and has habitually exercise, in a contracting state an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a PE in that State in respect of any activities which that person undertakes for the enterprise.  缔约国一方企业在缔约国另一方企业通过非独立代理人有 权代表所代理企业的名义签订合同，并经常使用这种权力, 就被视为设有常设机构。

 an authority to conclude contracts?  Participate in contract negotiation 参与合同谈判  Discuss and decide contract provisions 商定合同条文  Final contract signer??? 合同最后签署人 C4-2 Rules to constrain Source Jurisdiction

 UN Model Convention  The person has no such authority, but habitually maintained in the first-mentioned state a stock of goods or merchandise from which he regularly deliver goods or merchandise on behalf of the enterprise.  代理人没有以代理企业的名义签订合同，但在 缔约国另一方有货物或商品的库存并经常代表 该企业发送货物, 则该企业被视有常设机构。 C4-2 Rules to constrain Source Jurisdiction

 Case [4-4] A Dutch limited company provided oil to two locations in Germany through underground pipes laid between two countries. All the pipes were owned by the Dutch company, and the oil transportation was controlled remotely by the computer in Netherlands. The company didn’t send personnel to Germany, and all the technology and marketing staff were in Netherlands. The pipes laid in Germany were maintained and repaired by some independent contractor. The Germany IRD (Inland Revenue Department) treated that the pipes located in Germany was some kind of Permanent Establishment, and determined to levy on the Dutch company.

 PE shall be deemed not to include a) The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise  专为存储 \ 陈列 \ 发送货物而使用的设施 b) The maintenance of a stock of goods or merchandise belong to the enterprise solely for the purpose of storage, display or delivery.  专为存储 \ 陈列 \ 发送的货物或商品的库存 C4-2 Rules to constrain Source Jurisdiction Not in UN model

 PE shall be deemed not to include: c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise  专为加工而存储本企业的货物或商品库存 d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise  专为本企业采购货物或搜集情报 C4-2 Rules to constrain Source Jurisdiction

 PE shall be deemed not to include: e) The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.  其他从事准备性或辅助性活动的场所 f) The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of preparatory or auxiliary character.  从事上述 a) 到 e) 所有活动组合的准备性或辅助性场所 C4-2 Rules to constrain Source Jurisdiction

 Case [4-5] The determination of PE  A German company GG contracted with a Chinese company CC and GG would construct a power station valued as 100 million DEM for CC. The main contents of the contract were as the following:  (1) the design and maintenance manual of facilities was produced in Germany 20 million  (2) facilities operation technology 3  (3) manufacturing drawings and materials of auxiliary facilities 40  (4) The training expense of Chinese staff occurred in Germany 3  (5) GG sent employees to CC and provided consultancy  service for a period more than 6 months 30  See Article 5(3b) of China-Germany tax treaty. C4-2 Rules to constrain Source Jurisdiction

OECD Model UN Model -The enterprise carries on business in the other state through a PE situated therein. - business profit is attributed to that PE 仅就归属于该 PE 的营业所得纳税 -sales of goods or merchandise of same or similar kind in that other State as those sold through PE. 销售货物与 PE 相同或类似 - other business of activities carried on in that other state of the same or similar kind as those effected through that PE 其他通过 PE 所影响的相同或类似的 业务

C4-2 Rules to constrain Source Jurisdiction  引力原则指常设机构所在国不仅对通过常设机构 取得的所得要征税，对虽没有直接通过常设机构， 但经营业务与常设机构经营相同或相似所获取的 所得，也要纳入该常设机构的征税范围。引力原 则与归属原则相比，扩大了常设机构所在国地域 管辖权的行使范围，使不属于常设机构的跨国经 营所得也一并征税。就实践来看，大多数国际税 收协定为便利税收管理和减少对企业经营活动的 干扰，都放弃引力原则，而采用实际联系原则。

 Case [4-6] The Practice in China  Attraction Principle could only be found in the treaty between Pakistan  Other treaties use attribution principle.  中国只在与巴基斯坦的协定中有条件地采用引力原则。 C4-2 Rules to constrain Source Jurisdiction

How to Tax Arm’s Length Rules 正常交易原则 Proportional Distribution Pattern 比例分配方式 - treating PE as a separate legal entity 视为单独法律实体 -assuming that PE deals at arm’s length with its head office 假设常设机构遵循公平交易原则 -allowing to deduct expenses which are incurred for the purpose of PE 允许扣除常设机构所发生的各项费用 1. Gross income is distributed between head office and its PEs according to some proportion singed in the treaty. 总所得根据协定规定的比例在总机构和各分支机构 分配之间 2. Gross income from different source is distributed between two or more countries according to some formula or proportion. 不同所得的总所得根据不同的公式或比例分配 income from manufacture and sale of personal property // Telecom income

 Case [4-7] A British Bank has set up a representative office in Wuhan, Hubei Province since The office has provided information of capital market to its head bank, and collected letters of credit for other branches of the above bank. The office has had only expenses. If the expense in 2000 was RMB, how to tax on the office.  Business income = Current expenses/(1-10%-5%)  Taxable income = business income x 10%  Income Tax payable = taxable income x 33%  = 52/(1-10%-5%)x10%x15 C4-2 Rules to constrain Source Jurisdiction Approved MarginBusiness tax rate Nominal tax rate Regulated by tax law Preferential tax rate

C4-2 Rules to constrain Source Jurisdiction Service income 劳务所得 income derived from independent personal services 独立劳务所得 professionals 专业人士 lawyer\doctor\accountant Income derived from dependent personal services 非独立劳务所得 Employment 受雇者 salary\wage\ other similar remuneration Others 其他所得 Director’s fee 董事费 Artists and sportsman 艺术家和运动员 Pensions 养老金 Government service 政府服务

C4-2 Rules to constrain Source Jurisdiction How to determine service income 如何判定劳务所得 Criterion of the place of service provision 劳务提供地标准 Independent personal service Fixed place to provide services 提供劳务的固定基地 Clinic\law firm\accounting firm Dependent personal service The place where employment Is exercised 受雇提供劳务的地点 Criterion of the place of Income payment 劳务所得支付地标准 The very state where the resident or enterprise or PE who pays the income is deemed to. 支付劳务所得的居民或企业或 常设机构的所在国

 Case [4-8] A Thai doctor provides medical service in China.  (1) he opens a clinic in China and gets medical service income from the clinic 他在中国开设诊从事医疗服务取得所得  (2) he has no clinic but stays for a period or periods aggregating more than183 days within any twelve-month period, and gets medical service income during that period 虽未开设诊所, 但在任何 12 个月中在中国停留达到或超过 183 天, 在此 期间内从事医疗服务取得所得  (3) his income from medical service is paid by an individual or enterprise who has Chinese resident status 他在中国从事医疗服务所得是由具有中国居民身份的人所支付的  (4) his income from medical service is borne by a representative office set by Thailand resident company 他在中国从事医疗服务所得是由一家泰国居民公司在中国的代表处 所负担 See Article 14 of China-Thailand tax treaty. C4-2 Rules to constrain Source Jurisdiction

 Income from employment  Remuneration derived by a resident of a Contracting State in the respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned state if all the following three conditions are met:  如果同时具备以下三个条件，仅由居住国征税 a)The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and 受雇者在缔约国另一方在一个财政年度内停留 累计不超过 183 天 b)The remuneration is paid by, or on behalf of, an employer who is not a resident of the other state, and 其报酬不是由作为 缔约国另一方居民的雇主或代表雇主支付 c)The remuneration is not borne by a PE which the employer has in the other state 其报酬不是由雇主设在缔约国另一方的 常设机构负担 C4-2 Rules to constrain Source Jurisdiction

 Case [4-9]  A Japanese individual resident was employed in Beijing Taihua Company from March to Oct He got service income since he provided technology services to the above company.  In which cases the Beijing tax bureau could levy income tax on this person?  See Article 15 of China-Japan tax treaty. C4-2 Rules to constrain Source Jurisdiction

 If the income was paid by Beijing company, and the company was a Chinese resident  如果日本居民的所得是由聘用他的企业支付, 而该企业具 有中国居民身份  If the income was borne by a PE set by the Japanese company  如果日本居民的所得是由日方设在我国的常设机构负担  If the income was borne by the Japanese company but that person stayed in China exceeding 183 days  如果日本居民的所得由日本企业负担，但他在中国停留时 间超过了 183 天 C4-2 Rules to constrain Source Jurisdiction

 Director’s fee  Director’s fee and other similar payments derived by a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State. C4-2 Rules to constrain Source Jurisdiction

 Artistes and Sportsmen’s income  Case [4-10] An American artiste exercised as an entertainer in China in May, (1)The artiste derived income from his personal activities in China. (2)The income was derived by anther person instead of the artiste. Could Chinese government levy income tax on the artiste? The answer is Yes. See Article 16 of China-US tax treaty. C4-2 Rules to constrain Source Jurisdiction

 According to Convention, income derived by a resident of a Contracting State as an entertainer or sportsman from his personal activities as such exercised in the other Contracting state, may be taxed in that other State.  Where income in respect of personal activities exercised by an entertainer or a sportsman in his capacity as such accrues not to the entertainer or sportsman himself but to another person, that income may be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised.  If his activities belonged to cultural exchange plan between China and America, the income should be tax free. See Article 16 of China-US tax treaty. C4-2 Rules to constrain Source Jurisdiction

 Pensions  Pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State. (OECD Model)  There are alternative A and alternative B in UN Model. For details, please refer to UN Model. C4-2 Rules to constrain Source Jurisdiction

 Case [4-11] China’s Practice  A British resident derived pension paid by a Chinese resident because of his past employment in China. [British]. For details, please see Article 19, 20(2) of China-UK tax treaty.  An American resident derived pension paid by a Chinese resident because of past employment in China. [America]. For details, please see Article 17, 18(2) of China-US tax treaty. Could Chinese government levy on the above pensions? No. C4-2 Rules to constrain Source Jurisdiction

 Students income  Case [4-12] An American lady studied in Peking university from 2000 to She got income from her personal activities as a part-time English teacher. Was her service income taxable in China?  Only USD5000 could be tax free in a taxable year, that is Jan.1 to Dec. 31.  For details, please refer to Article 20 of China-US tax treaty. C4-2 Rules to constrain Source Jurisdiction