1. Tax liability of Services provided by non-resident enterprises
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

2. Dr. Du Li Department of Public Economics,Fudan University
Case 1
Aco
China
Service provision
Payment
Country B
Bco
What if Bco provides service to Aco in country B and derives the income?
What if Bco provides service to Aco in China and derives the income?
What taxes shall be paid to Chinese tax authority?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

3. Dr. Du Li Department of Public Economics,Fudan University
Case 1
Aco
China
Service provision
Payment
Country B
Bco
How can China’s tax authority determine whether the service is provided in China or not?
How does the tax authority ensure the tax collection?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

4. Dr. Du Li Department of Public Economics,Fudan University
Case 1
Aco
China
Service provision
Payment
Country B
Bco
Bco will be regarded as deriving China-source business income and subject to EIT if:
(1)Bco sends employees to work for Aco in China, or
(2)Bco sends employees to work for Aco in China for a certain time period
(e.g. 6 months) if country B is China’s treaty partner.
In order to make payment to Bco, Aco must apply to the tax authority for the tax
payment certificate and pay tax. Otherwise, according to the foreign exchange regulations, Aco’s
bank will refuse the payment
The tax authority will check the relevant payment records of Aco and visa records of
Bco’s employees for the tax auditing. If Aco and Bco do not truthfully report to the tax authority, they shall have to pay fines and late payment surcharges.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

5. Dr. Du Li Department of Public Economics,Fudan University
Case 2
Aco
China
Service provision
Deposits
Country B
Payment
Bank in country B
Bco
What if Aco make the payment directly from its overseas bank accounts to Bco?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

6. Dr. Du Li Department of Public Economics,Fudan University
Case 2
Aco
China
Service provision
Deposits
Country B
Payment
Bank in country B
Bco
What if Aco make the payment directly from its overseas accounts to Bco?
In this case, the tax authority can still check the relevant payment records of Aco and
visa records of Bco’s employees for the tax auditing.
In order to avoid the risk of high late payment surcharges and fines, the taxpayers shall
comply with the tax laws carefully.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

7. Dr. Du Li Department of Public Economics,Fudan University
Case 3
Aco
China
Service provision
(design and management)
Payment
Country B
Bco
What if Bco provides to Aco a package of different kind of services?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

8. Dr. Du Li Department of Public Economics,Fudan University
Case 3
Aco
China
Service provision
Payment
Country B
Bco
What if Bco provides to Aco a package of different kind of services?
In this case, different services shall be accounted separately and subject to different effective tax
rates.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

9. Dr. Du Li Department of Public Economics,Fudan University
Relevant rules:
If a non-resident enterprise establishment fails to keep proper accounting books and records and cannot calculate the accurate amounts of income, costs or expenses and is unable to report taxes on actual basis as stipulated, the tax authority is empowered to verify the amount of its tax payable.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

10. Different basis for verification
Verification of taxable income based on gross revenue:
Taxable income = gross revenue ×verified margin
Assessment of taxable income based on costs and expenses:
Taxable income = total costs and expenses ÷ (1 – verified margin ) × verified margin
Assessment of taxable income based on revenue converted from operational expenditures:
Taxable income = total of operational expenditures ÷ (1 –verified margin – business tax rate) × verified margin
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

11. Different margin rates for verification
For enterprises engaging in project contracting, design and consulting services, the margin shall be 15% to 30%
For enterprises providing management services, the margin shall be of 30% to 50%
For enterprises providing other services or engaging in business other than providing services, the margin shall be not less than 15%
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

12. Dr. Du Li Department of Public Economics,Fudan University
Case 4
Aco
China
Equipment
Installation
service
Payment
Country B
Bco
What if Bco sells equipment to Aco and sends employees to help install the equipment
in China ?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

13. Dr. Du Li Department of Public Economics,Fudan University
Case 4
Aco
China
Equipment
Installation
service
Payment
Country B
Bco
What if Bco sells equipment to Aco and sends employees to help install the equipment
in China ?
In this case, the installation fee shall be separately accounted and subject to EIT in
China. Income from sale of equipment shall not be subject to China’s EIT.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

14. Dr. Du Li Department of Public Economics,Fudan University
Case 5
Aco
China
Service provision (design)
Payment
Country B
Bco
What if Bco do the design work in country B but does not transfer the
Intellectual property of relevant products to Aco?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

15. Dr. Du Li Department of Public Economics,Fudan University
Case 5
Aco
China
Service provision (design)
Payment
Country B
Bco
What if Bco do the design work in country B but does not transfer the
Intellectual property of relevant products to Aco?
In this case ,the income will be regarded as royalties and subject to 10% withholding
tax in China.
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

16. Dr. Du Li Department of Public Economics,Fudan University
Summary: steps for determining the tax liability in China for NRE providing services to Chinese entities
Determine source of the income: providing service within or outside China?
Determine status of taxpayer: establishment or not? (PE or not?)
Determine the type of taxable income: service income or royalties?
Determine mode of assessment: WHT, based on actual accounting profits or applicable margin?
2018/9/21
Dr. Du Li Department of Public Economics,Fudan University

17. NREs providing services to Chinese entities
With employees working in China?
yes no
providing services within China
providing services outside China
From treaty country?
IP transferred to China?
yes no
yes no
Present in China for
6 months or more?
With establishment
Business income
royalties
yes no
No tax
10% WHT
With PE
No tax
With sound accounting system?
yes no
EIT based on accounting profits
EIT based on applicable margin
Other services
Design/project
Contracting/
consulting
management
2018/9/21
15-30%
30-50%
Dr. Du Li Department of Public Economics,Fudan University
>=15%