using chinas free trade double tax agreements
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This issue will examine the role of Free Trade Agreements and the various regional blocs that China is either a member of or considering becoming so, as well as how these can be of significance to your China business. We'll also examine the role of Double Tax treaties, provide a list of active agreements, and explain how to obtain the tax minimization benefits on offer.TRANSCRIPT
1
Understanding China’s Bilateral & Multilateral Agreements
China’s Proposed New Silk Road Free Trade Area
P.04
P.11
Using China’s Free Trade & Double Tax Agreements
P.13 Taking Advantage of China’s Double Tax Agreements
Issue 151 • January 2015
From Dezan Shira & Associates
www.china-briefing.com
2
China has been assertive when it comes to
attracting and encouraging trade and investment
- especially so when it comes to entering into
Free Trade Agreements and bilateral Double Tax
Treaties. However, remains a disconnect when
it comes to many would-be foreign investors in
China, who are often unaware that their country
of origin may well have
treaties in place with China,
which, if used correctly,
can significantly reduce
their China tax burden and
thereby increase the overall
level of profitability of the
China based entity.
Tax is always a fast evolving
subject, and over the years
China has been shrewd in
how it uses tax concessions
to either encourage or
discourage trade in certain areas. Double Tax
Treaties are an important symbol of the mutual
desire of both China and the reciprocating
nation to boost trade, and should be very much
at the forefront of any strategic planning when
considering an investment into China.
However, the tax benefits that can be obtained
from enacting such treaties and concessions need
to be applied for - they do not automatically appear.
Local tax bureaus in China need to be made aware
of treaty status, and provided with supporting
documentation; otherwise, the opportunity will
be lost.
In this issue of China Briefing,
we examine the role of Free
Trade Agreements and the
various regional blocs that
China is either a member of
or considering becoming
so, as well as how these can
be of significance to your
China business. We also
examine the role of Double
Tax Treaties, provide a list
of active agreements, and
explain how to obtain the tax
minimization benefits on offer.
We wish you all a profitable 2015 and Chinese New
Year of the Sheep!
This Month’s Cover Artby Huang You Wei ( 黄有维 ) Chinese Painting, 92x54cm Wan Fung Art Gallery (云峰画苑)[email protected] | +86 0760 8833 3861www.wanfung.com.cn/eng
For queries regarding the content of this magazine, please contact:[email protected]
All materials and contents © 2015 Asia Briefing Ltd.
ReferenceChina Briefing and related titles are produced by Asia Briefing Ltd., a wholly owned subsidiary of Dezan Shira Group.
Content is provided by Dezan Shira & Associates. No liability may be accepted for any of the contents of this publication. Readers are strongly advised to seek professional advice when actively looking to implement suggestions made within this publication.
Sabrina Zhang National Tax Partner
Dezan Shira & Associates
Beijing Office
Introduction
With kind regards,
Sabrina Zhang
3
CreditsPublisher / Chris Devonshire-EllisSenior Editor / Matthew ZitoEditors / Zhou Qian & Steven ElsingaDesign / Jessica Huang & Estela Mi
Table of Contents
Understanding China’s Bilateral
& Multilateral Agreements
China’s Proposed New Silk
Road Free Trade Area
Taking Advantage of China’s
Double Tax Agreements
P.04
P.11
P.13Topic This Issue
Using China’s Free Trade & Double Tax Agreements
Online Resources on Emerging Asia
“? ” China-South Korean Free Trade Agreement Talks Concluded
Beijing Promoted FTAAP Will Drive US Investors To ASEAN
Hong Kong-ASEAN FTA Could Be Implemented By 2016
Australia Secures Far-Reaching Free Trade Agreement With
China
China’s Double Tax Treaties: Complete Archive
ASIA BRIEFING Analysis of Asia’s Tax Rates
OECD & ASEAN Release Myanmar Foreign Investment Review
INDIA BRIEFING Understanding India’s Industry Specific Tax Incentives
Vietnam’s New Foreign Investment Information System
Online Resources from China Briefing
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4
Understanding China’s Bilateral & Multilateral AgreementsBy Chris Devonshire-EllisDezan Shira & Associates
As China has developed over the past three
decades, it has also spread its wings to encompass
numerous international agreements and treaties
to improve its attractiveness for foreign investors,
cement the development of potential export
markets outside of China, and position itself as a
production and trade giant in the world economy.
This has not occurred by accident: it has been a
long term process that is still ongoing, and one that
includes a significant development that will impact
upon China at the end of this year, that of Vietnam
coming into AEC compliance.
However, many foreign investors remain blissfully
unaware that they can take advantage of these
initiatives, and thereby actively reduce their tax
burdens when trading with or operating in China. This
may be because many countries, especially the United
States, do not place enough emphasis on promoting
the bilateral tax advantages that may be obtained by
their more internationally-minded businesses.
It is also true that, as many foreign investors tend to use
lawyers to incorporate, they miss out on the detailed
taxation issues of structuring a business in China, even
to the extent of completely omitting any examination
of the tax situation in China, bar the very basics. This
is a critical mistake. All businesses investing in China
should fully understand what the tax implications and
available incentives are – beyond merely knowing the
corporate income tax rate, VAT and their individual
income tax burden.
In this article we examine the two major areas that
impact upon China and foreign investors’ chances of
success or failure in this huge market.
China’s Free Trade Agreements China has entered into a number of Free Trade
Agreements (FTAs) on a bilateral and multilateral
basis. These have had significant impact on the Asian
geographical region, and proved highly influential
in encouraging the direction of trade flows and the
development of supply chains. China is rather more
sophisticated in understanding its own development
and demographics than many observers give it
credit for.
The Chinese government is well aware it is faced
with an aging population and increasingly expensive
workforce, and to cater for this has been very active
in developing agreements that, on the face of it,
encourage certain industries (particularly, labor-
intensive ones) to relocate outside of China.
Faced with a population that is becoming wealthier,
there are thousands of products that China simply
doesn’t wish to manufacture any more. Moving the
manufacturing base away from low-end goods and
into more added value and innovative products has
long been a specific aim of the Central Government.
China’s use of FTAs fits exactly into this policy.
Knowing how these agreements work and the
geographical restructuring they support is crucial
to understanding and developing your future China
business strategy.
5
Issue 151 • January 2015 • China Briefing
ASEAN The China-ASEAN Free Trade Agreement is by far
the single most important FTA that China has yet
reached, and currently the only multilateral one. It
is already having a significant impact upon regional
and global supply chains, and represents a total trade
volume of some US$443.6 billion (2013), with growth
running in excess of 10 percent per annum.
China’s FTA with ASEAN went live in 2010, yet the
implications of this are only now starting to become
apparent. What this agreement does is to eliminate
import-export tariffs and other barriers on some 90
percent of all products traded between China and
the ASEAN member states.
ASEAN is a ten member Asian trade bloc, including
the “Asian Tigers” of Singapore, Indonesia, Malaysia,
the Philippines and Thailand, all of whom have
already implemented tariff reductions (and received
reciprocation from China) on the majority of
products traded between themselves. By the end of
this year, the same will also apply to the other ASEAN
members of Cambodia, Laos, Myanmar and Vietnam.
These developments are of extreme economic
importance. While the full impact of the China-
ASEAN FTA has yet to be felt by foreign investors, it is
already starting to change the way the global supply
chain operates – and this is having huge implications
for global manufacturers, especially those operating
in China. China, as it is now commonly known, is
becoming a far more expensive country in which
to manufacture goods. Minimum wage levels have
grown by approximately 13 percent over the past
5 years, and are predicted to rise similarly in 2015.
What isn’t often recognized is that the total cost of
employing Chinese workers is increasing as well
– China imposes mandatory welfare payments on
employers for hiring permanent staff, and these
payments – amounting to a maximum of around 35
percent of an employee’s salary cost within certain
caps – make up a significant portion of the total
expense. Therefore, if wages go up – so does the
mandatory welfare.
When assessing ASEAN’s potential, however, it
is important to differentiate between the bloc’s
capabilities. Singapore is essentially a services hub,
and although it does possess some manufacturing
capabilities, is typically not a destination for lower-cost
production; rather, its role is in regional management.
Meanwhile, Brunei is almost exclusively an oil and
gas play, while the smaller ASEAN economies of
Cambodia, Laos and Myanmar are still infrastructure
poor and unlikely to be able to handle sustainable-
quality production at this time.
For this reason, the more developed ASEAN
economies of Indonesia, Malaysia, Philippines,
Thailand and Vietnam are all starting to have a large
effect on the regional financial competitiveness of
skilled workers when compared as follows:
More than twenty years ago, much of the global
chain moved to China to take advantage of its
well-organized infrastructure, cheap labor and
ultra-low tax rates in Special Economic Zones (SEZs).
However, with the Enterprise Income Tax Law of 2007,
these tax incentives were severely curtailed, and
foreign investors were newly struck by a 10 percent
withholding tax on repatriated dividends. China
now compares with its regional rivals as shown in
the table to the left.
Labor Costs in China Versus ASEAN
CityAverage Worker Salary
(US$, per calendar month)Mandatory Welfare
(percentage of salary)Guangzhou 760 35%
Bangkok 460 5%
Ho Chi Minh City 150 22%
Jakarta 240 4.8%
Kuala Lumpur 800 12%
Manila 500 25%
Note: Guangzhou welfare can vary depending upon the housing fund contribution amount.
Shown is the average value. All other country welfare figures can vary depending on a number of
circumstances. Shown are the typical contribution rates.
Corporate Taxation in China Versus ASEAN
CountryCorporate Income
Tax RateDividend Tax
ImposedChina 25% 10%
Indonesia 25% 20%
Malaysia 25% 0%
Philippines 30% 15%
Thailand 20% 10%
Vietnam 22% 0%
Note: Vietnam plans to further reduce its CIT rate to 20% from 2016. Dividend taxes can further be reduced by 50% if an applicable Double Tax Treaty is invoked. For more information, see the article “Taking Advantage of China’s Double Tax Treaties” elsewhere in this magazine.
6
China Briefing • Issue 151 • January 2015
In all cases, China’s heavier tax burdens coupled with
its higher labor costs are now making manufacturing
in the country less competitive than in the major
ASEAN economies. Yet a mass departure of foreign
investors from China has not occurred, although
there has undoubtedly been some leakage. The
reason for this is the upside to the increasing labor
costs of China – the development of a considerable
middle class consumer market.
Today, China has a middle class consumer market of
about 250 million people – yet in what will become
one of the fastest-growing wealth trajectories ever
seen, that number is set to increase to 600 million
by 2020 – just five years from now. This means that
many factories in China are forgoing relocation – or
at least those that possess and are continuing to
build their China supply chains to reach out to the
new Chinese consumers.
But what is happening is that the additional
manufacturing capacity that is gradually being
required to service China is being repositioned
elsewhere – a direct consequence of the China-
ASEAN FTA. Nearly all import duties from the ASEAN
nations mentioned above have been eliminated, and
Vietnam will follow suit in December, 2015.
This now means a double-pronged strategy is
being developed by many companies intent on
servicing the Chinese market. The intention is
to develop a strategic hub in China, which may
include some manufacturing, and which definitely
needs to sit tight on the supply chain management,
while combining this with production of either
component parts or complete products sourced
from other factories in ASEAN.
Here, there seems to be a general rule of thumb, at
least amongst Dezan Shira & Associates’ own clients
– if non-China production can reach 70 percent of
the level that can be achieved by a China factory, it
usually makes good sense to house your production
in the non-China facility. Plus that production gap is
only going to close as regional infrastructure improves.
We have already seen Foxconn announce that they
are to up sticks from China and gradually relocate
to Indonesia. With a workforce of over one million,
the China price of manufacturing components for
Apple is becoming too high for the end-product
to remain globally competitive. Indonesia, as part
of the China-ASEAN FTA, provides a solution. Other
companies are sure to follow.
The implications are clear: as the Chinese economy
moves from an export manufacturing base to a
consumer driven model, production facilities offering
lower labor and tax overheads elsewhere in Asia
will emerge to take up the challenge. China’s Free
Trade Agreement with ASEAN dictates that the main
beneficiaries of this will, over the next decade, be
Indonesia, Malaysia, the Philippines, Thailand and
Vietnam. The China-ASEAN FTA is also being expanded,
with negotiations underway to include a greater
portion of the service industry within the agreement.
Foreign manufacturers based in China must
consider the benefits of relocating their production
capacity to these destinations in ASEAN for use in
servicing the China market.
Other China Free Trade Agreements China’s other FTAs have been enacted on a bilateral
basis. We summarize them as follows:
Mainland and Hong Kong Closer Economic and Partnership ArrangementAlthough Hong Kong is part of China, there are
differences between the two concerning tariffs
and duties, as well as through Hong Kong’s status
as a Free Port. To address these, China structured
the “Closer Economic & Partnership Arrangement”
(CEPA) with Hong Kong, implemented in 2003. A
similar agreement also exists with Macau.
These CEPA agreements provide a number of
incentives for businesses from each Special
Administrative Region to invest in mainland China,
irrespective of beneficial ownership. These include
permitting fast-track investment into industry
sectors in China still restricted to foreign investors,
as well as large service industry concessions.
Typically, a qualifying period is required, as are
minimal tax contribution requirements in either
Related Reading
For information on China’s Free Trade and Double Tax
Agreements with ASEAN, please visit www.aseanbriefing.com.
EXPLORE MORE
7
Issue 151 • January 2015 • China Briefing
Hong Kong or Macau. What is interesting about the
CEPA arrangements is that they do not necessarily
preclude foreign-invested Hong Kong companies
from taking advantage of the relevant benefits.
This means that it is possible in certain industries
(particularly the services sector, as shown above) to
acquire a Hong Kong company and then use that,
under CEPA regulations, to participate in areas that
are still otherwise subject to restrictions concerning
total foreign ownership in mainland China.
China-Singapore Free Trade Agreement China and Singapore signed the China-Singapore
Free Trade Agreement in 2008. Under this
Agreement, the two countries accelerated the
liberalization of trade in goods on the basis of the
Agreement on Trade in Goods of the China-ASEAN
FTA. The Singapore agreement goes further than
the ASEAN FTA, however, in liberalizing trade in
services between the two nations. Singapore
investors should be looking at both the ASEAN
agreement, the China-Singapore FTA and the
China-Singapore DTA to fully understand the
numerous incentives available to them under these
respective agreements with China.
China-Switzerland Free Trade AgreementThis agreement came into effect on 1 July 2014.
Switzerland is not a member of the European Union,
nonetheless many in the E.U. see the development
of this agreement as a potential precursor to a
future China-E.U. FTA. The agreement is one of the
highest-level and most comprehensive FTAs that
China has signed with a foreign country in recent
years. The agreement contains a high zero-tariff
ratio for trade in goods, and favorable mechanisms
for bilateral cooperation in many fields including
Swiss horology, textiles, clothes, footwear and
headwear, auto parts and metal products. In total,
about 99.7 percent of China’s exports to Switzerland
will be imported at zero tariffs, and 96.5 percent of
Swiss exports to China.
A number of new rules on environmental protection
and intellectual property rights were also included
in the agreement, which is the subject of ongoing
negotiations to expand its remit.
China-Iceland Free Trade Agreement The China-Iceland FTA was China’s first with a European
country, and came into effect on 1 July, 2013. The
agreement includes specific provisions within the
areas of energy, food and shipbuilding, and reduces to
zero nearly 96 percent of all mutually traded products.
China-New Zealand Free Trade Agreement This FTA was the first that China signed off on, and
dates back to 2008. The agreement has helped New
Zealand exports to China triple in volume since it
came into force, with dairy products (including milk
powder, butter and cheese) becoming the country’s
top export commodity to China, followed by logs,
wood, and wood products. China’s major exports
to New Zealand include mechanical machinery,
equipment and computers.
Industries Eligible for Foreign Investment Through the China-Hong Kong CEPA AgreementAccounting services Advertising Airport Services
Audio-visual Banking Building cleaning
Computer services Conventions and exhibitions Cultural services
Distribution Environmental Freight forwarding
Individually owned stores Insurance IT services
Job intermediary services Job referral agencies Legal services
Logistics Management consulting Market research
Medical and dental Patent agencies Photographic services
Placement and supply of personnel Printing and publishing Professional qualification examinations
Public utility Real estate/construction Mining (restricted to oil and gas)
Scientific and technical consulting Sports Storage and warehousing
Securities and futures Telecommunications Tourism
Trademark agents Translation and interpretationTransport
(including road/freight/passenger and maritime)
>> Continued on page 10
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10
China Briefing • Issue 151 • January 2015
The China-Australia Free Trade Agreement This FTA was recently agreed upon in November 2014,
and covers a wide range of agreements on everything
from agricultural tariffs to quotas, manufactured
goods, services and investment. For more details,
please see the related link on Page 3 above. Other
important FTAs that China has signed off on include
deals with Pakistan, Chile, Peru and Costa Rica.
Free Trade Agreements Under Discussion China has entered negotiations with a number of
other countries and trade blocs, including:
The China-GCC (Gulf Cooperation Council) Free Trade Agreement This prospective agreement includes the Middle
Eastern states of Saudi Arabia, the U.A.E., Kuwait,
Oman, Qatar, and Bahrain, and will concentrate on
the energy industry.
The China-Korea Free Trade AgreementThis agreement has been concluded and is expected
to be ratified by both governments during 2015. It is
expected to provide South Korean businesses with
advantages in China to make them more competitive
in mainland China than those from Taiwan.
The China-Japan-Korea Free Trade AgreementDespite China’s territorial disputes with Japan, this
agreement is still under negotiation and may yet
come good, now that the South Korean bilateral
agreement has been concluded. Japan remains an
important market for China and economic benefits
are likely to outweigh political disputes. Progress
can be expected in 2015.
The China-Sri Lanka Free Trade Agreement Sri Lanka is an important strategic ally for China,
and this FTA concentrates on imports of computers,
machinery and infrastructure from China, and
textiles, agriculture and fishery products from Sri
Lanka. It is also likely to boost tourism into Sri Lanka
from China.
The China-Norway Free Trade Agreement Norway is one of China’s most important trading
partners in Northern Europe, as well as one of
China‘s main suppliers of fertilizer, aquatic products
and oil in Europe. Negotiations remain ongoing.
The China-India Free Trade Agreement This is another FTA that would be a game changer
should it come to fruition. Both sides agreed to
participate in a feasibility study back in 2003.
However, with the Indian economy now resurging,
this agreement is likely to be swiftly fast-tracked to
formal negotiations.
The China-Bangladesh Free Trade Agreement Negotiations on this agreement, which is likely to
focus on textiles and light manufacturing, were
announced in December 2014.
The Regional Comprehensive Economic Partnership (RCEP)This agreement marries part of the AsiaPac nations
with ASEAN and other Asian countries. It does not
include the United States and is the subject of
intense discussion.
The Free Trade Area of the Asia Pacific (FTAAP) China agreed with members of APEC to conduct a
two year feasibility study into this at the APEC
ministerial meetings in Beijing in November 2014.
FTAAP may eventually replace the proposed RCEP
and TPP agreements.
Related Reading
For information on India’s Free Trade and Double Taxation
Agreements, please see our forthcoming publication on the subject.
COMING SOON
Continued from page 7 >>
11
China’s Proposed New Silk Road Free Trade Area
Chinese President Xi Jinping has been busy in Central
Asia, touring the region last year and including
visits to Turkmenistan, Kazakhstan, Uzbekistan and
Kyrgyzstan. He also proposed, in cooperation with
leaders of the Shanghai Cooperation Organisation
(SCO), the establishment of a new Silk Road that
would encompass free trade throughout Central
Asia.
The SCO is an official grouping that includes China,
Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and
Uzbekistan, with Afghanistan, India, Iran, Mongolia
& Pakistan as observer states; Belarus, Sri Lanka
& Turkey as dialogue partners; and ASEAN, the
Commonwealth of Independent States (CIS) and
Turkmenistan as guests.
Xi is looking for both new markets and to leverage
some economic clout over the region’s vast oil
and gas reserves, as well as hoping to minimize
the potential for conflict that could spill over into
China’s Xinjiang Autonomous Region by raising
local incomes and wealth throughout the region.
He has stated that the proposed region contains
“close to 3 billion people and represents the biggest
market in the world with unparalleled potential.”
The ultimate aim of the proposed Silk Road
economic belt is to complete infrastructure linkages
and then develop trading points all the way along
this route and into Europe. Not since Genghis Khan
took his warriors to the gates of Moscow has there
been such a gigantic expansion westwards from
Asia. Russia’s official policy on Chinese expansion
into its previously ruled territory may be rather more
pragmatic than emotional, as Russians generally are.
The Kremlin spin is that the Russian and Chinese
economies are complementary – China’s “sizable
financial resources” match Russia’s “technologies,
industrial skills, and historical relations with the
region” according to Russian President Vladimir
Putin, represented in the region by Russia’s
membership in the CIS.
Accordingly, Xi’s strategy makes sense. As the only
power in Central Asia that can afford financial,
military and mass-population support, China is
poised to transform Central Asia from the backward
days of the Soviet Union, while cementing peace
via encouraging trade and helping to develop
infrastructure in ways in which the Russians have
lately appeared unable to do.
Additionally, with the region controlled by
governments of similar minds to those of China’s
Communist Party leaders, the political dynamics
match. This means that a China-Russia-Iran axis
is likely to develop core interests in European
markets, affecting the organization’s political and
trade relationships with governments and countries
throughout the EU and beyond.
However, China’s primary objective at this stage
in developing the old Silk Road route is mainly
to do with energy – the country is energy
deficient and must import a great deal of its oil
and gas, accordingly. Redeveloping trade routes
across Central Asia would give China access to
Chris Devonshire-EllisFounding Partner
Dezan Shira & Associates
EXPERT COMMENTARY
12
China Briefing • Issue 151 • January 2015
numerous deposits, and some of these are already
transforming the economies of Central Asian
nations.
Beyond the energy gambit, the route will also
offer development potential for trade. That is
also key to China, not least because it recognizes
that keeping the peace in what can be a volatile
region is essential. Urumqi is already Central Asia’s
wealthiest city, and that is partly to do with keeping
the Uyghurs from pushing for too much autonomy.
Xi’s proposed Silk Road economic belt would
concentrate on free trade, connectivity and
currency circulation (denominated in RMB). This
was only made possible because border problems
between Russia and its former Central Asian allies
have now largely been solved. For example, the
Commonwealth of Independent States allows
visa-free access for its members. This lines up
perfectly with China’s push to develop its Far West
in Xinjiang.
Beijing is already massively investing in new roads
and bridges across the region via a wealth of
separate projects. Linking these countries together
then is a network of highways, railways, fiber optics
and pipelines – with the added Chinese push for
logistics centers, manufacturing hubs and,
inevitably, new cities and towns. The New Silk Road
is set to become a reality.
BeijingBeijing
UrumqiUrumqiAlmaty
SamarkandSamarkand TashkentTashkent
KabulKabulIslamabadIslamabad
Tehran
IstanbulIstanbul
Moscow
China's Proposed Overland New Silk Road Route
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13
Taking Advantage of China’s Double Tax Agreements By Chris Devonshire-EllisDezan Shira & Associates
China has taken an assertive view when it comes
to entering into Double Tax Agreements (DTAs)
with other nations – it now has over 100 such
treaties, many of them recent. This compares with
the United States, which has only 67 such treaties
(including one with China), but many of which
are seriously out of date and written prior to the
contemporary Internet age. As a result, many of the
American treaties are insufficient when it comes to
dealing with IT and communications. China’s DTAs
tend to be rather more sophisticated by virtue of
being more contemporary.
DTAs are useful as they enshrine within a bilateral
agreement the treatment of many forms of tax –
including corporate income tax, individual income
tax, withholding taxes and dividend taxes, amongst
others. They are useful not just for companies that
have a presence in both nations, but also for trading
companies that may not have a permanent presence
in China but who nonetheless may be charging for
services to a China-based entity. Such services are
typically subject to withholding tax, which the effective
use of an applicable DTA can halve.
Yet, as in the case of China’s Free Trade Agreements,
the legal and tax professions are effectively split
in China, and because of this, not many law firms
possess knowledge of DTA’s and consequently may
ignore them when structuring foreign investments
into the country.
This is problematic, as the identification of, and the
ability to utilize applicable DTAs should often be
catered for within a company’s articles of association
– as well as negotiated up front with the relevant
tax officials in China. Failing to do so can result in
the company being struck with tax overheads that
are far more than they ever needed to have been.
That said, the situation can be redeemed – but
only through firms qualified to do so and with an
understanding of China’s regulations from both the
legal and the tax perspectives. China has always been
a tax structural play for foreign investors at the start-
up stage. Attention to detail is necessary so as not
to miss out on bilateral benefits that can be highly
beneficial to your business operations in China.
Typical DTA BenefitsApart from the principal of an individual or
corporation not being subject to “double taxation”
– being taxed both in one country and then back
home – most DTAs also include “tax sweeteners”
that savvy international businesses can take
advantage of. These include reductions as follows:
Dividends TaxChina charges a 10 percent dividends tax upon
profit repatriation overseas, in addition to a 25
percent corporate income tax (CIT). Many DTAs
provide for a clause that reduces the dividends tax
portion by 50 percent.
14
China Briefing • Issue 151 • January 2015
Withholding TaxWithholding Tax (WT) is charged on an array of
service fees billed by a company in its home country
to a company (which could be either a client or a
subsidiary) in China for services that the former has
provided to the latter. As profits tax cannot be charged
to a company that is non-resident, WT takes its place.
The amount of WT varies considerably depending
upon the service provided.
Interested businesses should check with their advisors
as to what the applicable rate per service is. However,
as a general rule of thumb, it is normally between
10-20 percent of the total invoice value. DTAs can in
many cases halve this amount. Services charged by
the parent for use of royalties for trademarks by its
own subsidiary, for example, may be remitted to the
parent at a lower rate than the 10 percent withholding
tax levied in China.
While Chinese foreign-invested entities can sign a
variety of service agreements with foreign companies,
including with their headquarters (HQ), these
agreements can sometimes be looked upon with
suspicion as “constructed channels” for sending money
between an HQ and its subsidiary. It is important to
bring the intent to use a DTA to the attention of the
local tax office in China, together with copies of the
DTA (in Chinese) and the articles of association and
business license of the company.
Permission is required by tax officials in China to reduce
the amount of taxes due from a company, and they
will need to provide an explanation to their own
superiors. Accordingly, a well-presented case must
be made. It is advisable for this to involve assistance
from a professional firm in China qualified to do so.
The tax savings thus obtained typically outweigh the
fees charged for such services.
Transfer PricingIt should be noted that under the banner of WT,
services and IP issues, corporate structures can become
complicated, for which there are additional rules to
cater for their fair and reasonable use. These rules come
under China’s Transfer Pricing regulations, and may be
referred to in our book on the subject here.
Countries with Double Taxation Avoidance Agreements with China (as of January 2015)
Albania Croatia India
Algeria Cuba Indonesia
Armenia Cyprus Iran
Australia Czech Republic Ireland
Austria Denmark Israel
Azerbaijan Ecuador** Italy
Bahrain Egypt Jamaica
Bangladesh Estonia Japan
Barbados Ethiopia Kazakhstan
Belarus Finland Korea (R.O.K.)
Belgium* France Kuwait
Bosnia-Herzegovina Georgia Kyrgyzstan
Botswana** Germany Laos
Brazil Greece Latvia
Brunei Hong Kong Lithuania
Bulgaria Hungary Luxembourg
Canada Iceland Macao
Macedonia Poland Syria
Malaysia Portugal Tajikistan
Malta Qatar Thailand
Mauritius Romania Trinidad & Tobago
Mexico Russia* Tunisia
Moldova Saudi Arabia Turkey
Mongolia Serbia & Montenegro Turkmenistan
Morocco Seychelles Ukraine
Nepal Singapore United Arab Emirates
Netherlands* Slovakia United Kingdom*
New Zealand Slovenia United States
Nigeria South Africa Uzbekistan
Norway Spain Uganda**
Oman Sri Lanka Venezuela
Pakistan Sudan Vietnam
Papua New Guinea Sweden Zambia
Philippines Switzerland
* Additional protocol signed but not yet in effect. ** Agreement signed but not in effect at time of writing.
15
Issue 151 • January 2015 • China Briefing
Related Reading
For information on Vietnam’s Free Trade and Double Taxation
Agreements, please see our forthcoming publication.
COMING SOON
Where Can I Find China’s Double Tax Agreements? The Dezan Shira & Associates Business Resource
Library has a full section devoted to, and containing
copies of, China’s DTA agreements (complimentary
access).
Taking Advantage of China’s DTAs The practical steps to take when looking at invoking
DTA benefits are as follows:
• Examine whether or not applicable services are
included under the specific DTA;
• Examine whether the DTA includes any other
benefits such as withholding or dividend tax
reductions;
• Where applicable, include any applicable treaty
benefits into your pre-incorporation business
plan and articles of incorporation;
• Examine any China tax registration processes that
may require additional registration and advise
them of your intent to invoke treaty status. This
is a specific registration process in China.
If you have not completed this process or are
unsure, seek professional advice to remedy the
situation. Even given the fees incurred, the amount
of tax saved will almost certainly cover this in year
one alone. When completed, your business is
DTA-enacted and will save on the various taxes that
would otherwise have been due.
For assistance with applying for tax treaty status
for your business in China, please contact
Dezan Shira & Associates at [email protected].
The practice can assist with negotiating with
the relevant tax bureau and with preparing
supporting documentation to realize tax reductions.
Downloadable copies of these agreements can
be obtained from the Dezan Shira & Associates
Business Resource library.
Executive Summary: China’s Free Trade & Double Tax Agreements
Understanding and putting into practice the
relevant tariff and tax reductions that can be
obtained from smart use of China’s free trade and
double tax agreements is an important part of
the China executives tool kit when it comes to
maximising profitability. Yet this agreements and
the concessions contained within them do not just
magically appear. Documentation confirming issues
such as rules of origin under FTA, and applying to
the pertinent tax bureau when enacting DTA must
be produced and filed with customs and other
relevant authorities. This means taking a proactive
approach to the issue. Many Chinese or China
based managers and even China based consultants
may not be aware of these benefits if they are not
experienced working in an international company
or familiar with China’s tax or customs regulations.
Such benefits are not restricted in terms of volume
either, they can be applied for by any SME and for
any amount as they are product centric, not based
on financial transaction value.
Advice and expertise in getting together the
right documentation should be sought from
profess ionals fami l iar with bi latera l and
multilateral trade and ideally with a pan-Asia
presence, especially when it comes to China
trade with ASEAN, India and even the United
States and Europe and beyond. At risk is losing
business to more savvy competitors. In gains,
these agreements enable increased profitability.
Enacting DTA between your businesses home
country and China is a win-win situation, while
examining FTA for the applicable product tariff
concessions make complete sense as part of
normal trade and cost exercises for the successful
business. For fur ther ass istance, contact
Dezan Shira & Associates .
Hong [email protected]
Liaison O�ce, United [email protected]
Liaison O�ce, [email protected]
Liaison O�ces, [email protected]
* Dezan Shira Asian Alliance Member
The Philippines *[email protected]
Thailand *[email protected]
Malaysia *[email protected]
Singapore [email protected]
Indonesia *[email protected]
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