SAT Delegates Power of Recognizing and Verifying Tax-Resident

The State Administration of Taxation (SAT) recently issued the Circular on Recognizing Tax-Resident Enterprises by Standards of De Facto Management Bodies, clarifying relevant management measures following the delegation of the power of recognizing and verifying tax-resident enterprises to tax authorities at the provincial level and below.

At the end of 2013, the State Council issued the Decision on Issues Relative to Canceling and Handing Down Items for Administrative Approval, and the Decision on Canceling and Handing Down Items for Administrative Approval, announcing 9 items to be removed from and handed down for administrative approval, said a responsible person from SAT Income Tax Department. The SAT has since conscientiously implemented the decisions of the State Council, soon making sure the removal and handing down of items subject to tax-related administrative approval is well arranged for. This Circular, setting forth the management measures post to the delegation of the power of recognizing and verifying tax-resident enterprise, is an important initiative in implementing the State Council's decisions, designed to further straighten out the processes of administrative approval, improve the policy environment for Chinese businesses that operate capital globally, offer convenience to taxpayers and grassroots tax authorities, optimize tax services and reduce cost of tax compliance. These follow-up measures have four highlights as follows:

Slashing the layers of approval

After reviewed by the competent tax authority, the tax-resident enterprise recognition application will be confirmed by the provincial tax authority. For cross-province investment within the border of China, the application will be forwarded after confirmation by the provincial tax authority to the provincial tax authority in the province where the investment will go to, and will be no longer submitted to the SAT for confirmation.

Achieving centralized management

Given the fact that the venue of de facto management body of an overseas Chinese business is not identical to that of its major investor in China, recognition application can be lodged to the competent tax authority where the business's major investor is registered in China, instead of to multiple authorities, thus the competent recognition authority after power delegation is made clear.

Clarifying taxation methodology

The Circular makes it clear that the equity investment income such as dividend and bonus derived by an overseas Chinese business from other tax-resident enterprises in China since the year when it is recognized as tax-resident enterprise, and undistributed profits of the previous year shall be taxed pursuant to Article 26 under Corporate Income Tax Law and Article 17 and 83 under Implementation Rules.

Intensifying supervision and inspection

The management model of combining grassroots recognition with reporting to the SAT will be adopted. To be specific, a provincial tax authority will report the results to the SAT within 30 days after it confirms the application for being a tax-resident enterprise, and the SAT will uniformly publish the results at its website. In the meanwhile, the SAT will organize inspection at a proper time and require unqualified businesses to correct.

It is learned that the provisions regarding recognition of tax-resident enterprises under Corporate Income Tax Law are meant to expanding tax jurisdiction, filling the loopholes of cross-border tax avoidance and safeguarding national tax sovereignty, in reference to international conventions. But as the policy for dividend income tax is changed under Corporate Income Tax Law, overseas Chinese red chip holding companies are faced with repeated levy on dividend. To address this issue, the SAT launched in 2009 the Circular on Recognizing Chinese Holding Companies Registered Overseas as Tax-Resident Enterprises by Standards of De Facto Management Bodies, clarifying that some overseas (mostly HK based) Chinese holding companies would be recognized as tax-resident enterprises to solve the issue of repeated tax on dividend. The recognition efforts have run smoothly over the past few years but the management approach of reporting level-by-level to the SAT for verification and approval is problematic. To be specific, the approval processes for level-by-level reporting of recognition of tax-resident enterprises to the SAT are rather complex and tedious, and inconvenient for businesses to operate capital globally. As required by the Chinese government for gradually simplifying and clearing up items subject to administrative approval, the approval layers need to be adjusted and the management approach needs to be improved. In this circumstance, the SAT has revised some regulations and publishes them in the form of a circular.