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Previously, under the old rule, Guoshuifa [2009] No. 124 (“Circular 124), tax non-residents (or alternatively the withholders) had to file for approval of the tax authority a request in order to be granted tax treaty benefits on China sourced income, such as dividends, interest, royalties, capital gains and etc. Without such approval, or forgetting to applying for the approval, the taxpayer was deemed to have given up the opportunities to enjoy treaty benefits.
Announcement 60 issued on 27 August 2015 has replaced the old compulsory requirement of pre-approval with a more comfortable arrangement – the self-filing. As from now, non-residents will have the powers to decide by themselves whether they qualify for treaty benefits or not. If eligible, they can decide about amount of withholding tax and the net payment amount first, though after that they are still required to make a back-filing with the tax bureau. The in-charge tax bureaus will then review the filing and may further follow up with non-residents/withholders if such determination is challenged by them later on.
The required documents for the above-mentioned self-filing are as follows:
1. Tax resident information form
2. Applicability of tax treaty information form
3. Foreign tax resident certificate
4. Contracts, board resolutions, shareholder resolutions, invoices or payment receipts related to income at issue and
5. Other materials related to eligibility for the tax treaty benefits.
The above documents will be the base to determine the eligibility for the tax treaty benefits, including the beneficiary ownership status focused by tax bureau in recent years. It is possible that some non-residents or withholders will have a hard time during their filings, absent some help from professional tax advisors.
With one success case in hand, non-residents are exempted from filing the same set of documents on the same category of income with the same in-charge tax bureaus within three years. However, if capital gains are involved, non-residents still need to make respective filing at each payment.
If the self-filling of the tax treaty benefits turns out to be wrong, the in-charge tax bureaus are expected to follow up and demand payment of unpaid or underpaid taxes, probably plus interest and penalties. Such case will incur when some applicable tax treaty benefits show ambiguous. As a result, non-residents are faced with two options. They can either (a) make a high-certainty filing with maximum upfront tax benefits, or (b) claim no upfront tax benefits initially and then seek to request a refund on a follow-up filing from the in-charge tax bureaus. While the latter approach will get rid of potential exposure of interest and penalties, it could delay the granting of the tax treaty benefits; also it should be considered that with some tax bureaus the tax refund procedure is very tough to proceed, even if the documents are flawless.
There is one critical unclear point in Announcement 60. Considering that routinely the bank remittance in China requires tax clearance certificates to be provided as part of the applications documents, Announcement 60 has created a practical confusion on how it will actually work with the bank on remittance before tax filing. It is possible that non-residents will have to wait to receive a tax clearance certificate after formal review by the tax bureau. If this is the case, the Announcement 60 self-filing system essentially has not changed the key aspects of Circular 124.
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Announcement 60 is clearly a step in the right direction for companies. We cannot deny that the SAT is trying to undertake positive action by eliminating the Circular 124 approval regime. On the other hand, it remains uncertain how Announcement 60 will work in practice. To avoid the potential trap of Announcement 60, which may lead to unnecessary tax exposures for both withholders and non-residents, parties involved clearly need to check with both tax bureau and the payer’s bank and be certain about the applicability of the new rule before taking it for granted to enjoy the treaty benefits automatically.