Bureaucracy Reduction versus Tax Expertise

Recently the Chinese tax authority published SAT Public Notice [2019] No. 35 (“the Notice”), which released new measures for non-resident taxpayers to enjoy treaty benefits in China. The new measures came into force with 1 January 2020.

The points that are worth most attention are specified as follows:

Definition “Non-Resident Taxpayers”

It should be noticed that the definition of “non-resident taxpayers” in the Notice is different from those defined by Chinese corporate income tax law (“CIT Law”) and individual income tax law (“IIT Law”). The Notice follows the definition of applicable tax treaties, i.e. non-resident taxpayers in the Notice are defined as resident taxpayers of the other contracting state of the applicable tax treaty.

With such a definition, the following two groups of taxpayers could fall into the scope of “non-resident taxpayers” in the Notice:

• Non-resident taxpayers according to CIT Law or IIT Law, who are defined as resident taxpayers by the domestic laws of the other contracting state;
• Resident taxpayers according to CIT Law or IIT Law, who are defined as resident taxpayers by the domestic laws of the other contracting state at the same time, while according to the applicable tax treaty, should be defined as resident taxpayers of the other contracting state only.

For corporate taxpayers, the tax residency belongs to the state where the place of effective management is situated.

While for individual taxpayers, the tax residency would be subject to detailed analysis if the individual is defined as resident taxpayer in both contracting states.

Simplified Reporting Requirements

Comparing to the measures till to the end of year 2019, the most eye-catching change in the measures effective from 1 January 2020 is the simplified reporting procedures for applying treaty benefits. Thus, instead of an extensive package of various documents, reports and information of the non-resident taxpayer, only a one-page form is required for reporting. The taxpayer can make self-assessment on their eligibility of the treaty benefits, utilize the benefits in the tax calculation by themselves, report the utilization of treaty benefits to the tax authority by submitting a one-page form, and retain the supporting documents for future inspection by tax authorities.

The reporting requirements are significantly simplified in the new measures, which would provide much more flexibility in tax compliance and practice to taxpayers.

Responsibility of Applying Treaty Benefits

The new measures have clarified the responsibilities of withholding agents and taxpayers for applying treaty benefits. It is the taxpayers who should take the responsibility for applying treaty benefits.

If the tax should be paid on a withholding basis, taxpayers should be aware of their eligibility for the treaty benefits, hand over the completed information reporting form to the withholding agents, and request them to apply treaty benefits to their income when withholding the relevant income tax. Meanwhile, withholding agents would have the obligation for providing supporting documents upon tax authorities’ request in future tax inspection. Therefore, it is recommended that withholding agents should retain a copy of the supporting documents as well if they have applied any treaty benefits on behalf of the taxpayers.

The withholding agents have no obligation of applying treaty benefits to the income taxation if not requested by the taxpayers.

Our View

The Chinese tax authority seems to have loosened the upfront administration and supervision on treaty benefits application, nevertheless might invest more efforts in afterwards inspection on the eligibility of the application. Furthermore, even if the taxpayers are eligible for applying the treaty benefits, their prepared supporting documents may not be sufficient from the tax authorities’ point of view, and that could not be realized until a tax inspection actually arrives. To certain extent, the new measures actually demand more professional knowledge from both taxpayers and withholding agents concerned, in order to fully meet the compliance requirements. So involving professional assistances at an earlier stage is recommended for tax risk controlling in this regard.