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How to Avoid Double Tax from China and Your Home Country?

HiTouch 18 December 2018

Our previous article regarding resident taxpayers has ignited many concerns among foreign individuals, many of them are worried about whether they will be levied double tax by China and their home country under China's upcoming new individual income tax system.


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Image: islamproven.com

 

What's more, the launch of Common Reporting Standard (CRS) gives the tax authorities of both countries a greater ability to exchange taxpayer information and to exchange information on a wider range of taxes. It also provides that neither tax authority can refuse to provide information solely because it does not require the information for its own domestic purposes, or because the information is held by a bank or similar institution. So, under these complex tax protocols, can you avoid double tax from China and your home country?

 

We have to make it clear at the beginning of the article, double tax is applicable to many forms of tax – including corporate income tax, individual income tax, withholding taxes, and dividend taxes amongst others, as a result, both foreign individuals (resident taxpayers) and enterprises( enterprise resident taxpayers) may get involved in it if the person stay in China for a prolonged period of time, or the company lawfully incorporated in China, or lawfully incorporated pursuant to the laws of a foreign country (region) but where actual management functions are conducted in China.

 

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Image: internationalinvestment

 

Understanding Double Tax

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). Double liability is mitigated in a number of ways, for example:

 

  • the main taxing jurisdiction may exempt foreign-source income from tax,

  • the main taxing jurisdiction may exempt foreign-source income from tax if the tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions.

  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

 

The term "double taxation" can also refer to the double taxation of some income or activity. For example, in some jurisdictions, corporate profits are taxed twice, once when earned by the corporation and again when the profits are distributed to shareholders as a dividend or other distribution.

 

Is Your Country On The List Of China's Tax Treaty With Over 100 Countries?

Actually, China has signed over 100 Agreement on Avoidance of Double Taxation (DTA), more than 10 tax information exchange agreements (TIEA), and 1 multilateral convention of mutual administrative assistance in tax matters. The DTA's of China basically followed the Model Treaty Convention of the Organisation for Economic Co-operation and Development (OECD).

 

China has taken an assertive view when it comes to participating in Double Tax Agreements (DTA) with other nations – it now has 102 such treaties, many of them recent. Terms of the protocol and the listed countries are constantly keeping updated. Here are the latest details of the DTA are available at the website of the State Administration of Taxation.

 

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Image: State Administration of Taxation of The People's Republic of China

 

There are mainly four effects of signing Double Taxation Avoidance Agreement.

 

  1. Eliminate the double taxation, decrease the tax cost of "going global" enterprises.

  2. Increase the certainty of taxation, decrease the risk of cross-border taxation.

  3. Decrease the tax burden of "going global" enterprises in the host country, improve the competitiveness of those enterprises.

  4. When taxation disputes occur, the agreements can provide bidirectional consultation mechanism, solve the existed disputed problems.

 

Benefits of Double Tax Agreements

DTAs are useful as they are applicable to the bilateral agreement the treatment of many forms of tax – including corporate income tax, individual income tax, withholding taxes, and dividend taxes amongst others.

 

Not only companies that have a presence in both nations, but also for trading companies that may not have a temporary presence but who may be charging services to a China-based entity benefit from the DTAs. Typical tax like withholding tax is chargeable for these companies, and the use of DTA can halve this burden. Double tax agreements offer the following benefits:

 

  • DTAs clearly lay down the rules for division of revenue between two countries and how tax is to be imposed in each. In other words, DTAs define the jurisdictional authority on transnational trade.

  • DTAs help taxpayers of one country know the potential limits of their tax liabilities in the other country.

  • DTAs enhance the integrity of a country’s tax system and prevents tax evasion through a framework for the exchange of information between revenue authorities.

  • DTAs allow taxpayers to claim for relief for taxes paid overseas.


Withholding Tax

Withholding Tax is charged on a series of service fees billed by a company in its home country to a company in China for the service the former provides to the latter. The amount of withholding tax varies considerably depending upon the service provided. Under general conditions, the tax rate under tax treaty is often lower than the domestic tax rate under the law of host country.

 

Take Russia as an example, in Russia, the standard withholding tax rate of interest and royalty under domestic law is both 20%. According to the newest tax treaty China signed with Russia, the withholding tax rate of interest is 0 and the withholding tax rate of royalty is 6%. This can obviously reduce the tax cost of enterprises, increase the willing of "going global" and the competitiveness of domestic enterprises, and bring the goodness.

 

Dividends Tax

China charges a 10 percent dividends tax upon profit repatriation overseas, plus an addition to a 25 percent corporate income tax. In this situation, DTAs can help reduce the dividends tax portion by 50 percent.

 

Tax Treaty Credit For Foreign Investors in China

Indirect tax credit

Most of China's tax treaties provide that the corporate level income taxes paid by the foreign investment enterprise are eligible for an indirect tax credit for foreign investors in their home jurisdictions.

 

Tax sparing credit

An investor, who is a resident of a China's treaty country and owns the foreign investment enterprise, is deemed to have paid the income tax under the indirect tax sparing credit provision in respect of the tax concession being granted for income earned within China at both the Company and shareholder (investor) levels. However, there is no tax sparing credit provision in the treaty concluded between China and the USA.


 

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Image: taxguru.in

 

Side Effect

Though signing double taxation avoidance agreement is a way to solve the tax problems, there still can be other problems led out, or we can call it "side effect".

 

The initial aim of tax treaties is to avoid double taxation between two countries. Later, with closer the transnational economic relationships are, and the development of transnational enterprises, the governments realized it was necessary to enhance the cooperation through more well-established law together to face the tax evasion of transnational enterprises. Thus, some terms were added into the initial treaties, especially the information exchange terms and tax collection assistance terms. In this way, the second aim, to avoid tax evasion was appear in the theme.

 

The impact and the aim of the tax treaties are integrated, they are both to avoid double taxation in order to improve economic exchanges and relationships, to enhance the government cooperation in order to avoid tax evasion. However, the side effect gradually appeared.

 

The tax provides possibilities of avoiding tax in a legal way to transnational taxpayers. In order to avoid double taxation, the agreement divided the jurisdiction of taxation, including shared and excluded jurisdiction of taxation. It also established the limited tax rate in the origin countries. These all can be called the preferential treatments of the taxation agreement. The transnational enterprises, in order to get maximized profit, can use the terms of domestic law and taxation agreement, to avoid both taxation from origin country and residence country legally and achieve double taxation free. This can be a severe undermine to the international order, and a challenge to the domestic governments.

 

Reference: china-tax.net, Wikipedia, chinatax.gov.cn