China Corporate Tax

1
China Corporate Tax

• John McFarland
• Country Manager
• Singapore Malaysia

2
China Corporate Tax

• China Income tax rate for both foreign and
  domestic firms at 25 percent to provide them with
  a level playing field.
• The corporate tax law is a sign of major
  progress in China attracting overseas investment.
  
• A unified corporate income tax will promote fair
  market competition, and bring China more in line
  with the World Trade Organisations principle of
  fair and equal treatment.

3
China Corporate Tax

• Tax rate
• Foreign and domestic firms will both pay a 25
  percent income tax.
• Foreign firms that enjoy preferential tax rates
  will be given a 5-year grace period for the new
  rate to be phased in.
• The finance ministry estimates domestic firms
  will pay 134 billion yuan (US17.3 billion) less
  in taxes every year and foreign companies, 41
  billion yuan (US5.3 billion) more.
• (China News March 2007)

4
China Corporate Tax

• Foreign investors and offshore special purpose
  vehicles (SPV)
• Favourable treaty withholding tax (WHT) rates.
• 2. Subsequent disposal of the offshore SPV could
  be considered as an offshore transaction that
  would not be subject to China tax as capital
  gain, i.e. tax-efficient exit route.

5
China Corporate Tax

• Existing Foreign Enterprise Income Tax (FEIT)
  law, WHT on dividends from foreign investment
  enterprises (FIEs) to their foreign investors
  is exempted while WHT rate for other passive
  income is provisionally reduced from 20 to 10.
• New CIT - standard WHT rate will be 20.
• Will the existing dividend WHT exemption and
  rate deduction be kept intact?
• This uncertainty could significantly impact the
  after-tax return and cash up- streaming for
  foreign investors.

6
Impact on due diligence process and post-deal
integration

• While historical tax exposures could largely be
  shielded under an asset deal structure, such
  exposures under an equity deal structure could
  only be mitigated by appropriate terms of tax
  indemnities and warranties in place under the
  sales and purchase agreement.
• The new CIT Law may result in more equity deals
  and hybrid equity-asset deals in order to capture
  the potential tax benefits arising from
  acquisitions of Old FIEs. Therefore,
  identification of key historical tax exposures
  during the due diligence process would be
  increasingly important for the purpose of
  obtaining tax indemnities and warranties.

7
Impact on due diligence process and post-deal
integration

• The new CIT Law may cause the following paradigm
  shift in the focus of China tax due diligence
  review
• Robustness of tax incentives
• 2. Anti-tax avoidance risk

8
Tax Enforcement in China

• The general anti-avoidance provision introduced
  in the new CIT Law will empower the Chinese tax
  authorities to impose adjustments to taxable
  revenue or taxable income for business
  transactions which are conducted without
  reasonable commercial purpose.

9
Tax Enforcement in China

• It is estimated that China's tax revenues will
  increase by between 700 billion yuan and 800
  billion yuan (89 billion to 101 billion U.S.
  dollars)mainly due to stricter taxation
  enforcement
• Its is estimated that improved taxation
  enforcement will contribute to about 70 percent
  of the revenue growth (In1994, governments at
  various levels could only collect about 50
  percent of all the taxes, while in 2003 they
  could collect more than 70 percent
• China collected about 3.09 trillion yuan (391
  billion U.S. dollars) in taxes in 2005, excluding
  revenues from customs and farming, about 500
  billion yuan (63 billion U.S. dollars) more than
  previous year.
• But Chinese people have begun to feel
  increasingly burdened by taxes and whether or not
  the government has been too heavy handed with its
  tax rates has become a hot topic. (Gao Peiyong
  Chinese Academy of Social Sciences (CASS).

10
Tax Enforcement in China

• There is an overall increase in China on all
  enforcement of law
• Recent international attention on quality and
  related issues is adding to the impetus.
• As well with the Olympics in August 08 , the
  crackdown on all law violations is intensifying,
  as evident on recent a recent crackdown on visa
  violators in Beijing. The crackdown has been
  attributed directly to the need to clean up
  before the olympics. In particular it is seen by
  some as attempts to reign in foreigners who
  violate China's laws.
• In fact the visa crackdown may in fact be
  motivated in part by a desire to improve tax
  collection by cracking down on foreigners working
  without permission.
• The trend is clear, unrelenting, and unequivocal.
  The number of Chinese laws aimed at business is
  increasing and enforcement of those laws is
  increasing as well.

11
Chinas Tax Enforcement

• The enforcement efforts by the State
  Administration of Taxation (SAT) are expected to
  increase this year.
• The SAT has conducted the restructuring of its
  anti-tax avoidance team and strengthened its
  communication with the Organisation for Economic
  Co-Operation and Development (OECD) by organising
  training programs for high and medium-ranking
  officials of both its anti-tax avoidance team

12
Examples of Fraud and Corruption Statistics
from China

• 82 of major fraud cases involve companys own
  employees
• 23 of applicants have used false names
• 19 of applicants have lied about their criminal
  records
• Sources ASSC, Maxima plc

• Secret commissions/kickbacks (43)
• Expense accounting (29)
• False invoicing (27)
• Others purchases for personal use, cheque
  forgery, price fixing

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China Higher Fraud Risk Areas
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