when untrapped cash is taxed cash news from the · pdf filewhen untrapped cash is taxed cash...
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When untrapped cash is
taxed cash
News from the Zones
Michael Velten
Partner: Deloitte & Touche LLP
23 May 2014
Singapore
Preface
Any discussion about RMB reforms inevitably turns to tax.
Trapped cash may simply mean cash that the tax cost of moving is prohibitive.
Companies may choose to leave cash in China for many reasons – including when
the demand for it resides physically in China, and the fact that leaving it on deposit
can yield relatively highly – but new regulations may mean companies can benefit
from increased connectivity of cash balances.
Developments in the Shanghai pilot Free Trade Zone (FTZ) are particularly
significant. Two-way lending offshore is beginning to emerge, but tax regulation
appears opaque in some instances.
How far has the tax regime been clarified and how can your company engage with
the authorities?
© 2014 Deloitte & Touche LLP 2
3 © 2014 Deloitte & Touche LLP
Cash repatriation from China
Outbound remittances from China: Recent developments
Shanghai FTZ: An overview
Treasury innovation in the Shanghai FTZ
Tax considerations
Contents
Cash repatriation from
China
© 2014 Deloitte & Touche LLP 4
The conventional ways of cash/profit repatriation
Challenges
• Regulatory limitation on outbound
lending and dividend distribution
• Complicated documentation
requirements and time consuming
process
• Uncertainty on tax treatment
After tax Before tax
© 2014 Deloitte & Touche LLP 5
Outbound remittances
from China:
Recent developments
© 2014 Deloitte & Touche LLP 6
Outbound remittances from China What is happening now
Relaxation of tax
procedures for
outbound payments
Bulletin [2013] No. 40 and Huifa [2013] No. 30 remove the
requirements of tax clearance certificate for outbound
payments
Relaxation of regulatory
procedures for dividend
distribution
Huifa [2014] No.2 simplifies the remittance procedure for
dividend distribution
Direct overseas lending Domestic entities are allowed to make loans to overseas
affiliates according to Circular Huifa [2014] No.2.
Relaxation of regulatory
procedures for
outbound investment
Guo Fa [2013] No. 47 replaces the approval requirement with
reporting requirement for outbound investments
© 2014 Deloitte & Touche LLP 7
Overseas remittance
New rules SAFE (Huifa [2013] No. 30)
“Huifa 30”
• Documentation requirements simplified
− Transaction documents and tax clearance certificate no longer required for payment no more than USD50K
− Transaction documents verification by bank and Bulletin 40 requirements, if exceeding USD50K
− Registration documents with other government authorities no long required
• Reimbursement first time available to all payers and on national basis (as compared to qualifying MNCs and certain local practices in the past), but within a 12-month time window
• Interim dividend payment is permitted
SAFE & SAT (Huifa [2013] No. 40)
“Bulletin 40”
• Simplified filing applies to payment more than USD 50K (vs. USD 30K under old rule)
− Abolished tax clearance certificate requirement
− Submit ―tax filing form‖ to state tax authority
− Present such form to bank
• Advance clearance vs. post audit
− How realistic for the tax authorities to audit non-residents
• Local practice not necessarily simplified – scrutiny intensified
• No relief on tax/withholding obligation
SAFE
(Huifa [2014] No. 2)
“Circular 2”
• Procedures for dividend distribution simplified (see next slide)
• Distribution cap at retained earnings removed
• Overseas lending generally capped at 30% of total equity; tenure of the loan no longer limited to two years
© 2014 Deloitte & Touche LLP 8
Dividend distribution
Relaxation of regulatory procedures
Documents needed by remitting bank; when repatriating dividends offshore
Before 1 Sep 2013
1 Sep 2013 – 10 Feb 2014 “Huifa 30” & “Bulletin 40”
Effective 10 Feb 2014 “Circular 2”
not exceeding USD 50K
exceeding USD 50K
not exceeding USD 50K
exceeding USD 50K
• Tax clearance certificate Yes No No No No
• Tax filing form N/A No Yes No Yes
• Audit report on profits, dividends and bonuses of the year issued by an accounting firm
Yes No Yes No No
• Resolution of the board on distribution of profits, dividends and bonuses
Yes No Yes No Yes
• Capital contribution verification report issued by an accounting firm
Yes No Yes No No
Frequently Asked Questions
• Can dividend be repatriated exceeding retained
earnings (conflict with FIE Law)? What is the PRC tax
implication of a distribution in excess of the earnings?
• Local implementation (e.g., financial statement and tax
return may still be required at some locations)
• Can dividend be repatriated more than once a year
(e.g., quarterly/semi-annually)?
• Can treaty benefit apply to reduce WHT rate (tightened
beneficial ownership requirement)?
© 2014 Deloitte & Touche LLP 9
Direct overseas lending
Key considerations
• Foreign currency loans
–Generally capped at 30% of total equity; tenure of the loan no longer limited to 2 year
• RMB overseas lending:
–No cap; longer term; bank to process
• Implementation status of the rule in local practice
• Business tax on interest income and stamp duty on the loan agreement
• Risk of the loan being re-characterized as dividends
Before December 2012: Foreign currency loan was limited to the overseas subsidiary of a domestic company
Effective December 2012: SAFE issued Circular No. 59 allowing foreign currency loans to be made to overseas parent
Effective February 2014:
SAFE issued Circular No. 2 on
January 24, 2014 allowing
foreign currency loans to be
made to overseas affiliates
PBOC rules relax RMB
overseas lending
December 2012 January 2014
July 2013
© 2014 Deloitte & Touche LLP 10
Relaxation of regulatory procedures for outbound
investment On 2 December 2013, the State Council issued Guo Fa [2013] No. 47 - the
Investment Project Catalogue Subject to Government Approval (2013 Version).
Circular 47 relaxed the regulatory procedure for certain outbound investment
projects by replacing the approval requirement with reporting requirement.
Projects subject to approval Projects subject to reporting
Offshore
projects
a) Approval by Investment
Department of State Council
• Projects with investment from the
Chinese party of over USD1 billion
• Projects in sensitive countries,
regions or sensitive industries
a) Reporting to Investment
Department of State Council
• Investment made by enterprises
managed by central government
• Investment with amount of US$300
million or more made by local
enterprises
Establishment
of Offshore
enterprises
a) Approval by Ministry of Commerce
• Establishment of offshore
enterprises (other than financial
enterprises) in sensitive countries,
regions or sensitive industries
a) Reporting to Ministry of Commerce
• Establishment of offshore
enterprises (other than financial
enterprises) by enterprises
managed by central government
b) Reporting to provincial government
• Establishment of offshore
enterprises (other than financial
enterprises) by local enterprises
© 2014 Deloitte & Touche LLP 11
12 © 2014 Deloitte & Touche LLP
SFTZ – overview
September 2013
October 2013
2014
• Overall Framework Plan released (released
on 27 September, but effective from 18
September)
• Shanghai Pilot FTZ Administrative
Committee established (28 September)
• Shanghai Pilot FTZ officially launched, and
Negative List released (29 September)
• Foreign Investment Law
suspended in Shanghai Pilot
FTZ (1 October)
• Shanghai Pilot FTZ
Administrative Measures
implemented (1 October)
• Specific pilots: continued rollout
expected
• National level
Administrative
Regulations
• Pilot full
implementation
expected (2014)
Premier Li Keqiang
―Opening-up its [China] economy is an
approach to stimulate domestic demand and
push a new round of reform…
It is time to find a new pilot program. With its
ability and its achievements, Shanghai must
fuel reform through opening-up its economy
and there is still huge potential to realise this…
Based on the existing comprehensive bonded
zones, Shanghai is encouraged to … study,
pioneer and establish a Pilot FTZ‖
Late 2012 March 2013 July, August 2013
• China Central Economic
Working Conference
recommended
acceleration of “free
trade area” strategy
• Standing Committee of
Shanghai Municipal
People’s Congress issued
regulation to establish
the Shanghai FTZ
• Shanghai Pilot FTZ
framework approved in
principle by State Council
(July 3)
• Approval on suspension of
the application of foreign
investment law in Shanghai
FTZ by Standing Committee
of the National People’s
Congress (August 30)
China (Shanghai) Pilot Free Trade Zone Timeline so far
© 2014 Deloitte & Touche LLP 13
The SFTZ framework
Overall objective
• The SFTZ aims at piloting a number of economic reform initiatives, supporting China’s desire to
open to foreign trade and investment
• Learnings from this pilot will be incorporated into additional free trade zones, on the journey to an
open Chinese economy
Footprint
• Combined area of 28.78 km²
– Waigaoqiao free trade zone & bonded logistics zone
– Pudong airport free trade zone
– Yangshan bonded port
Scope
• The reforms are rooted in 4 areas (trade, investment, administration, and finance), across
6 sectors (financial services, transport, commerce and trade, professional services, culture, and
public services)
• The scope is quite narrow at present, limited by the “negative list” [See next slide]
SFTZ
framework
Trade reform
• RMB cross-border usage
• Cross border investment and transactions
• Off-shore trade
• Re-export hub
Investment
reform
• Market access restrictions, mainly affecting foreign investors, will be lifted
• Tax reform measures to be confirmed
Administrative
reform
• Relaxed rules for registration of foreign companies
• Simplified process for ongoing compliance to local regulations
• Investor protective measures (e.g., protection of intellectual property, anti-monopoly measures)
Financial reform
• Free-flow of capital
• RMB capital accounting liberalization
• Off-shore financial center
• Free trade multi-currency accounts for residents
• Potential for interest rate liberalization
© 2014 Deloitte & Touche LLP 14
Restrictions in addition to
the negative list
The negative list
Items on the negative list
• Refer to the catalogue for the Guidance of
Foreign Investment Industries, all of the
prohibited and restricted industries
unless modified by negative list
• Encouraged industries: provisions
containing the wording ―Equity Joint Venture
(EJV) or Cooperate Joint Venture (CJV)
only‖, ―EJV only‖, ―relatively controlled by
the Chinese side‖, ―controlled by the
Chinese side‖, ―CJV or partnership only‖
• Permitted industries: with additional
requirements in existing rules and
regulations, for e.g., wholesale of salt
Restrictions in addition to negative list
• Pre-approvals still required even for
domestic investment projects as
stipulated by the State Council
• Foreign investors are prohibited (or
restricted) from investment: in industries
that are prohibited (or restricted), in
projects and activities that compromise
national or public security, and the
business compromise public interest
• Negative list does not apply to public
management, social security, and social
organizations; international
organizations
Areas outside negative list
–reporting applies in place
of pre-approval
Special approval /
examination
required
Current restrictions on market
access for foreign investment
Without
modification
Items not on the negative list
• Pre-approval of foreign invested projects
and foreign investment entity (FIE) set-up
no longer required
• 6 relaxed service industries: listed in the
appendix of the framework plan
• Former relaxations: for e.g., Hong Kong,
Macau, and Taiwan investors entitled to
the more favorable treatment, if any,
available under Closer Economic
Partnership Agreements and Cross-Straits
Agreements
The following existing
regulations still applicable
• Foreign investors undertaking
M&A, strategic investments in
listed companies, capital
contributions using equity
interest of domestic
companies
• National security or
anti-monopoly investigations
© 2014 Deloitte & Touche LLP 15
SFTZ Tax incentives
Explicit policies Main content
Promote
investment
• Income tax payment (within 5 years) on income derived from
the increase in asset valuation may be paid within 5 years
• Individual income tax incentive in relation to awards to certain
employees in short supply by means of shares or capital
contributions
Promote trade
• Export tax refund for financial leasing companies or the project
related subsidiaries of financial leasing companies
• An aircraft with a dead weight of 25T or greater is entitled to the
preferential import VAT treatment
• The policy that charges custom duties on the domestically sold
goods will be implemented on a trial basis
• Goods imported by the production-oriented enterprises and
production-oriented service enterprises may be exempted from
taxes
• Improve the tax rebate trial policies at the port of departure
© 2014 Deloitte & Touche LLP 16
People's Bank of China (PBOC) financial
guidelines
General principles
• Finance shall always serve real economy
• Stick to the reform and innovation
• Maintain the risk and steadily progress
the reform
Monitoring and administration
• Obligations of institutions inside the Free
Trade Zone (FTZ)
• Categorized administration and
assessment for non-financial institutions
in the zone
• Take temporary measures due to certain
circumstances
General principles
Bank account system innovation
4 reform
aspects
Convertibility of currency for
financing and investment
Enhancement of
cross-border use of RMB
Boost of interest rate
liberalization
Deepening reform in foreign
exchange administration
Monitoring and administration
© 2014 Deloitte & Touche LLP 17
Expanded cross-border use of RMB
Notification of PBOC Shanghai Headquarter to support China (Shanghai) Pilot Free
Trade Zone on enhancement of cross-border use of RMB (Yinzongbufa [2014]
No.22)
• All encouraging and supportive policies on enhancement of cross-border use of RMB
promulgated by the state are applicable in pilot zone
• Cross-border RMB settlement for items under current accounts and direct investment –
simplified procedure
• Personal banking settlement accounts – eligible personnel
Specific
businesses
• Overseas RMB borrowing – introduction of new quota concept
• Cross-border RMB cash pooling – leaving banks with more responsibility
• Cross-border RMB Pay On Behalf Of (POBO) / Receipt On Behalf Of
(ROBO) – consolidation of payment under current items with bona fide
business transaction
• Cross-border e-business RMB settlement business – encourage and
support
Administration /
monitoring
• Information reporting
• Anti-money laundering, anti-terrorism financing, and anti-tax evasion
© 2014 Deloitte & Touche LLP 18
Other developments
SAFE Circular [2012] No. 167
• Pilot for MNCs and SOEs
– Foreign currency cash sweeping
– Foreign currency cross-border borrowing and lending [Limit: mid and long
terms lending and borrowing subject to the ―Overseas Lending Quota‖ and
―Foreign Debt Quota‖ approved by SAFE]
– Foreign currency cross-border cash netting for goods transactions; and
– Centralized payment and collection
• Some of the MNCs and SOEs in Beijing and Shanghai joined these pilots from
2012 and the program has expanded to other cities in mid 2013, e.g. Jiangsu,
Zhejiang, Guangdong, Shenzhen and Hubei
PBOC: 2 December 2013 release
• Free Trade Accounts (FTA) – by FTZ resident
– Free funds flow among:
• The FTA and overseas accounts
• Mainland ―non-resident‖ accounts
© 2014 Deloitte & Touche LLP 19
Other developments (cont.)
• Other FTA in the FTZ
• Free Trade Account for Non-resident (FTN)
• The same entity’s other bank settlement account for current account
transactions, loan repayment, industrial investment, and other qualified
―cross-border‖ trading needs
PBOC: 20 February 2014 notice
• Two-way cross-border RMB cash pooling allowed for a multinational group
with an operating entity in the FTZ
– RMB funds limited to cash flows from operating and industrial investment
activities not from financing activities
– POBO / ROBO allowed: may receive and make current account payments of
cross-border RMB on behalf of domestic and foreign related parties
• Related parties include ―non-group members‖, which have supply chain
and close business relationships with the group – i.e., certain third parties
– RMB borrowing from overseas for less than one year not capped – cannot be
used to invest in securities, derivatives, entrusted loans
© 2014 Deloitte & Touche LLP 20
Other developments (cont.)
SAFE: 28 February 2014 notice
• FTZ entity may open a Domestic Foreign Exchange Funds Master Account
(―Domestic Account‖)
– To pool forex (FX) of domestic affiliates from funds from foreign capital and
foreign debt
– POBO / ROBO / netting FX current account payments on behalf of domestic
affiliates
• FTZ entity may open an International Foreign Exchange Master Account
(―International Account‖)
– Free flow of funds with overseas accounts and Domestic Account
• FTZ entity may freely convert capital account FX to RMB
© 2014 Deloitte & Touche LLP 21
Other developments (cont.)
SAFE: 18 April 2014 notice
• FX cash management extended to entities outside of SFTZ
– Innovative bank account system for MNCs
– Convenient utilisation of centralised funds of MNCs
– Simplified review of MNC’s documents
– Consolidated quotas of foreign debt and overseas lending
– ―Negative list‖ management for settlement of capital funds and foreign debts
© 2014 Deloitte & Touche LLP 22
23 © 2014 Deloitte & Touche LLP
Treasury innovation
Offshore RMB (CNH)
account (HK/SG/
London)
Header Special account
in Shanghai
Domestic
TBA sub A/C
1
Domestic
TBA sub A/C
2
Domestic
TBA sub A/C
3
Header entity is
registered in the
SFTZ
China outside SFTZ
Netting center
/ overseas
entities Overseas
Netting /
POBO /
ROBO
Shanghai Free Trade Zone RMB cross border pooling structure
© 2014 Deloitte & Touche LLP 24
Key Features
• Two way cash pooling: Centrally
manage cash flow generated from
operating and industrial investment
activities, not from financing activities
• POBO/ROBO allowed: receive and
make current account payments of
cross-border RMB on behalf of domestic
and foreign ―related parties‖ (includes
―non-group‖ members‖)
• ―Netting‖ of relevant receivables and
payables
Benefits
• China liquidity now accessible
• Can use excess funds from overseas
operations to fund China operations
Shanghai Free Trade Zone Foreign currency cross border pooling structure l (cont’d)
Participant A
FCY accounts
Participant B
FCY accounts
Participant C
FCY accounts
Overseas
pool header
Domestic FX
master account
Cross border FX
master account
(Pool header)
China mainland
Overseas
Key Features
• Funds managed via ―FX Domestic
Account‖ and ―FX International
Account‖. Free flow of funds between
the two accounts
• Subject to foreign debt quota
prescribed by the Shanghai branch of
SAFE.
• Additional capabilities compared to
outside FTZ
‒ A foreign-invested enterprise may
freely convert capital account FX to
RMB
‒ General ceiling for offshore foreign
currency loans raised to 50% of
equity (compared to 30%)
‒ SAFE approval not required for
provision of guarantees to offshore
parties and payment of guarantee
fees to guarantors offshore.
© 2014 Deloitte & Touche LLP 25
26 © 2014 Deloitte & Touche LLP
Tax considerations
The SFTZ tax regime
• The basic tax regime applies in the FTZ
– Corporate and individual income tax
– Withholding tax
– Business tax and VAT
• Some tax concessions
• Not a tax advantaged zone – yet
© 2014 Deloitte & Touche LLP 27
Tax considerations • Concentrate funds at Overseas Treasury Centre or Domestic
Treasury Centre?
• Costs vs benefits: Would tax on intercompany loan outweigh
the benefits of using RMB offshore?
• Interest income from China is subject to withholding tax and
business tax. Can the interest recipient claim foreign tax
credit in full? Is there any withholding tax leakage?
• Beneficial ownership: How does the ―Beneficial Ownership‖
test apply to the cross-border cash pooling arrangements?
• If the overseas lender/pool header is subject to tax in China,
how to fulfill the Chinese tax withholding and reporting
requirements?
• Should the Chinese pool header/participants determine their
taxable income for business tax purposes based on gross
interest or net interest?
Overseas
Co A Co B
Foreign Pool
Header
Cash Pool (RMB or
Foreign Currency)
Co X Co Y
FTZ
China
© 2014 Deloitte & Touche LLP 28
Cash Pooling
Tax Considerations
Tax considerations (cont’d) • Transfer Pricing issues
– Related party transactions under cash pooling includes:
• Intra-group loan between the header and participants
• Contributions by participants
• Performance of administrative role by the header
company
– See next slide Overseas
Co A Co B
Foreign Pool
Header
Cash Pool (RMB or
Foreign Currency)
Co X Co Y
FTZ
China
© 2014 Deloitte & Touche LLP 29
Cash Pooling
Tax Considerations
Cash Pooling Transfer Pricing Considerations
China Transfer Pricing Requirements
• Enterprise Income Tax Law and Implementation
Rules of the PRC, and,
• Circular 2 (Implementation Regulations for
Special Tax Adjustments (Trial))
‒ Arm’s Length Principle
‒ Documentation requirement: ≥ RMB 40 Million
(e.g., interest, service fees and royalties, etc.)
‒ Thin capitalization rule: i.e., debt-to-equity ratio
of 2:1 for nonfinancial enterprises and interests
deductibility
Frequent Concerns from Tax Bureau
• Difference on EIT among cash pool participants
• Arm’s length nature of lending/borrowing rates
and service returns
• Allocation of cash pool benefits / risks
© 2014 Deloitte & Touche LLP 30
Cash management –functions & risks
Treasury Services – service return
Lending and Borrowing – interest rate
Arm’s Length Principle
Cash Pooling Transfer Pricing Considerations (cont.)
Key Transfer Pricing Considerations
• How to fit business needs
• Benefits should commensurate with
functions and risks (―F&R‖)
• Allocation of Cash Pool Benefits
– Netting benefits: spread between short-
term debit and credit market interest
rates remains within the pool for the
netted balance
– Volume benefits: centralizing balances
and certain functions allows interest
savings or refinancing of balance by
more favorable interest terms
• FTZ Specific Considerations
CP: cash pool;
CPL: cash pool leader.
© 2014 Deloitte & Touche LLP 31
Lending/ Borrowing – interest rates
Allocation of cash pool benefits
F&R of participants
Guarantee and credit-
worthiness? FTZ specific
considerations
Compensation for participants
Compensation for CPL
Cash Pooling Transfer Pricing Considerations (cont.)
© 2014 Deloitte & Touche LLP 32
Transfer Pricing Methods
• Comparable Uncontrolled Price
(CUP)
• Cost Plus / Transactional Net Margin
Method (TNMM)
• Profit Split
Functional and risk allocation is a major
determinant for an arm’s length
allocation of the economic cash pool
profit.
Cost Plus Profit Split CUP
Routine
Non-Routine Pool
Participants
Pool Header
Pool Participants
Pool Header
Pool Header
Total Cash Pool Benefits
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