Tax Transformation from Business Tax to Value-Added Tax in China

The State Administration of Taxation has issued the Provisional Measures of Applying the Exempt, Credit and Refund Method to Zero-rated Value-added Tax Services in Their Transformation from Business Tax to Value-added Tax under the Pilot Program (the “Provisional Measures”) on April 5th, 2012, which has retrospectively become into effective since January 1st, 2012.

The main contents of the Provisional Measures are as follows:

1. The exempt, credit and refund method (the “ECR”) means when the zero-rated VAT services is provided, the Services Provider will be exempted from VAT, the relevant input VAT will credit the payable VAT, and the rest of the input VAT will be refunded.

2. In the pilot area, the legal entity and individual who provide the zero-rated value-added tax (the “VAT”) services and who are deemed to be general taxpayers (the “Services Provider”), are applied the zero-rated VAT and the exempt, credit and refund method, but are not allowed to issue the exclusive VAT invoice under the pilot program.

3. Scope of the Zero-rated VAT Services

a. International Transportation Service, including:

-- Transportation of travelers or goods from inside to outside China;
-- Transportation of travelers or goods from outside to inside China;
-- Transportation of travelers or goods outside China.

However, the transportation of travelers or goods from inside China to the special areas and places supervised by China customs, the transportation of travelers or goods from the special areas and places supervised by China customs to other areas and places inside China, and the transportation of travelers or goods in the special areas and places supervised by China customs are excluded from the scope of the zero-rated VAT service.

b. Provision of the Research and Development Service or Design Service to an abroad entity

The provision of the research and development service or design service to the special areas and places supervised by China customs is excluded from the scope of the zero-rated VAT service.

4. Before the Service Provider apply and file for the ECR of the zero-rated VAT services, it should apply for the identification of the export refund or exemption in the competent tax authority.

The Provisional Measures has been issued in order to interact and ensure that the pilot program of the transformation from business tax to VAT can be successfully preceded. The tax transformation from business tax to VAT now is only piloted in Shanghai and we believe it will be extended to more cities in the near future.

by UBILLA & CIA

Adjustment of the Standard of Social Security Payment

Shanghai Human Resources and Social Security Bureau issued the New Standard of Social Security Payment in Shanghai (the “New Standard”) on March 31st, 2012. The New Standard has come into effect on April 1st, 2012 and will expire on March 31, 2013.

The New Standard increases the payment base (the “Base”), which refers to the number used to calculate the amount of the social security payments, as stated at lostsscard.com.

The new standard regarding the upper limit and the lower limit of the Base are summarized as follows:

1. The Base
The Base of the social security payments should be the actual salary of the employee, however, the upper limit is RMB 12,933 and the lower limit is RMB 2,599. In other words, if an employee’s actual salary is over RMB 12,933, his/her Base of the social security payments should still be RMB 12,933, and if an employee’s actual salary is below RMB 2,599, his/her Base should still be RMB 2,599.

2. The Cost
The cost of the social security payments should be born divided as follows:

Born by the employee: 11% of the Base;
Born by the employer: 37% of the Base.

The amount of the social security payment is a percentage of the Base. Since the Base is increased every year, the social security payment will be increased accordingly.

by UBILLA & CIA

New Edition of Catalogue for the Guidance of Foreign Investment Industries

The Catalogue for the Guidance of Foreign Investment Industries (Amended in 2011) (the “Catalogue”), which shall come into force as of January 30th, 2012 and replace the old version of the Catalogue promulgated on October 31, 2007.

The new Catalogue includes 473 items in total - 354 encouraged items, 80 restricted items and 39 prohibited items.

The major amendments to the content of the new Catalogue are as follows:

a. The opening-up has been further expanded.

In addition to 3 new encouraged items, 7 original restricted items and 1 original prohibited item are cancelled. Meanwhile, restrictions over the proportion of foreign equity in certain areas are cancelled.

b. Promote the Reform and Upgrade Manufacturing Industry

High-end manufacturing industries are designated as key areas in which foreign investments are encouraged. In terms of encouraged items, new products and new technologies in textile, chemical and mechanism manufacturing industries are added while automobile manufacturing industry is cancelled. Besides, poly-silicon and coal chemical industries are also cancelled in order to relieve the problems of surplus production capacity and irrational redundant construction in these industries.

c. Develop Strategic Emerging Industries

Investments in strategic emerging industries are encouraged, such as energy-conserving and environment-protective industries and new generation of information technology industries. For example, pivotal parts of new-energy automobiles and equipments for the next generation of Internet system based on IPv6 are added to the encouraged items. LCD panel of the encouraged items is specified to be more advanced than 6th generation.

d. Promote the Service Sector

Foreign investment in modern service sectors are encouraged for the purpose of industrial reconstruction. Regarding service sector in the new Catalogue, nine encouraged items are added, including charging station for motor vehicles. Foreign-invested medical institution and financial leasing companies are changed from restricted items to permitted items.

e. Achieve Balanced Development among Different Regions

For the purpose of industrial transfer and regional development, some encouraged items released from the new Catalogue will be taken into consideration during the amendment of Catalogue of Advantaged Industries for Foreign Investment in the Central-Western Region.

Conclusion

The amendments mentioned above revolve closely around the theme of accelerating the economic reform in the direction of China’s economic development, and place great emphasis on improving the foreign investment structure, promoting technological innovation, as well as upgrading industries.

by UBILLA & CIA

China's National People's Congress Issued New Individual Income Tax Law

China's National People's Congress issued the new Individual Income Tax Law (the "IITL") on June 30, 2011, which will enter into force on September 1, 2011.

The new IITL was modified based on the current IITL (issued on December 29, 2007) and the major changes were made as follows:

1. Taxable Threshold

The minimum amount of the taxable threshold for individual income tax payments by Chinese employees has been increased from RMB 2,000 to RMB 3,500, which means that Chinese employees who earn less than RMB 3,500 per month will not pay individual income tax.

However, the minimum amount of the taxable threshold for individual income tax payments by foreign employees has not been changed. It still remains RMB 4,800.

2. Bracket System of Tax Rates

The corresponding part of the salary amount will be taxed according to the new tax rates stipulated in the new IITL.

Please refer to the form below to compare the tax rates before and after September 1, 2011:

Comments

According to the new IICL, the taxable threshold will be raised to RMB 3,500 and the tax rates will also be changed, which will lead to the following results:

a. The low-income employees (whose monthly salary is below RMB 3,500 per month) will benefit from this new taxable threshold and they will not bear the tax burden.
b. The tax burden on the salary of the employees (whose monthly salary is more than RMB 3,500) will be decreased according to the new taxable threshold and tax rates.
c. Employers (companies) will indirectly benefit from the new IICL and reduce the employment cost.
d. Although the new taxable threshold will not apply to the foreign employees (it will remain RMB 4,800), the new tax rates in new IICL will be applied to the foreign employees, which means that the tax burden on the salary of the foreign employees will also be decreased.

by UBILLA & CIA

New Detailed Rules Regulating Value-added Tax and Business Tax of China

The new Detailed Rules of the Provisional Regulations on Value-added Tax of the People’s Republic of China (the “VAT Rules”) and the new Detailed Rules of the Provisional Regulations on Business Tax of the People’s Republic of China (the “Business Tax Rules”) were issued by the Ministry of Finance and the State Administration of Taxation on October 28, 2011 and will become effective as of November 1, 2011.

According to the VAT Rules and the Business Tax Rules, the minimum thresholds of the Valued-added Tax (the “VAT”) and the business tax are increased. The specific rules are as follows:

The scope of the increased minimum threshold of VAT:

The scope of the increased minimum threshold of business tax:

Conclusion

Compared to the previous regulations in this regard, the minimum thresholds of both VAT and business tax have been increased, which means a reduction of the tax burden over enterprises, especially the “mini” and small enterprises whose tax to be paid will be substantially influenced by the threshold changes. These new rules are regarded as part of structural tax reduction of the taxation reform of China, which aims to further reduce the tax burden of the enterprises and promote their development.

by UBILLA & CIA

Administrative Measures of Shanghai Municipality on Pharmaceutical Prices (Trial Implementation)

Administrative Measures of Shanghai Municipality on Pharmaceutical Prices (Trial Implementation, the “Measures”) were issued by Shanghai Development and Reform Commission on July 29, 2011. The Measures will be effective as of September 1, 2011.

The main contents of the Measures are as follows:

1.- Scope of Applicaiton

All the pharmaceutical manufacturers, distributors, retailers (including pharmacies) and medical institutions in Shanghai

2.- Forms of Pharmaceutical Price-Fixing

a. Government Fixed-price
Shanghai price administration authorities fix the price of pharmaceuticals which are included in the list of pharmaceuticals selected by National Development and Reform Commission (“NDRC”) and Shanghai price administration authorities. The selling price of pharmaceuticals in this List should be the same as the price fixed by the authorities.

b. Government Guidance Price

NDRC fixes the government guidance price of pharmaceuticals in the range of:

i. Prescription pharmaceuticals which are included in the List of National Basic Medical Insurance;
ii. Pharmaceuticals which are included in the List of National Basic Pharmaceuticals;
iii. Some special pharmaceuticals (including pharmaceuticals of psychotropic, narcotic, immune, fertility, etc.).

Except the pharmaceuticals mentioned above, Shanghai price administration authorities fix the government guidance price (the highest price of retailing price in Shanghai) of pharmaceuticals in the range of:

i. Non-prescription pharmaceuticals (“OTC” - Over The Counter) which is included in the List of National Basic Medical Insurance;
ii. Pharmaceuticals which are included in the List of Shanghai Basic Medical Insurance;
iii. Chinese traditional pharmaceuticals which enjoy the benefit of medical insurance reimbursement;
iiii. Pharmaceuticals made by the hospitals, etc.

The selling price of pharmaceuticals mentioned in this section shall not be more than the maximum price of retailing price in Shanghai.

c. Market Adjustment Price

The price of other pharmaceuticals which are excluded from the part a) and b) is fixed by pharmaceutical companies autonomously according to market conditions. Then the price shall be submitted to the relevant industry association for assessment. The industry association will publish the highest retailing price to adjust the retailing price of pharmaceutical companies.

3.- Methods of Price-fixing

a. Price of Similar Pharmaceutical Products

The price of pharmaceuticals entering into Shanghai’s market for the first time shall be fixed in light of the highest retailing price of the same kind of pharmaceuticals being sold in Shanghai’s market according to relevant regulations. This price should be the highest retailing price of new pharmaceuticals to be sold in Shanghai.

b. Centralized Bidding

Firstly, the reasonable bidding price is fixed through normative price evaluation by way of public bidding and internet purchase. Secondly, based on the bidding price, Shanghai price administration authorities publish the hospital supply price and highest retailing price according to the Rules of Increase of Pharmaceutical Price.

c. Information of Market Price and Pharmaceutical Bidding Price.

Shanghai price administration authorities adjusts pharmaceutical highest retailing price dynamically based on the information of market pharmaceutical price in Shanghai & surrounding provinces and the bidding price fixed during the centralized purchase by medical institutions.

Conclusions
Pharmaceutical price-fixing mechanism is one of the crucial parts of health care reform of China. However, national measures on management of pharmaceutical prices have been informed for public comments but the formal measures have not been issued. The Measures were issued according to the principle of pharmaceutical price-fixing and management. Although the Measures were issued as a trial implementation, they are regarded as an important guidance to regulate the pharmaceutical prices in Shanghai.

The Measures just indicate the framework of the pharmaceutical price-fixing and management. However, the Measures don’t regulate the specific operational rules regarding the fixing of pharmaceutical prices. Moreover, the Measure shall be subject to national measures on pharmaceutical prices to be issued by NDRC. Therefore, the Measures shall be improved and adjusted in the following months after its implementation.

by UBILLA & CIA

New Policy on Social Insurance for Foreign Employees in China

The Ministry of Human Resources and Social Security issued the Tentative Measures for Social Insurance Enrollment of Foreign Employees in China (Draft for Comments) (the "Tentative Measures") on June 10, 2011.

The main contents of the Tentative Measures are as follows:

1.- Scope of Application

A company together with its foreign employee shall pay the social insurance in one of the following cases:

1. A foreign employee working in a company, public institution, non governmental organization, private non-enterprise unit, foundation, law firm, or accounting firm which is legally established in China;
2. A foreign employee working for a foreign enterprise and is being dispatched to the branch or representative office of the foreign enterprise which is legally established in China.

2.- Social Insurance Benefits

2.1 Withdrawal of Social Security Amounts

If a foreign employee submits a written application, the amount in his/her individual account can be paid back to him/her and the relationship of the social insurance will be terminated.

2.2 Reserve Social Security Amounts

If a foreign employee terminates his/her labor relationship before the retirement age has been arrived, his/her individual account of the social insurance will be reserved, and if he/she continues his/her labor relationship in the future, the years of his/her payments of the social insurance will be continued and accumulated.

3. Inheritance

If a foreign employee dies, the amount in his/her individual amount can be inherited by his/her successor.

4. Dispute Resolution

If there is a dispute regarding the social insurance between a company and its foreign employee, the mediation, arbitration or lawsuit can be raised by either party.

The Tentative Measures are only a draft for comments. If it is adopted and promulgated, the expenses of the company, the branch or the representative office will be increased, since the company, the branch or the representative office shall pay part of the social insurance for its foreign employee. However, the detailed measures of the social insurance for foreign employees, including but not limit to the percentages to be paid by the company and the foreign employee, the age of retirement of the foreign employee, or whether the social insurance is mandatory or voluntary, will be clear after the Tentative Measures is promulgated.

by UBILLA & CIA

Capital Contributions by Equity: Available to Foreign Invested Enterprises in China Soon

On May 4th 2011, the Ministry of Commerce (“MOFCOM”) issued a Draft of the Management Measures regarding Capital Contribution by Equity to Foreign Invested Enterprises (“FIEs”) for public comments ("Draft Measures"). The deadline for the submission of comments was May 20th, 2011.

According to the current laws and regulations, the form of capital contribution to the FIE shall only include cash and non-monetary assets which are transferable and can be economically assessed, such as tangible assets, intellectual property, land use right, etc.

On January 14, 2009, the State Administration of Industry and Commence issued Measures on the Registration of Capital Contributions by Equity, which stipulated that capital contributions by equity to Chinese domestic enterprises were allowed. However, capital contributions by equity to the FIEs were excluded in this regulation at that time.

The promulgation of the Draft Measures creates a new method of investment for local and foreign investors, which means that investors are allowed to use equity as the capital contribution to a FIE.

The main points of the Draft Measures are as follows:

1.- The Definition of Contribution by Equity

Capital contribution by equity refers to the act of using investors’ equity in domestic enterprises as the capital contribution in order to establish the FIE.

The FIE establishment includes the following scenarios:

1. Incorporating a FIE by establishing a new legal entity;
2. Changing a domestic enterprise to a FIE by increasing capital of the domestic enterprise;
3. Change the equity structure of a FIE by increasing the capital of the FIE.

2.- Requirements regarding the Equity

Under the following circumstances equity can not be used as the capital contribution to a FIE:

1. The investor’s equity to be contributed to a FIE in the Chinese domestic enterprise has not been fully paid;
2. The investor’s equity has been pledged or is legally frozen;
3. The investor’s equity is nontransferable according to the Article of Association of the Chinese domestic enterprise;
4. The equity of a FIE which didn’t apply for or pass the annual inspection;
5. The equity of Foreign Invested Investment Enterprises or Foreign Invested Equity Investment Enterprises;
6. The equity transfer has not been approved by the authorities;
7. Others.

3.- Equity Value Assessment

The equity to be contributed to a FIE must be assessed by a domestic evaluation agency established in accordance with the PRC law. Based on the value assessment of the equity reported by the domestic evaluation agency, the investors shall fix the final value of the equity and the equity amount to be contributed to a FIE.

The final value of the equity shall not be higher than the assessed amount of the equity.

4.- Proportion of Forms of Contribution

The aggregate value of the contribution by equity and other non-monetary capital contributions made by all shareholders of the FIE shall not exceed 70% of the registered capital of the FIE.

5.- Procedural Regulations

The Draft Measures also stipulate the procedural regulations including the documents to be provided for the registration change with the authorities, the authorities who are in charge of the approval of equity contribution, etc.

Conclusion

Even though the Draft Measures are only a draft for public comments and observations, they show that the Chinese government intends to further promote the development of investment by creating a new mean of capital contribution to the FIE in China. The Draft Measures also stipulate the corresponding requirements and procedures which will certainly facilitate the authorities’ examination and approval. Investors should keep a close eye on the final “Measures” which will probably be issued by the authorities in the following months.

by UBILLA & CIA

Adjustment of the Standard of Social Security Payment

Shanghai Human Resources and Social Security Bureau issued the New Standard of Social Security Payment in Shanghai (the “New Standard”) on March 31, 2011. The New Standard has come into effect on April 1, 2011 and will expire on March 31, 2012.

The New Standard increases the payment base (the “Base”), which refers to the number used to calculate the amount of the social security payments.

The new standard regarding the upper limit and the lower limit of the Base are summarized as follows:

The amount of the social security payment shall be a percentage of the Base. Since the Base is increased every year, the social security payment will be increased accordingly.

by UBILLA & CIA

Interim Rules on Implementation of a Security Review System regarding M&A Transactions Executed by Foreign Investors over Domestic Enterprises

On March 4th 2011, Ministry of Commerce (“MOFCOM”) issued the Interim Rules on Implementation of a Security Review System regarding M&A Transactions Executed by Foreign Investors over Domestic Enterprises (the “Interim Rules”), which will come into effect on March 5th, the same day the Notice on the establishment of a security review system regarding merger and acquisition (“M&A”) transactions over domestic enterprises executed by foreign investors (“the Notice”) comes into effect.

The Interim Rules specify more details with respect to the procedure of national security review. The Interim Rules will play a transitional role in the establishment of national security review system because it will expire on August 31st 2011.

1. Initiation of National Security Review

The Interim Rules provide that if M&A transactions executed by foreign investors over domestic enterprises clearly fall within the national security review scope stipulated in the Notice, the foreign investor (the “Applicant”) shall apply for this review to MOFCOM. If M&A transactions are conducted by more than one foreign investor, the security review may be applied by the Applicants jointly or by only one of them.

If M&A transactions fall within the national security review scope but are not applied for the national security review to MOFCOM, the general review on M&A transactions will not be accepted by local commercial committee. The local commercial committee shall request foreign investors to apply for the national security review to MOFCOM in writing.

2. Function of MOFCOM

The Applicant should submit relevant documents to MOFCOM. If the documents are complete and meet legal requirements, the Applicant will be notified in writing that the security review application is accepted by MOFCOM within 15 working days after the reception of the application by MOFCOM.

After receiving the official acceptance of MOFCOM, the Applicant is not allowed to implement the M&A transaction within 15 working days after the written notice of the official acceptance is received by the Applicant. If MOFCOM doesn’t notify the Applicant within 15 working days, the Applicant may proceed to implement the M&A transaction.

The Interim Rules also provide that the Applicant may apply for the pre-filing consultation to MOFCOM with respect to procedural issues before officially applying for the national security review.

3. Review Decisions

The Interim Rules provide three kinds of review decisions by the joint committee (“Joint Committee”):

1. No impact on national security

   If the transaction will not impact national security after the security review, the Applicant can apply for the general M&A review and other relevant approvals according to various foreign investment regulations;

2. Potential impact on national security

   If the transaction may impact national security, the Applicant can not apply for the general M&A review or other relevant approvals until the Applicant amends the transaction plan, the application documents and re-submits them for security review;

3. Actual or potential severe impact on national security.

   If the transaction has already impacted or may severely impact the national security, the M&A transaction will be prohibited. Measures, such as share transfer and assets transfer, will be required by the authority to eliminate the impact on national security caused by this M&A transaction.

Comments

The Interim Rules specify some details on the national security review application procedure, such as documents to be submitted and the review decisions by the Joint Committee. It will facilitate the review application and increase the transparency of the review. Meanwhile, the Interim Rules stipulate the function of MOFCOM, which have clarified the uncertainty regarding the function of MOFCOM in the Notices and will help MOFCOM to better supervise the M&A transactions.

The Interim Rules will expire on August 31, 2011. Any suggestion or comments from the public are encouraged to provide to MOFCOM until April 10 2011, and MOFCOM may adjust the Interim Rules according to the public’s suggestion or comments after the expiration of the Interim Rules. This arrangement in the Interim Rules clearly indicates that MOFCOM and the relevant authorities will evaluate the review procedure system established in the Interim Rules during the effective period and improve the specific regulations in the Interim Rules later.

by UBILLA & CIA