In China, all kinds of outbound payments are closely monitored by both tax authorities and foreign exchange departments, and these outbound payments can be divided into goods trade payments and non-goods trade payments. Non-goods trade payments are mainly service fees, interest, royalties and dividends.
The process for Chinese companies to make goods-trade payments to overseas suppliers is relatively straightforward, as the authenticity of the transactions and related data can be verified by customs, while non-goods trade payments are more complex, especially for inter-company transactions. Here are some key points to consider from tax perspective:
(1) Risk mitigation strategies:
-Conduct regular transfer pricing studies to ensure arm's length pricing of intercompany transactions.
-Maintain comprehensive documentation for all cross-border payments, including contracts, invoices and proofs of service or goods received.
-Stay abreast of changes in tax laws and double taxation treaties between China and other countries.
-Consider requesting advance rulings or consultations with tax authorities for complex or high-value transactions.
(2) Compliance and reporting:
Currently, there are two methods of reporting of non-goods trade payments to tax bureau, visiting tax bureau personally or using the most popular method: e-tax bureau. No matter taking which method, the companies should ensure timely and accurate reporting of the contracts and payment information based on tax authorities' requirements.
For the contracts reporting, taxpayers need to choose the income items of payment based on the content of the contract, and the contract filing information is not the same for different income items. Generally speaking, taxpayers need to fill in the contract name, contract period, contract currency and amount, and whether the parties to the contract are related parties. Besides, the copy of contract, invoice, and their Chinese translation are also required to be uploaded via the e-tax bureau.
For the oversea payment taxation reporting, taxpayers are only required to do this reporting when a single payment exceeds the equivalent of $50,000 for the first time payment, and the reporting information includes: bank information, contract information , payment amount and predicted payment date etc..
After Chinese companies complete the above reporting, they could process the payment with their banks. While, they shall withhold and pay the relevant taxes within seven days from the date when the payment is made.
(3) Professional assistance:
According to our experience, due to the lack of understanding of tax regulations on tax-related items of non-goods trade payment, domestic companies often face issues such as unclear division between domestic and foreign income, incorrect application of tax rates, failure to withhold and pay taxes on time, and using inaccurate exchange rates. These problems result in their failure to properly fulfill their tax withholding obligations, leading to significant tax risks for the company. Given the complexity of China's tax regulations and the potential risks involved, it's advisable to seek professional assistance from tax experts or firms specializing in China tax matters.
By following these guidelines and remaining vigilant about compliance, companies can better manage their tax risks associated with outbound payments from China.
