Partnership interest tax, incentives in Western China, value-added (VAT) pilot program for Beijing delayed, and VAT compensation and zero-rated services regulations in Shanghai:
1) Limited partnerships have become increasingly popular as investment vehicles because of advantages such as flexibility, efficiency and taxation. Now, the State Administration of Taxation is considering imposing a higher profit tax rate of 35% to 40% on the difference between the initial public offering price for an interest and the interest holder’s original investment under the Draft Implementing Measures for Income Tax on Partnership Enterprises and Partners. If adopted, the tax, which is higher than the 25% corporate income tax, would apparently be levied on both realized and unrealized income at the time of the public offering.
2) Enterprise Income Tax (EIT) incentives in western areas of China had expired according to statute in December, 2010. They have been replaced by similar incentives under the Notice Regarding The Implementation of Enterprise Income Tax Policies for The Development of The Western Regions, issued by the State Tax Administration on April 6th, which extends previous incentives to December, 2020. Further, businesses falling within the relevant Catalog for Encouraged Investments can qualify for a reduction of EIT from 25% to 15% or any lower rate offered by other incentive programs. “Encouraged investments” include a broad range of projects. The EIT reduction adds to the attractiveness of cheaper land and labor and an investor friendly environment for many project in Western China cities such as Chongqing, Chengdu and Xi’an.
3) Following Shanghai’s successful experience, Beijing applied to replace the business tax with VAT on transportation and certain modern services, such as research and development, information and technology services, and logistics. The Beijing authorities issued forms on their website for use by companies affected by the pilot program, which was expected to commence on July 1st. Now, however, the program appears to have been delayed nationwide (except the program already in effect in Shanghai) until October of this year.
4) The Shanghai taxation bureau issued a notice providing financial compensation for Shanghai companies whose tax burden increased when the business tax was replaced with VAT for certain services. Shanghai is applying to expand its pilot VAT program to financial services, telecommunications and lifestyle services.
5) The State Aministration of Taxation issued the Administrative Measures on the Exemption, Offset and Refund Policy for Zero-rated VATable Service in the Pilot Areas on April 5th, setting out rules to implement zero-rating for international transportation services, and for export of research, development and design services. Under such rules, foreign purchasers of zero-rated services do not pay VAT (and the seller’s input VAT thus cannot be credited against its output (sales) VAT), but they do permit the seller to apply for refund of input VAT on such services that cannot be offet against the seller’s total output VAT.