How to get a credit for paying taxes abroad?+ FAQs for cross-border taxpayers and payers

How to deduct taxes paid abroad?

Author: Lu Wenqi Author's Affiliation: Ningbo Zhenhai District Taxation Bureau, State Administration of Taxation

With the continuous advancement of the mainland's high-level opening-up, more and more enterprises are accelerating their overseas strategic layout. According to statistics from the Ningbo tax department, by the end of 2023, there were 874 "going out" enterprises in Ningbo, and more than 80% of the "going out" enterprises belonged to wholesale and retail trade, manufacturing, leasing and business services. In order to avoid double taxation in the international arena, the mainland has introduced a policy of credit for overseas income tax. In the course of practical work, the author has found that some "going out" enterprises have doubts about how to calculate the credit in China for equity investment income such as dividends and bonuses obtained from overseas.

Case Introduction

Company B, registered in Ningbo, is a high-tech enterprise whose business scope includes the production of textiles, textiles and garments, craft toys, sporting goods, etc., and is subject to a preferential corporate income tax rate of 15%. In 2013, Company B set up a wholly-owned overseas production base in Vietnam, Company C, with a total investment of 700 million US dollars, mainly engaged in the production and sales of dyed yarn. From January 1, 2016, the statutory corporate income tax rate in Vietnam is 20%, and Company C can enjoy the preferential tax policy of "four exemptions and nine halves", that is, the enterprise income tax will be exempted for 4 years from the date of taxable income obtained by the enterprise, and the enterprise income tax will be reduced by half within 9 years. From 2013 to 2016, it is the tax holiday for Company C.

Due to the advantages of raw materials, energy and labor cost prices in Vietnam, coupled with the support of local preferential tax policies, Company C has been operating well and has been profitable since 2015. As of December 31, 2016, Company C's cumulative undistributed profit was approximately VND 487.6 billion. On May 14, 2021, the board of directors of Company C made a profit distribution resolution to withdraw about VND 181.4 billion from the undistributed profits in 2016 and distribute it to Ningbo Company B, repatriating about USD 7.84 million, which was converted into RMB 49.93 million at the current exchange rate.

Policy analysis

According to Article 23 of the Enterprise Income Tax Law, the income tax paid abroad for the taxable income of a resident enterprise sourced from outside China can be deducted from the current tax payable, and the credit limit is the tax payable calculated for the income in accordance with the provisions of the Enterprise Income Tax Law. Article 24 of the Enterprise Income Tax Law further clarifies that dividends, bonuses and other equity investment income derived from foreign enterprises directly or indirectly controlled by a resident enterprise from outside China, and the part of the income tax actually paid by the foreign enterprise outside the country that is the burden of such income, can be regarded as the foreign income tax creditable by the resident enterprise and shall be credited within the credit limit stipulated in Article 23 of the Enterprise Income Tax Law. According to the provisions of the CS [2017] No. 84), an enterprise can choose to calculate its taxable income from overseas sources separately by country (region) [i.e., "no country (regional) no item"] or not by country (region) aggregate calculation [i.e. "no country (region) no item"].

Specific credit methods include direct credit and indirect credit. Direct credit refers to the amount of income tax paid by enterprises directly as taxpayers on their overseas income in the amount of tax payable in mainland China. In this case, since the current tax law in Vietnam does not levy withholding tax on dividend income, Company B is not required to pay tax when Vietnamese Company C repatriates profits to Company B in China. In other words, the amount of income tax paid directly by Company B is 0. Indirect credit refers to the part of the foreign income tax paid by the foreign enterprise on the profits before the distribution of dividends, which is indirectly borne by the mainland resident enterprise in respect of the dividends received by the mainland resident enterprise, and is credited against the tax payable in the mainland. In this case, the tax period corresponding to the dividends distributed by Vietnam Company C overlapped with its tax holiday, so the tax paid by Vietnam Company C on the income was zero, and the income tax indirectly borne by China Company B was also zero.

To enjoy tax exemption or tax reduction, it is also necessary to determine whether the tax concession policy can be applied to the overseas enterprise. According to the Operational Guidelines for Overseas Income Tax Credits for Enterprises, if a resident enterprise obtains tax exemption or tax reduction treatment in accordance with the tax laws of a country (region) that has entered into a tax treaty (or arrangement) with the mainland government, and the amount of such tax exemption or reduction shall be deemed to have been credited against the tax payable in China in accordance with the provisions of the tax treaty, the amount of tax exemption or reduction can be used as the amount of foreign income tax actually paid by the enterprise for tax credit.

In this case, according to the bilateral tax treaty between China and Vietnam, the amount of tax that should have been paid by the contracting state for tax reduction and exemption under the law to promote economic development should be included in the deductible tax allowance. In 2016, Vietnam Company C enjoyed corporate income tax exemption and should be deemed to have paid the tax at the statutory corporate income tax rate of 20% for the calculation of the tax credit. According to the China-Vietnam Bilateral Tax Treaty and Protocol, as long as dividends are not taxed in Vietnam according to its tax laws, the current tax on the repatriation of profits shall be regarded as a tax on dividends and the tax shall be calculated at a rate of 10% for credit.

Tax calculations

In 2021, Vietnam Company C distributed profits to China Company B, which was converted into about RMB 49.93 million. The calculation of the credit for this foreign income in China needs to be divided into three steps.

The first step is to calculate the amount of tax allowance for foreign income. Company B in China did not pay withholding tax on the dividends, and Company C in Vietnam was in a tax holiday period during the period to which the profits belonged and did not pay the corresponding taxes, so the direct tax payment and indirect tax borne by Company B were both zero. In terms of concession tax, it should be deemed that domestic company B has paid dividend withholding tax at a rate of 10% 4993×10% = 499.3 (10,000 yuan), and the difference between Vietnam's domestic statutory tax rate (20%) and the actual tax rate (no tax) is 4993× (20%-0%) = 998.6 (10,000 yuan), and the total amount of concession tax is 499.3 + 998.6 = 1497.9 (10,000 yuan), that is, the tax credit amount of company B's overseas income is 14.979 (10,000 yuan).

The second step is to calculate the amount of foreign income credit. In 2021, the taxable income of enterprise income tax of China B in mainland China will be about 620.72 million yuan, and the total taxable amount of domestic and overseas will be 62072 + 4993 = 67065 (10,000 yuan). According to the calculation formula of "no subdivision by country (region)", the income tax credit limit of a country (region) = the total taxable amount of income within and outside China calculated in accordance with the provisions of the enterprise income tax law and the implementing regulations× the taxable income from a certain country (region) ÷the total taxable income within and outside China = (67065×25%)×4993÷67065 = 12.483 (10,000 yuan).

The third step is to calculate the amount of foreign income tax that can be deducted for the current year. Comparing the foreign income allowance allowance and the foreign income income credit limit, the smaller one is the foreign income tax credit for the current year. In this case, the deductible limit of overseas income is 12.483 million yuan, which is less than the deductible amount of overseas income of 14.979 million yuan. Therefore, the actual tax credit of Company B in the current year is 12.483 million yuan, and the undeductible tax exemption in the current year that can be carried forward is 2.496 million yuan (1497.9-1248.3).

Cross-border taxpayer payer FAQs

Author/Source: State Administration of Taxation website

Recently, the official website of the State Administration of Taxation has released the FAQs of cross-border taxpayers and payers in the column of "Tax Road and Tax Service 'Belt and Road'" on the official website of the State Administration of Taxation.

Deduction vouchers

Q: If an enterprise is unable to obtain an invoice for the expenditure incurred in purchasing goods or services from abroad, can the receipt obtained be used as a pre-tax deduction voucher for enterprise income tax?

Answer: According to Article 11 of the Announcement No. 28 of the State Administration of Taxation [2018]: "The expenditure incurred by an enterprise in purchasing goods or services from abroad shall be deducted from tax with the invoice issued by the other party, the receipt voucher with the nature of invoice, and the relevant tax payment voucher." At the same time, the "" stipulates that: "If the tax authorities have doubts about the invoices or vouchers related to tax payment obtained by entities and individuals from outside China, they may require them to provide confirmation certificates from overseas notary institutions or certified public accountants, which can only be used as vouchers for bookkeeping and accounting after being reviewed and approved by the tax authorities." Therefore, when an enterprise purchases goods or services from abroad, it should obtain an invoice or a receipt voucher in the nature of an invoice, a voucher for the payment of relevant taxes and fees, or provide a confirmation certificate from an overseas notary public or certified public accountant.

Fill in the information

Q: Are eligible resident enterprises required to submit the "Report Form on Overseas Investment Information of Resident Enterprises" every year, and does the production and operation information of the foreign enterprises to be filled in comply with domestic tax laws or accounting standards?

Answer: According to Article 1 of the Announcement No. 17 of 2023 of the State Administration of Taxation, "if a resident enterprise or its domestic partnership directly or indirectly holds more than 10% (inclusive) of the shares or voting shares of a foreign enterprise on any day in a tax year, it shall submit the simplified "Overseas Investment Information Report Form of Resident Enterprises" to the in-charge tax authorities when filing the annual enterprise income tax declaration for that year. "Eligible resident enterprises shall fill in the "Overseas Investment Information Report Form of Resident Enterprises" every year.

Article 6 of the Interpretation of the Announcement explains: The "Report Form on Overseas Investment Information of Resident Enterprises" involves providing information on the production and operation of overseas invested enterprises, except for the "actual amount of income tax paid", and the accounting statement data of the invested enterprise shall be filled in, and the annual and foreign currency conversion items shall be determined in accordance with the instructions for filling in the form.

For example, if the tax year of the jurisdiction where foreign enterprise B is located (April 1 of the current year to March 31 of the following year) is different from the tax year of the mainland (January 1 to December 31 in the mainland), when resident enterprise A fills in the 2023 "Resident Enterprise Overseas Investment Information Report Form" in 2024, it should fill in the data of foreign enterprise B for the year from April 1, 2022 to March 31, 2023 because the deadline for the tax year of foreign enterprise B is March 31, 2023.

Therefore, the financial data of foreign enterprises do not need to be adjusted in accordance with domestic accounting standards or tax regulations, but they need to be converted into RMB according to the central parity of the RMB exchange rate on the last day of the mainland tax year.

Filing of external payments

Q: If my company needs to pay funds overseas, under what circumstances do I need to go through the tax filing for external payment?

Answer: According to the provisions of the Announcement No. 40 of 2013 of the State Administration of Taxation and the State Administration of Foreign Exchange, domestic institutions and individuals shall file with the local competent tax authorities for the following foreign exchange funds with a single payment of more than US$50,000 equivalent (excluding the equivalent of US$50,000, the same below) overseas, except for the circumstances specified in Article 3 of this announcement:

(1) Income from trade in services such as transportation, tourism, communications, construction, installation and labor contracting, insurance services, financial services, computer and information services, exclusive rights use and licensing, sports culture and entertainment services, other commercial services, and government services obtained by foreign institutions or individuals from within the mainland;

(2) Remuneration for work of overseas individuals in China, dividends, bonuses, profits, interest on direct debts, guarantee fees, and non-capital transfer donations, compensation, taxes, incidental income, and current transfer income obtained by overseas institutions or individuals from China;

(3) Financial lease rents, income from the transfer of immovable property, income from equity transfer, and other lawful income of foreign investors obtained by foreign institutions or individuals from China.

Q: The same contract needs to be paid multiple times, is it necessary to make a payment record before each payment?

Answer: According to the provisions of the Announcement No. 19 of 2021 of the State Administration of Taxation, if domestic institutions and individuals need to make multiple external payments for the same contract, they only need to go through the tax filing before the first foreign exchange payment.

Cross-border services

Q: Is there any fixed relief channel for overseas Chinese to encounter tax disputes or cross-border tax policy handling in the course of overseas investment and operation?

Answer: Overseas investment adheres to the principle of "enterprise main body, market-oriented operation, and government guidance". Enterprises should follow market rules and international practices, make their own decisions, be responsible for their own profits and losses, and bear their own risks. In the course of overseas investment and operation, tax disputes can be resolved through the legal remedies provided by the domestic law of the host country. If the disputed tax decision is suspected of violating the double taxation agreement between China and the host country, if there is a mutual agreement clause in the agreement, the dispute can be resolved through such a clause. If the tax dispute is subject to the Regulations of the People's Republic of China on Consular Protection and Assistance, you can seek consultation and assistance through our diplomatic missions abroad in accordance with the Regulations.

Q: Can the tax authorities provide more detailed information on the tax systems of other countries (regions) and issue early warning information on tax risks in a timely manner?

Answer: Taxpayers should do their own tax due diligence on outbound investment, including understanding the tax system and tax risks of other countries (regions). In order to better serve taxpayers, the official website of the State Administration of Taxation has launched a number of public knowledge products, including country (regional) investment tax guides, global tax news, overseas tax case databases, etc., which can help taxpayers understand the tax system of foreign countries (regions) and the handling of tax disputes. It is worth noting that the above-mentioned knowledge products are only for reference and cannot be used as a basis for tax decision-making.

Source: China Tax News, 19 April 2024. The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!