KPMG: Navigating China's Funds Repatriation Maze

by Bolivia Cheung (pictured), Ryan Huang and Lilly Chen, KPMG, 29 October 2009

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Accounting and Regulations Tax

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Bolivia Cheung KPMG Lilly Chen remittances Ryan Huang

According to China’s Corporate Income Tax (CIT) Law, management fees are not deductible items. However, there is no clear explanation in any tax regulation or notice what exactly a “management fee” is. Company B argued that the management fee it is charging Company A was a substantial service fee, and should therefore be treated as a “service fee” as described in tax regulations.

But the State Tax Bureau still refused to issue a tax clearance. Said the tax official: “We cannot accept an application without clear instructions from current laws and regulations, even if Company B was willing to pay the tax.”

Interestingly, the result of this case could have been completely different if Company B used the term “management service fee” instead of just “management fee” – the State Tax Bureau considers management service fees as normal service charges, as the term is defined in current tax regulations.

What Can Foreign Investors Do?

Foreign investors are not completely helpless in navigating China’s remittance maze. We suggest the following:

Conduct advance planning. With proper planning, enterprises can avoid getting trapped in red tape. They may also reduce relevant tax costs. For example, they should make sure that the type of service they are charging for are clearly defined in current tax directives. Avoid charging for “uncertain” items such as management fees. Check the detailed requirements from different government authorities in advance. It is also helpful to research tax treaties between China and other countries to find potential tax planning opportunities.
Structure contracts with tax efficiency in mind. For example, a service contract should clearly state the nature of the services to be provided, the service location, the relevant fee-charging method and so on. As a bonus, a well-structured contract can also create opportunities for reducing tax costs, such as claiming corporate income tax exemptions on the basis of non-PE status.
Keep all supporting documents. Enterprises should prepare and have on hand all supporting documents as evidence of charges, such as working papers, meeting notes, correspondence, staff work plans and staff time sheets, even if these are not specifically required. Well-prepared application packages help facilitate the entire remittance process and also give government officials confidence to approve the application.

About the Authors

Bolivia Cheung is Partner, PRC Tax and Business Advisory, at KPMG China. She has a BA (Hons) in Business Studies and a Master of Science in Accounting, and is a fellow of the Hong Kong Instittue of Certified Public Accountants and a member of CPA Australia and ACCA.

Ryan Huang is Tax Manager, PRC Tax and Business Advisory, at KPMG China. He has a Bachelor of Economics in financial management and an MBA in corporate finance, and is a member of China Certified Agent.

Lilly Chen is Tax Assistant Manager, PRC Tax and Business Advisory, at KPMG China. She has a Bachelor of Law in economic laws, a Master of Science in business management, and is a member of China Certified Tax Agent.

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