What are the tax issues in China and other countries in Asia in 2013? “There’s one thing many people are looking at, and that is the Vodafone case in India,” says LS Goh, a Partner at Big Four accounting firm PwC.
In 2007, a Vodafone subsidiary in the Netherlands bought 67% of Indian telecom company Essar from Hong Kong’s Hutchison for US$11.2 billion. No taxes were paid in India because the buyer and seller were outside the country. A law is now under consideration in India’s Parliament making clear that transactions like this are taxable in India. Controversially, the coverage will be retroactive to 2007 to cover the Essar deal, which would make Vodafone liable to pay US$4.5 billion in taxes and fines.
In this final part of a two-part interview, Goh tells CFO Innovation’s Pearl Liu about her take on the Vodafone tax controversy and the possible tax changes in China specifically – she has been providing clients with her expertise in China tax consulting and business advisory since 1994. Excerpts:
What are the important tax issues that Asia’s finance professionals should keep in mind in 2013?
There’s one thing many people are looking at, and that is the Vodafone case in India, which is an indirect equity transfer. In the past, we always say, This is outside China or this is outside India, so you should not tax me . . .
Now, with the Vodafone case, I think India is going to change the law [and the past principles and practices around indirect equity transfers]. Everyone [else in Asia] is looking at this, to see whether they could tax these transfers as well. I think this is the key development in at least the next two years.
Let’s talk about China. What is the general trend of business-related taxes there in the coming years?
I think there will be more changes in terms of the turnover taxes. Corporate income tax is going to stay there for a while.
I think over time, I do not know when, the business tax may go away. It should go away because it’s causing a lot of confusion. If you go to a restaurant in China and order your food, that is subject to business tax. But if you go to a restaurant and order the take-out, your order is subject to value-added tax (VAT). So what happens if you cannot finish your meal and you ask for a doggy bag for the leftovers?
There’s a lot of this kind of confusion in the construction industry, which is subject to business tax. Companies purchase material from different suppliers. The business tax law says that you should combine the whole project [and pay tax on it]. But these materials are also subject to VAT, so there’s a lot of double taxes.
That’s why over time, I think China will find that there should be a change.
China lowered the corporate income tax rate to 25% in 2008. Do you expect this to change in the coming years?
It takes a long time to come up with a big law like that. The previous one lasted from 1991 to 2008. So if you ask me whether there will be a major change in the income tax law, I would say no.
But maybe more places, starting with Hengqin and Qianhai, and maybe smaller areas like high-tech zones in cities like Shanghai and Shenzhen, where all the high-tech companies are situated, will give more incentives.
Is there any difference between multinationals in China and local companies in terms of corporate tax?
No, not now. Before 2008, there were two corporate income tax laws, one for domestic companies without foreign investments and another for what we call foreign-invested enterprises, FIEs, those with at least 25% foreign stake. The FIEs enjoyed a lot of incentives, tax holidays. Domestic companies got nothing.
But starting from 2008, everyone came under the same law. Actually, you can say that MNCs are worse off. Nowadays, China has become so rich that it encourages only foreign investment that it really wants. Otherwise they just don’t care. They are very selective now.
You had earlier flagged the importance of the individual income tax, which the company is liable to pay if the employee concerned fails to do so. What advice can you give CFOs regarding this matter?
You should do advance planning for the individual income tax. If you send an expatriate into China without such planning, the full amount (of his salary) is going to be taxed. When you try to rectify that later and develop a tax plan, the tax people may say no. If, say, this year you pay RMB100,000 in tax and next year it is down to RMB60,000 [because of better tax planning], the tax people may come to check and investigate.
Any other advice for CFOs whose company is doing business in China or seeking opportunities there?
First of all, before they go in, before they do anything, they should plan first. To amend a situation [later] is very difficult, and may be impossible.
Say a foreign company wants to charge service fees into their Chinese subsidiary – that’s one way of getting money out [of China]. The contract must be sent to the tax bureau because, when [the China subsidiary] remits money, it needs to have clearance from the tax office. This document will indicate whether the transaction is tax-exempt or not.
If your service contract is drafted without much tax planning, the full amount [charged in service fees] will be taxed. If you then tell the tax bureau, “No, no, no, actually some of these services are performed outside China. Do not tax me,” it will be too late.
There is a lot of planning that should be done [in drafting a contract for] service fees so that you could reduce your tax.
What if a foreign company wants to remit dividends?
If you want to remit dividends out of China, you need to make sure that the parent company [that controls] the Chinese subsidiary has substance. If it’s just a shell company, you cannot enjoy the 5% withholding tax [exemption under certain taxation treaties] such as the China-Hong Kong tax arrangement.
Two years ago, I advised a client to properly plan and to build substance here [in Hong Kong]. This is not a form-filling exercise; you have to [convince] the tax bureau in China. You have to provide them with substantiation [evidence]. But their local person in China said, “No need, no need, I will try to talk to the tax bureau.” She managed to get the 5%.
Now, two years later, the tax bureau told the company: “You did not provide any information. You did not tell me what [the Hong Kong parent does and why it is not a shell company]. I think it’s fake.” So all the company could do is to go crawling back. In this situation, it’s more difficult to help.
So tax planning is very important in China. How can a company go about doing it?
There are a lot of ways. And when we talk about tax planning, the aim is not only reduce taxes. For example, [you can also plan for] reducing the pre-payment of VAT. If you do not actually need to pay the tax now but still do [for whatever reason], that is a cash drain on the company. So tax planning is not just about minimising tax; it is also about delaying the payment of tax.
In China, there’s still a long way to go for tax. It’s so complicated; there could be a lot of interpretations. If you ask, [the interpretations in] this region and that region are different. Sometimes, even within the same region, it’s different. Worse, the law keeps changing, and even if the law doesn’t change, the interpretation [of the law can change].
A lot of times, I have to tell my client, the technical interpretation is this, and then I have to tell them the local interpretation is this. With local interpretation, I don’t just check with one particular person. I check around the region, to see what is the more sensible interpretation, what is the local practice. There’s a lot of checking, but you have to do your homework.