Iris Qi
The Stamp Duty Law of the People’s Republic of China (the “New Stamp Duty Law”) came into effect on 1 July 2022, and at the same time accompanied by several announcements from the State Administration of Taxation to help facilitate a smooth transition.
With the New Stamp Duty Law being in effect for more than two months, what are the significant impacts on businesses compared to the 33-year-old Interim Stamp Duty Regulations (the “Former Interim Regulations”)? Recently at DaWo we have gained some hands-on experience from several cases or projects over the last two months and would like to share some advice.
1. Some changes in Tax Rates and Taxable Basis
The New Stamp Duty Law basically follows the taxable items and tax rates of the Former Interim Regulations. However, there are still some changes worth noting.
– Some rates been reduced
(1) Contracts for hired work/ Contracts for construction work/Transport contracts;
(2) Documents for the transfer of exclusive right to use a trademark, copyright, patent right, and the right to use proprietary technology
(– the above two are reduced from 0.05% to 0.03%);
(3) Business account books (total amount of paid-in capital and capital reserve)
(– the above one is reduced from 0.05% to 0.025%);
(4) Cancellation of the fixed stamp duty of Five Yuan RMB on four certificates and one license (House Ownership Certificate, Trademark Registration Certificate, Patent Certificate, Land Use Right Certificate and Business License).
– Taxation Basis
Particularly reminding, the tax basis for Property insurance contracts has been changed at the same time – from “0.03% of the insured amount” to “0.1% of the insurance premium”.
2. Contract price needs to be distinguished from VAT
According to Articles 5 and 6 of the New Stamp Duty Law, the tax basis for taxable contracts and taxable ownership transfer documents does not include the amount of VAT stated. However, if the taxable document fails to specify the transaction price without VAT, the tax basis will be determined by the actual settlement amount.
We recommend that companies should list the price excluding VAT as well as VAT separately and clearly when signing contracts, not only to clarify the tax liabilities of a taxable entity, but also to facilitate the calculation of stamp duty. Failure to do so may result in higher stamp duty losses and unnecessary reimbursement or refund of taxes.
3. Framework contracts need to be settled at the end of the year or period
Many companies may choose framework contracts, annual contracts, distributor rules or other similar framework documents, where only the approximate total sales amount or volume is agreed with the counterparty and the exact amount is to be settled through separate orders; or there might not be any orders, parties just do the calculation and settlement at the end of the period/year.
As a result, if such framework documents are agreed to be high and the actual amounts of transactions are low, how should they be taxed? The Announcement on the Implementation (State Taxation Administration [2022] No.22) clarifies that the extra stamp duty paid is not refundable if there is any non-performance of a taxable contract.
We highly recommend that where business is conducted through “framework + order” mode, the parties should conduct regular and formal settlements and make changes or additions to the initial framework contract at year-end or period-end in an effort to clarify the final amount of the total contract and to avoid unnecessary losses or administrative liability for tax administration.
It should be noted that the discussion here does not include cases where a contract has not been signed but the sale-relationship is established by other forms of documentation. In such a case, the taxable document is not a “contract” in the narrow sense of the word, but rather each specific document establishing the sale-relationship – which means, even if there is no written contract, a stamp duty shall be payable on any document that can be identified as establishing the sale-relationship.
4. Contracts signed by foreign entities for domestic use are subject to withholding and payment
The Former Interim Regulations were unclear on how to pay stamp duty for foreign entities, resulting in substantial tax loss. At present, Article 14 of the New Stamp Duty Law clarifies that:
Where the taxpayer is an overseas entity or individual and has an agent in China, the domestic agent shall be the withholding agent; where there is no agent in China, such taxpayer shall declare and pay the stamp tax by itself, in which case the specific measures shall be formulated by the competent tax authority of the State Council.
Furthermore the Notice of State Taxation Administration [2022] No.14 has made a further refinement of the place and procedure or taxation involved in the above-mentioned law: if there is a domestic agent, the competent tax authority is the place where the agent is located; if there is no agent, the foreign taxpayer shall declare and pay the tax to the competent tax authority in the place where the assets are delivered, where the domestic service provider or recipient is, where the domestic signing party of taxable documents is located, and where the immovable property is located.
However, in practice, it is very inconvenient for foreign entities to declare and pay taxes by themselves. We recommend that foreign entities choose the withholding mode, i.e. entrusting the declaration and withholding to a domestic agent or the counterparty of the transaction. Failure to pay the stamp duty in a timely manner, may be an undesirable risk for conducting future business in the country even if it is a small amount.
Conclusion
Although stamp duty is a small tax, it covers nearly all aspects and is closely related to business operations or personal life. The system of stamp duty is independent in a way and a lot of unnecessary trouble can be avoided with a slight bit of attention.
DaWo Law Firm is committed to resolving all kinds of tax disputes for our clients, please feel free to contact us if you have any questions.
