28.01.10 16:00 Age: 16 yrs
SAT and MOF move to clarify and expand Foreign Tax Credit regime
The PRC State Administration of Taxation (SAT) and the Ministry of Finance (MOF) recently moved to clarify and expand the states Foreign Tax Credit regime. This new tax circular (circular No. 125) offers a more detailed interpretation of the foreign tax credit regime already in place under articles 23 and 24 of the Enterprise Income Tax Law.
While the new regulation offers many new interpretations, one salient example is its guidance regarding foreign source income. It stipulates that Chinese companies with foreign branches who have not obtained separable tax status, must include all income generated from a foreign source with the Chinese companies normal taxable income for the given period. This should be done regardless of whether or not the income generated abroad is ever repatriated to the PRC.
Circular No.125 also spells out what does and does not qualify for foreign tax credit. Specifically the circular details what type of expenditures do not qualify for a tax credit. These include: Foreign income taxes that are wrongly paid or collected under foreign income tax laws and regulations; Foreign income taxes that will not be paid due to the application of a tax treaty, Interest expense, overdue charges and penalties due to an under-payment or a late payment of foreign income taxes; and Foreign income tax refunds or compensation actually received by the foreign income taxpayer or its related parties from the foreign tax authorities.
The new circular also limits indirect FTC to a three tier system. These tiers are based off of the composition and status of a company's shareholders
Circular No. 125 also provides details and interpretations regarding; calculations of indirect tax credit, FTC limitations, calculations of FTC, and details regarding the administration of FTC.
This circular demonstrates the significance with witch the PRC views the development of an effective international taxation system. While the circular does much to clarify the current tax regime it still leaves many areas of ambiguity. Companies with foreign branches should pay particular close attention to further developments in this area to ensure a proper calculation of FTC.
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