China Tax Update for Q4 2023

In Q4 2023, the transition to e-invoicing system has been further developed in China and some amendments to the existing tax laws were published by the National People’s Congress for collection of public opinions. In Hong Kong, the Legislative Council passed two bills regarding the stamp duty rate reduction and the taxation on foreign-sourced disposal gains respectively.

I. Transition to E-invoicing System in the last eight provinces in China

The fully digitalized e-invoicing system has been rolled out nationwide in Q3 2023. In Q4 2023, with the last eight provinces announcing to launch the fully digitized electronic invoices, the e-invoicing system has covered all provinces/regions in China.

The e-invoicing progress in last eight provinces are summarized as follows:

II. Extension of VAT exemption policy for interest-free intercompany loans

In September 2023, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) issued the Circular [2023] No. 68, which extends the effective period of VAT exemption policy for interest-free intercompany loans between intergroup enterprises to the end of 2027. Before the extension, the preferential VAT treatment were supposed to be ended at 31 December 2023.

III. New legislation progress of Mainland China

1. VAT Law (draft for collection of public opinion)

On 1 September 2023, the National People’s Congress (“NPC”) issued the Second Draft of the amendment to the PRC Value Added Tax Law for collection of public opinions. Compared to the first draft, the main changes in this version are as follows:

• The standards for small-scale taxpayers are clearly stated, with taxable income not exceeding five million RMB.
• When the revenue of a taxpayer is significantly high or low without proper reasons, the tax authorities should use refer to the relevant clauses in the “Administrative Law of the People’s Republic of China on the Levying and Collection of Taxes” to determine the revenue of the taxpayer.
• If the input VAT exceeds the output VAT, taxpayers opt to carry forward the excess to the next period or claim a tax refund.
• Remove the rule that the simplified tax calculation method cannot be changed within the prescribed period once chosen by the taxpayer.
• Clearly state the situations that are eligible for dedicated preferential policies. For instance, supporting the development of small and micro-enterprises, key industries, as well as promoting entrepreneurship and employment.
• The tax payment obligation arises on the date on which the transaction deemed as taxable is completed.

2. Amendments to the Implementation Regulations for Invoice Administration

On 20 July 2023, the State Council announced to revise the Implementation Regulations for Invoice Administration for the third time. In accordance with the “Decision of the State Council on Revising and Repealing Some Administrative Regulations”, the main changes compared with the 2019 version are as follows:

• Add a regulation stipulating that hard copy invoices and electronic invoices shall have the same legal effect.
• No permits are required for vendors of invoices. Instead, tax authorities shall determine the vendor of invoices following the relevant provisions on government procurement procedures.
• When determining the types, quantity of invoices and method of collection, the tax authorities consider the risk level. Entities or individuals are not required to present the invoice purchase register to the tax authorities when collecting invoices.
• For prohibit acts regarding invoice administration, the following actions have been added: stealing, intercepting, tampering with, selling or disclosing invoice data.
• Verification of the tax agent’s identity is required when issuing an invoice.

3. New Administrative Dispute Resolution Law

On 1 September 2023, the Administrative Dispute Resolution Law of the People’s Republic of China was amended and passed at the 5^th Session of the Standing Committee of the 14^th National People’s Congress. Compared with the previous draft, the main changes of the new law are as follows:

• Departments with different functions and levels are clearly differentiated to assist applicants in identifying the appropriate department to apply to.
• The scope of administrative dispute resolution is expanded to include additional situations such as decisions on compensation and work-related injuries, unlawful actions by administrative organizations, and violations of legal rights in the disclosure of government information.
• Applicants may authorize one or two lawyers or a legal aid agent to participate in the administrative consideration and to submit their applications online. If the application documents are incomplete, the administrative organ shall notify the applicant in writing within five (5) days, listing the items that need to be corrected once and for all.
• A new chapter is added to regulate the procedures for the administrative dispute resolution hearing. This chapter outlines the standards for suspending and terminating administrative dispute resolution, as well as the practical requirements for administrative dispute resolution hearing cases.
• The decision process for administrative dispute resolution is optimized. The standard for changing, cancelling and confirming administrative dispute resolution decisions has been clarified and additional rules for the respondent have been added to strengthen the enforcement of administrative dispute resolution decisions.

IV. HK Stamp Duty Rate Reduction

On 15 November 2023, the Stamp Duty (Amendment) (Stock Transfers) Bill 2023 was passed by the Legislative Council of Hong Kong. According to the amendment, the rate of stamp duty on stock transfers is reduced from 0.13% to 0.1%, which came into effect on 17 November 2023.

The stamp duty rate reduction is aimed to lower investors’ transaction costs, improve market sentiment, and enhance the competitiveness of Hong Kong’s stock market.

V. HK IRD’s New Bill for Taxation on Foreign-sourced Disposal Gains

On 29 November 2023, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 was passed by the Legislative Council of Hong Kong. The Bill seeks to refine Hong Kong’s foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover all assets other than shares or equity interests. The refined FSIE regime will come into effect on 1 January 2024.

Under the existing FSIE regime of Hong Kong, multinational enterprises (MNEs) are not required to have adequate economic substance in Hong Kong to enjoy tax exemption for their offshore passive income. According to the latest requirements of the Guidance on FSIE regime updated by the EU in December 2022, all types of passive income (including dividends, interests, royalties and capital gains) shall be subject to the economic substance test. So Hong Kong was landed on the European Union’s (EU) “watch-list” of markets with risks of double non-taxation.

Under the refined FSIE regime of Hong Kong, the scope of assets in relation to foreign-sourced disposal gains is expanded, which brings Hong Kong’s FSIE regime in line with the updated Guidance on FSIE regime of the EU. With the introduction of the new Bill, Hong Kong Government requests the EU to swiftly remove Hong Kong from the EU watch-list in order to benefit local MNEs in Hong Kong. 

We suggest that MNEs entities in Hong Kong closely monitoring the on-going development of the FSIE regime and assessing the potential tax impact accordingly.