On 9 July 2013, the State Administration of Taxation ("SAT") and State Administration of Foreign Exchange ("SAFE") jointly promulgated Announcement on Issues Concerning Tax Recordal for Outbound Payments under Service Trade Items ("Announcement 40"), which repeals the old rules governing outbound service related payments and provides for a simplified settlement procedure for service fees, dividends, interests, profits, royalties, and income from financial leasing and transfer of real properties or equity, and expense reimbursement (collectively referred to as "Payments").
Following the issuance of Announcement 40, SAFE further issued the Notice regarding the Issuance of Regulations on Administration of Foreign Exchange under Service Trade ("Notice 30" ) on 18 July 2013 with the aim to facilitate cross-border payments and receipts of foreign exchange under service trade items through simplifying the administrative procedures and documentation requirements.
Both Announcement 40 and Notice 30 have come into effect on September 1, 2013.
We highlight below the key features of Announcement 40 and Notice 30.
Simplified Settlement Procedure
According to Announcement 40, a PRC payor no longer needs to obtain the tax clearance certificate 1 before remittance of the Payments.
- For Payments exceeding USD 50,000 per transaction, a PRC payor shall file a recordal with the in-charge tax authority ("Tax Recordal") and submit the rectified Tax Recordal Form together with the supporting documents (including the underlying contracts, invoices and other supplementary documents) to the remitting bank for settlement of such Payments; and
- For Payments of USD 50,000 or less per transaction, the Tax Recordal is not required and a PRC payor may freely settle such payments at the remitting bank.
Announcement 40 provides some exceptions where the requirement on the Tax Recordal is exempted, such as the outbound payment of overseas travel expenses, exhibition fees, conference fees, etc.
Key Features of Tax Recordal
For Tax Recordal purposes, a PRC payor shall file with the in-charge state tax authority the underlying contract and invoices in relation to the Payments and shall fill out a Tax Recordal Form. For multiple Payments made pursuant to one contract, the Tax Recordal is required for each Payment but the contract and invoices shall be submitted only once at the time of the first Payment.
Upon receipt of the Tax Recordal Form, the in-charge state tax authority shall immediately acknowledge receipt of the Tax Recordal Form (before review of the recordal documents) by affixing a chop on it, and return one copy to the payer. The payor will then present the rectified Tax Recordal Form to the remitting bank to arrange for the Payments. The in-charge state tax authority shall keep one copy and send the other copy of the Tax Recrodal Form to the in-charge local tax authority.
Within 15 business days following the receipt of the recordal documents, both the tax authorities shall conduct a comprehensive review of such documents and may request additional documents where necessary. The tax authorities shall examine whether the payor has paid or withheld the relevant PRC taxes, and assess whether the beneficial owner of such Payments is entitled to any preferential treatment under the applicable tax treaties.
Compared with the repealed rules, the payer now only needs to deal with the in-charge state tax authority in order to get the necessary tax document for remittance purpose and no longer also with the in-charge local tax authority. Further, the tax-check from the tax authorities’ side occurs only afterwards and will not affect the Payments. Such changes are expected to facilitate the payment process.
Under the current established foreign exchange regulations, outbound remittances of Payments generally requires the presentation of various (supporting) documents to the remitting banks 2, after which the documents would go through a review process by relevant remitting banks. Moreover, approval from the relevant local SAFE must be obtained for certain exceptional categories of Payments prior to applying to the remitting banks. In addition, as already discussed above, for outbound Payments exceeding USD 30,000, a tax clearance certificate from the relevant tax authority is required.
The newly promulgated Notice 30 and its appendices 3, will replace a total of 49 regulations issued by SAFE and provides a new relaxed framework for inbound and outbound remittances of foreign exchange under service trade items.
Key features of Notice 30
- Local SAFE approval for outbound remittances of foreign exchange for service trade is abolished for all categories of Payments.
- For Payments in an amount equal to or less than USD 50,000, generally no supporting documents are required to be submitted to the remitting banks as a condition precedent to completing the remittance. However, if the nature of the fund is considered suspicious or ambiguous, the remitting banks may still request the payer to submit the underlying transaction documents for review.
- The supporting documentation requirements for remittances exceeding USD 50,000 are simplified.
- For Payments exceeding USD 50,000 per transaction, a PRC payor shall file a recordal with the in-charge tax authority.
- Subject to SAFE's approval, PRC registered companies (including both domestic and foreign invested companies) may now be allowed to retain their foreign exchange revenue which has been lawfully earned from services business in their offshore account, provided that the total amount of such revenue kept offshore shall not exceed 50% of the company's total foreign exchange revenue generated from its service trade in the immediately previous year.
The issuance of Announcement 40 and Notice 30 relaxes the historical foreign exchange controls on inbound and outbound remittances for non-trade transactions (see attached the Schedule A for comparison of some major non-trade items). It is expected that efficiency for payment settlement will be significantly enhanced as a result of these new rules. Of course, it still needs to be seen how these new regulations will be implemented by the tax authorities and banks in practice.
1 Under the repealed rules (i.e., Huifa  No. 64), for outbound payments of USD 30,000 or more per transaction for non-trade current account items, the PRC payor must present to the remitting bank a tax clearance certificate as a pre-condition for remittance. Such tax clearance certificate is issued by the in-charge tax authority to demonstrate the fulfillment of all PRC tax obligations in relation to such outbound payments.
2 The required documentation being dependent upon the nature of the underlying transaction.
3 Notice 30 includes three appendices namely i) Guidelines for the Administration of Foreign Exchange Administration under Service Trade, ii) Detailed Implementation Rules of the Guidelines, and iii) List of Abolished SAFE Regulations.