China Tax/Business News Flash 

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Please click on the links below to view more:   Clarification of individual income tax treatments on unlisted share option gains On 9 October 2007, the State Administration of Taxation ("SAT") issued a notice - Guoshuihan [2007] No. 1030 ("Circular 1030") - to provide feedback on various issues surrounding the China individual income tax ("IIT") position on gains realized from the exercise of share options issued by an unlisted company.   Read more...... Expand / Collapse Four key principles drawn out of this Circular are as follows: It is now clarified that the preferential IIT treatment on share option gains in respect of listed shares as provided under Caishui [2005] No. 35 ("Circular 35") does not apply to the gains realized from the exercise of share options of unlisted shares.  Circular 35 provides that the accumulated share option gains can be taxed separately from the monthly income, normally resulting in at a lower top marginal tax rate;   However, if the share option gain is significant, it may be allowed to be calculated in accordance with the preferential IIT treatment for a one-time annual bonus as stipulated in Guoshuifa [2005] No. 9 ("Circular 9").  This may still give rise to a favorable tax consequence, but the tax treatment for any other bonus is uncertain and dependent on a number of mixed factors;   It is confirmed that the taxable event is triggered at the time when the share purchase takes place and the taxable gain is the difference between the purchase price and the value of the shares on the date of the purchase; and   As to the valuation of the unlisted shares, Circular 1030 stipulates that unless there is an actual or predetermined transaction price of these unlisted shares, or an actual transaction price of comparable shares, the share value on the purchase date can be referred to the net asset value of the unlisted company as reflected in its last audited accounts. PwC Observation   From the tax burden perspective, the principles set forth in Circular 1030 can be considered as good news to those employees who are awarded with unlisted company's share options because the use of the net asset value in the last audited accounts in calculating the taxable gains provides a more predictable tax profile and, more importantly, in some cases, that value is lower than the share price as valued by independent share valuation which takes into consideration many factors other than net assets.  On the other hand, the application of Circular 9 in calculating the IIT on share option gains may cause complication and confusion, especially when the employee exercises the share options more than once a year.   It is also worth noting that as each share option scheme may have its own unique features and characteristics (e.g. vesting period, buy-back privileges, restrictions etc.), the China IIT treatments could be varied and complex.  Therefore, companies with employee share option schemes (whether for listed or unlisted shares) are advised to review their schemes and assess the potential China IIT exposures on the grant and exercise the share options, as well as the subsequent disposal of the shares.   Close New tax registration requirements for expatriates in Guangzhou    On 25 September 2007, the Guangzhou Municipal Local Tax Bureau ("GZLTB") issued a notice - Suidishuifa [2007] No. 227 - to further strengthen the China IIT enforcement on expatriates in Guangzhou who provide dependent services (as employees), independent services (as independent consultants), or other personal services.   Read more...... Expand / Collapse Under the new requirements, among other things, employer companies and the expatriate employees are required to attend to the tax registration procedure upon commencement of the expatriates' employment and the tax de-registration procedure prior to the termination.  In addition, at the end of each tax year, the employer companies also have to provide a detailed summary about their expatriates, including those who joined and left the companies during the tax year concerned.    Apart from the personal particulars and travel information and documents usually required, the GZLTB also requires for a detailed income breakdown / certificate and overseas tax declaration in respect of the expatriate's recent employment income derived from overseas before the assignment to China.    These new requirements took effect from 1 November 2007.  Companies failing to comply with the registration and annual reporting requirements are subject to a penalty.    PwC Observation    The new requirements allow the GZLTB to closely track the expatriate employees' information from the point they arrive to the point they leave, and surely place additional tax administration burden on employer companies and expatriate employees.  In addition, the request for details of overseas income and overseas tax declaration will allow the Chinese tax authorities to better appraise the expatriates' earnings situation and overseas tax profile prior to the assignment to China, so as to further enhance the compliance control over this tax source.  Guangzhou is the first city in China to implement such a closely "tracking" mechanism on expatriates' information for IIT.  It is still yet to be certain whether the same or similar tax registration requirements will be extended to other cities in the future. Close Enhancing the administration of full individual income reporting and tax withholding    The new SAT circular - Guoshuifa [2007] No. 97 ("Circular 97") on the administration of full individual income reporting and tax withholding issued by the SAT on 14 August 2007 does not make any change to the role of IIT withholding agents, including employers.  Instead, Circular 97 is seen as a clear indication that the SAT will continue to set top priority on the employers' full reporting and withholding requirement in respect of all their employees' income derived from employment.   Read more...... Expand / Collapse Besides the emphasis on how effectual administration of such full reporting requirement can facilitate the administration of annual IIT filing and enhance the development of an IIT information database, Circular 97 reiterates the importance of focusing on the compliance level of IIT withholding agents.  It also stresses the importance of collecting market intelligence and information from the public domain (e.g. listed companies' information or notice, news and advertisements, purchase of high-end properties and vehicles etc.) for analytical assessment against the IIT declarations.    PwC Observation    The SAT has repeatedly placed emphases on tightening up the administration and control over the IIT regime in recent years.  From a risk management perspective, it would be worthwhile for employer companies to conduct thorough review of their existing employment income reporting and IIT withholding procedures.  If there are any findings of under-reporting of employment income and/or IIT underpayment, it would be in the company's interest to rectify the problem voluntarily as soon as practical. 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