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Tax Refund of RMB2.8 Million Received by Shenzhen Representative Office |
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I. Demand of Cost Savings from Representative Offices
Against the backdrop of economic downturn around the globe in nearly two years, many representative offices established by foreign-funded enterprises experienced layoffs or left China in succession. What’s more, those who stayed relocated their offices from the center, replacing salary raise with pay cuts. The chief representatives in those offices are trying everything to find a way to reduce the tax, so, is there any preferential tax policy that can make them pay less tax in safe and appropriate way, in order to achieve cost-efficiency?
II. Client’s Revenue and Review
On April 7, 2017, Shenzhen Representative Office of BD Company received a tax amount of RMB2.8 million for business tax and surcharges.
Mr. Wang, the manager of QA department, was very excited. He said, “Since the representative office got the tax refund, combined with the nearly RMB 1 million resulting from annual tax savings for the new company, the headquarters is more confident to continue operation in China. Thank you very much for your hard working and efforts! ”
(3) Risk Analysis
1). Basic necessary expenses of the office (such as rents, utilities, wages, social security fees and running cost reimbursement) are paid by headquarter directly to the domestic business account(s) of the office for transferring to others.
2). A third party is entrusted to file tax returns. The aggregated current expenditure is paid out of monetary funds, and the expenditure is translated into revenue and paid business tax, complementary tax, and corporate income tax.
III. Backgrounds of Client and Case
Background of the Client: BD Company, headquartered in America, is principally engaged in the design and sales of skiing-related products. It is a famous company in the industry, with products mainly sold to European and the American area. Having hundreds of products of all kinds, Shenzhen Representative Office of BD Company is responsible for developing suppliers to purchase in China and Southeast Asia. In addition to Shenzhen Representative Office, the headquarters has also established one trading company, which is responsible for domestic sales.
Background of the case: Shenzhen Representative Office of BD Company has about 80 staff. Prior to 2016, its annual average tax payment was about RMB2 million. By the end of 2015, considering the cost, business development and other factors together, the headquarters established a new foreign-invested company, with an aim to deregistering representative office when its staff and business are transferred to new company. During one week just before posting application to deregister, Mr. Wang got such a message that the representative office is entitled to having tax savings as well as tax refund. He was very interested in this, and on the same day, he made an appointment with the advisor from BMICS to learn more.
Mr. Wang indicated that he never heard of such message that representative office could get tax refund. Looking at his face full of confusion, the advisor of BMICS exactly explained the background and governing regulations for the tax refund policy. When explaining the service content of supply chain management service, it caught his attention, and he said, “Yes, exactly, we provide this service! ” when hearing that this preferential policy was in place since 2010 , he sighed repeatedly and said, “Oh, my god, we did not know this at all! Didn’t tax bureau give publicity to that?” Mr. Xu, responsible for accounting, was more confused, and she said, “I never realize that the representative office should provide the supply chain management service! There is no difference between representative office and general companies at expense reimbursement and wage accounting.”
IV. Why the Client Know Nothing about Tax Preference
Facing with the queries raised from client, the advisor of BMICS really had something to say. The purpose of introducing policy was to entitle taxpayer, so it was sure that the policy was promoted in great publicity efforts. The reasons that why the client still did not know were as follows:
1）Financial staff was busy with the internal affairs. Some companies assigned the tax affairs to third party, and they were too busy to concern regulatory developments.
2）The law came with complexity.
3）Due to the division of labor in management in such kind of company, the financial staff had access to such information about business operation, being unable to make adjustment based on regulation combined with the business essence.
Therefore, in order to enjoy the tax preference on the basis of lawfulness and compliance, the interpretation of law and business essence should be grasped firmly at the same time. The client nodded repeatedly in agreement.
After one week when the both parties completed their talks, Mr. Wang obtained the approval from the headquarters in United States to sign the cooperative agreement with BMICS. 11months later, the client received over RMB 2.8 million of tax refund. Now, the representative office is going through the procedures of deregistration.
V. Solution Provided by BMICS
1. Fully Understanding the Business Activities of Representative Office to Assess the Scope to Enjoy the Preferential Tax
With strict research on the client’s business activities, the project staff collected the necessary information which were concerned by tax authority and relevant to business (except those related to product and technology), in order to assess the whole revenue generated by Shenzhen Representative Office of BD Company were fully complied with the preferential tax policy.
2. Assessment of the Best Tax Refund Solution
According to the business essence of representative office, the regulation governing change from business tax to value-added tax, the revenue code for representative office and the related requirements for establishment of representative office, the internal and external senior professionals were organized to make full discussion and assessment.
3. To Facilitate Tax Refund Approval through Teamwork, Confidence, Integration of Resources and Communication Level by Level
To facilitate tax refund was full of twists and turns. As the level of tax authority to review the tax refund became higher and higher, the various tax authority raised different questions, however, BMICS always kept an open mind as well as a calm but determined attitude to communicate with the competent national and local tax bureau, the third party governmental sector with authority opinion about business essence, finally reaching an agreement to approve unanimously.
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