For Chinese companies, overseas payments, particularly those to cross-border service providers (non-trade remittances), have been a complex and challenging task. This article explores the potential risks and provides guidance based on a real case study.

Case Study

A Company makes regular payments for design services to overseas suppliers. Major of single payment was under USD 50,000, leading the bank to request only proforma invoices. These invoices were provided, and payments were made. However, years later, the client received a tax notification demanding additional taxes of over CNY 1 million for the past three years' cross border payments. The tax authorities required immediate payment of withholding value-added tax (VAT) and corporate income tax (CIT) within 15 days.

Our Solution

PHC ADVISORY conducted a comprehensive analysis of the client's cross-border payments made in the past. By meticulously examining the specific circumstances of each transaction, we were able to negotiate with the tax bureau. Ultimately, the tax bureau waived the obligation of withholding CIT and related penalties. The Company only needed to pay the obligated withholding VAT, which is input VAT and could be offset against output VAT in the future.

Financial Staff Training: We also provided training on proper documentation for future cross-border payments to the Company's financial team. This includes collecting essential supporting documents and utilizing the electronic tax bureau for legal declaration and filing of each remittance.

Key Takeaways

This case highlights the importance of proper documentation and adhering to tax regulations for cross board non-trade remittances. Here are some best practices:

• Gather comprehensive documentation: Not only proforma invoices but also detailed contracts outlining the services provided and their value.

• Carry on electronic tax filing timely: Proper declaration and filing in the electronic system of tax bureau for the remittance.

• Consult with Tax Professionals: Ensure compliance with all relevant tax regulations for non-trade remittances.

By following these steps, the Company could navigate the complexities of cross-border non-trade remittances and mitigate potential tax risks.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.

PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance.

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way.

If you want to know more about doing business in China, please have a look at our previous articles:

• Have You Filled Your Annual Income Tax Declaration for 2023?

• China Tax Incentives for Manufacturing Companies