In the case of cross board payment, whether the service is "completely occurring outside China" will determine whether the payment needs to withhold and pay value-added tax and corporate income tax on behalf of the taxpayer. Generally speaking, the value-added tax and corporate income tax paid on behalf of the enterprise account for about 16% of the contract amount. Customers often have such questions, that is, how to understand "services completely occurring outside China." Therefore, today we will discuss this issue together.

According to Annex 1, Article 13 of the Cai Shui [2016] No. 36 Document:

 ·         Services entirely rendered overseas sold by a foreign entity or individual to a domestic entity or individual.

 ·         Intangible assets entirely used overseas sold by a foreign entity or individual to a domestic entity or individual.

 ·         Tangible movable property entirely used overseas leased by a foreign entity or individual to a domestic entity or individual.

 ·         Other circumstances as stipulated by the Ministry of Finance and the State Taxation Administration.

Although the term "entirely" in "services entirely rendered overseas" has not been clearly defined, and the relevant regulations seem to be ambiguous, we can still infer the practical criteria for determining this regulation through specific cases.

Case 1

A domestic company successfully sold a batch of goods to an Italian customer B through an Italian market promotion service provider A. The domestic company needs to pay a certain percentage of commission to the Italian market promotion service provider A. Does this commission need to be declared and withheld for VAT?

After investigation, it was learned that the Italian market promotion service provider A was active entirely overseas throughout the entire promotion process. The domestic company communicated with service provider A through email and video conferences to determine product information and the background of the domestic company. Since this service was completed entirely overseas from beginning (processing) to end (delivering), it belongs to services entirely rendered overseas, so the domestic company does not need to withhold and remit VAT or CIT for its overseas payments.

Case 2

Suppose a foreign company provided design services for a domestic design company, and the designing process of the service was completed overseas. The final design drawings were sent to the domestic company via email for acceptance. Then, does this type of service need to be declared and withheld for VAT and CIT?

Through a comparative analysis with Case 1, we can see that although the main design part of the service is performed overseas, but the result needs to be delivered and used domestically. Therefore, this type of service cannot be regarded as services entirely rendered overseas, and thus withholding VAT and CIT needs to be withheld and remitted.

Case 3

A domestic company provides on-site design and decoration services to an Italian customer C. The domestic company entrusts an Italian supplier D to provide the necessary equipment and materials to the Italian customer C, while the domestic company provides design services to the Italian customer C. Finally, the domestic company collects all the service and goods packaging costs from the Italian customer and pays the goods cost to the Italian supplier D. In this case of mixed sales, does the goods cost paid to the foreign supplier D need to be withheld and remitted for VAT?

According to Article 8 of Order No. 50 of the State Taxation Administration, the first paragraph of the regulation stipulates that "the sale of goods or the provision of processing, repair, and maintenance services within the People's Republic of China (hereinafter referred to as 'domestic') means: (1) The place of origin or location of the goods sold is within the territory." Therefore, if the place of origin and destination of the foreign supplier's goods are both overseas, it can be considered as goods costs entirely incurred overseas. When the domestic company pays this amount to the foreign company, it can be considered as entirely occurring overseas.

To conclude, it is essential to ensure that the necessary contracts and invoices are sufficient to validate the legitimacy of the transaction. Should there be a lack of adequate supporting documents or an inability to confirm that the business activities were completely conducted outside of China, the local tax authorities may dispute the assessment and could demand the company to pay the VAT and CIT that were withheld and remitted.

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. 

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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. 

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