Tax Benefits and New Tax System For Micro-Enterprises In Ecuador
Contributed by Diego Zambrano, Tax Consulting and Practice Manager, Audit Corporate / Tax Corporate
A new tax regime for micro–enterprises was established in 2020 in Ecuador, which applies to those taxpayers (societies or natural persons), including entrepreneurs who fulfill the status of micro–enterprises, i.e. having 1-9 workers and an annual income of less than US$300,000. This regime applies to the following taxes: Income Tax (IR), Value Added Tax (VAT), and Excise Tax (ICE).
Taxpayers not included
Taxpayers engaged in activities related to the banana sector, construction contracts, or those whose economic activity involves the provision of professional services, liberal occupation, the relationship of dependency, as well as those who receive exclusively capital income may not be able to access this scheme.
Duration of the regime
Micro-enterprises will remain under this scheme as long as their status and characteristics in income and number of employees remain, in no case will the companies’ permanence be greater than 5 years. Then, they will subsequently be subject to the general regime.
The formal duties of taxpayers under this scheme include:
- Keeping accounts under SME standards (Small and Medium-sized Enterprises), in addition, they must submit declarations and annexes where appropriate.
- Keeping proof of sale that supports their operations for a period of not fewer than 7 years.
- Providing tax information to authorized officials for inspections or verifications and attending to the tax administration offices when required.
- Carrying out ICE, IR and VAT returns on a 16-monthly basis. If the taxpayer has unrecognized income under this scheme, he or she must also carry out the annual IR return.
PAYMENT AND TAX RETURN FEATURES
Income Tax (IR)
- Tax Base: The gross taxed income from business fewer commercial rebates or discounts and deferred tax adjustments will be considered.
- Income not considered: Financial income, asset revaluation, lottery prizes, raffles, royalties, double taxable income, inheritances, dividends, retirement pensions, or those obtained by the occasional disposal of movable and immovable property, or income detailed as not included under the scheme.
- IR Rate: The rate will be 2%, without the right to rebate or decrease.
- Withholdings at source: Taxpayers under this scheme will be subjected to a 1.75% withholding tax. If they have income under the general scheme (e.g. professional services) the retention they are required to make is based on the type of good or service that you sell outside the regime (8% or 10%).
- Six-monthly declaration: Taxpayers will pay the tax exclusively for income subject to this scheme in July and January.
- Annual Declaration: Only in the following cases should the IR’s annual return be additionally filed:
- Companies and permanent establishments of non-resident companies
- Natural persons with incomes other than Business Activity
- Natural persons who require requesting overpaid payment or filing the claim for improper payment.
Value Added Tax (VAT)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester).
- VAT withholdings: Taxpayers under this scheme will not be withholding agents. In special cases in which they must retain, these values will be declared on a monthly basis (the SRI may include micro-enterprises as retention agents).
Excise Tax (ICE)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester). In the event that they make a monthly declaration within the fiscal year, it must be maintained for the rest of the year.
- Taxpayers subject to this scheme who choose to submit the Simplified Transactional Annex (ATS) on a six-monthly basis. They must do so in accordance with the ninth digit of the Single Taxpayer Register (RUC), in the month following the end of the reported semester. For the semester from January to July, the ATS will be presented in August; for the semester from July to December, the ATS will be presented in February.
- The period for the submission of Annex ICE for the taxpayer that is subject to the micro-enterprise tax regime was established on a six-monthly basis. This addendum shall be submitted to taxpayers in accordance with the ninth digit of the RUC within the month following the end of the reported semester.
Benefits for Microenterprises
New micro-enterprises that start their economic activity from the validity of the “Organic Law for the Reactivation of the Economy, Strengthening the Dollarization and Modernization of Financial Management (year 2018)”, will be exempted from income tax for 3 years from the first fiscal year in which operational revenue is generated, provided that they generate net employment and incorporate national added value into their production processes.
China Updates – October 2020
- Tax data shows a rapid rebound in service consumption during the National Day holiday
- China sets up national fintech certification center in Chongqing
- Announcement of the General Administration of Customs on Promulgation of the Decision on Commodity Classification for 2020
- Facilitation Measures Regarding the Renewal and Reissuance of Hong Kong and Macao Residents Entry and Exit Permits
- Notice on Issuance of the Implementation Measures on the Administrative Assessment for Talent Green Cards in the Guangzhou Huadu District (Hua Ren She Gui Zi  No.2)
Tax data shows a rapid rebound in service consumption during the National Day holiday
The State Taxation Administration (STA) indicates that the consumption of goods and services in China showed a positive trend during the National Day holiday. During the eight–day national holiday, the goods market remained active. For instance, the average daily sales revenue of Chinese wholesale and retail trade had a 14.1 percent increase year-on-year. The consumption of sports goods, second-hand vehicles, durable goods, cosmetics, and hygiene products, and furniture has also shown a double-digit percentage increase.
China sets up national fintech certification center in Chongqing
According to the People’s Bank of China (PBOC), China established a national fintech certification center in Chongqing municipality. This center marked a significant step in the implementation of the Fintech Development Plan (2019-2021) and the establishment was an active measure to improve the regulatory framework for fintech, said Fan Yifei, Deputy Governor of the PBOC. Safeguarding the integrity, innovation, safety, and compliance in fintech development is the top priority. Especially, its purpose is to strengthen the joint governance system for fintech in China.
CUSTOMS & INMIGRATION
Announcement of the General Administration of Customs on Promulgation of the Decision on Commodity Classification for 2020
The General Administration of Customs (GACC) of the PRC has taken steps to guarantee the standardization and uniformity over the commodity classification system (stipulated on Annex I). As a response to the current import and export situation of commodities and international trade that China faces, the Commodity Classification Opinions of the Committee on the World Customs Organization Coordinating System have been transformed into the commodity classification decision (stipulated on Annex II). The previous commodity classification became invalid and a new classification has been promulgated (stipulated on appendix III). This implementation shall enter into force on 1 October 2020. In case of any new regulations, the previous stipulation shall become invalid while the new one will come into effect simultaneously.
I. Relevant Commodity Classification Decisions.
II. Commodity Classification Decision on the Transformation of Commodity Classification Opinions Given by the Committee on the World Customs Organization Coordinating System.
III. Commodity Classification Decisions Losing Effect in 2020.
Facilitation Measures Regarding the Renewal and Reissuance of Hong Kong and Macao Residents Entry and Exit Permits
Residents of Hong Kong and Macao who want to work and study in Mainland China can now renew and reissue their corresponding Resident Entry and Exit Permits (“Home Return Permits”) in Mainland China starting from 10 October 2020. The process will be similar to that in Hong Kong and Macao.
Notice on Issuance of the Implementation Measures on the Administrative Assessment for Talent Green Cards in the Guangzhou Huadu District (Hua Ren She Gui Zi  No.2)
In Guangzhou, the Huadu District authorities have issued measures to grant Green Cards to residents who meet certain talent criteria. Legal residents who work or have started a business for over 6 months in the district and meet the criteria in the third article of the “Guangzhou Talent Green Card System” can apply for the Talent Green Card. The measures took effect from 11 September 2020 and have a validity of 5 years.
China Updates – September 2020
- Effective from 28 September 2020, foreign nationals holding valid Chinese residence permits for work, personal matters, and reunion are allowed to enter China with no need for applying for new visas.
- Ministry of Commerce revised and adopted the Rules on Handling Complaints of Foreign-Invested Enterprises.
- Shenzhen introduced a trial run of the “Enterprise Dormancy”.
- Beijing plans to further open up the service sector.
- The 128th Session of Canton Fair will be scheduled online from October 15th to 24th.
- Hainan Free Trade Zone implements the “negative list system” for work permit application.
Entry by Foreign Nationals Holding Valid Chinese Residence Permits of Three Categories
Effective from 0 am., 28 September 2020, foreign nationals holding valid Chinese residence permits for work, personal matters, and reunion are allowed to enter China with no need for applying for new visas. If the above three categories of residence permits held by foreign nationals expired after 0 am, 28 March 2020, the holders may apply for relevant visas by presenting the expired residence permits and relevant materials to the Chinese embassies or consulates on the condition that the purpose of the holders’ visit to China remains unchanged. The above-mentioned personnel shall strictly abide by the Chinese regulations on epidemic prevention and control.
Other measures in the Announcement issued on 26 March will continue to be implemented. While ensuring effective epidemic control, the Chinese government will continue resuming people-to-people exchanges in a step-by-step and orderly manner.
Ministry of Commerce revised and adopted the Rules on Handling Complaints of Foreign-Invested Enterprises
Ministry of Commerce revised and adopted the Rules on Handling Complaints of Foreign-Invested Enterprises, which shall come into force as of 1 October 2020.
The Rules stipulate that foreign-invested enterprises or foreign investors can apply to the agencies handling complaints about coordination to resolve matters when they think the administrative actions have infringed their legitimate rights and interests. To ensure all complaints are handled properly, the Rules sets out detailed provisions on archive management, case reporting, regular inspections, proposals for the protection of interests, and rights, among other systems related to complaint handling.
Shenzhen introduced 36 measures to further improve the business environment and implement the trial run of the “Enterprise Dormancy”.
On 20 Aug 2020, the Market Supervision Administration of Shenzhen announced 36 service measures in six aspects in order to further optimize the business environment of the city.
One of the highlights of these 36 measures is the trial run of the “Enterprise Dormancy” system, where companies are allowed to apply for “dormant status” according to the actual needs of production and operation. During the “dormancy” period, they will not be identified as an abnormal business if they cannot be contacted at their registered domicile. Before the expiration of the “dormancy” period, they can independently apply for the restoration of normal operation status.
Source: 优化营商环境36项措施出台 深圳试点商事登记行政确认制改革
Beijing to further open up the service sector
Beijing plans to further open its services market to foreign investors in several areas including 26 segments of the financial sector. Here are some examples:
Foreign investors are allowed to invest in domestic virtual private network business (the proportion of foreign shares shall not be more than 50%), and overseas telecom operators can set up joint ventures to provide VPN services.
Foreign investors are encouraged to invest in adult education and training institutions, and set up for-profit vocational skills training institutions, and cultivate more international and professional talents.
Priority will be given to multinational corporations to set up wholly-owned finance companies. Foreign companies are supported to apply to be private fund managers and develop equity investment and asset management business.
Source: 国务院关于深化北京市新一轮服务业扩大开放综合试点建设国家服务业扩大开放综合示范区工作方案的批复 国函〔2020〕123号
The Ministry of Commerce: the 128th Session of Canton Fair scheduled online from October 15th to 24th
China will hold the 128th session of the China Import and Export Fair, also known as the Canton Fair, online between Oct 15 – 24. This is the second online session of the fair due to the COVID-19 epidemic.
Hainan Free Trade Zone implements the “negative list system” for work permit application.
The work permit for foreign nationals in Hainan free Trade Zone is subject to the negative list administration, which means that foreign nationals outside the negative list are not restricted to work in Hainan Free Trade Zone.
Foreign high-level talents who work in Hainan Free Trade Zone may directly work in Hainan Free trade Zone part-time, or start up their own businesses with the consent of the employer and after filing with the relevant government departments.
CW CPA combined forces with their partners Hewlett Rand and InvestHK to host a thought-provoking online event for business leaders across the Greater Bay Area during August. The event considered how HR & Training can support their business transformation and change to bounce back through the Covid-19 pandemic, as employees continue to return to their workplace and employers continue to navigate the ongoing pandemic.
Edith Wong, Chief Marketing Officer opened the event to set the context and Thomas Wong, Partner, CW CPA explained the opportunities ahead for firms in the Greater Bay Area and introduced Richard Lowe, Director of Training and Digital Learning and Angela Tang, HR & Training Consultant from Hewlett Rand who presented their recommendations on how to maximise people performance from trends in the market and working alongside clients to optimise people strategies and skills development.
Survive, Revive and Thrive
Amongst a disruptive backdrop, Richard and Angela reflected on challenges employers had faced and that the one certainty is that employers that adapt and manage change well will Survive, Revive and Thrive. They highlighted that whilst the immediate impact of CV19 sent businesses into survival mode, with many having to take decisive measures to stabilise cash flow, using reserves and draw off Government financial rescue packages and job retention schemes, the world will now recalibrate. As managers and employees continue to return to their workplaces, we will move into a phase where businesses can begin to look further ahead, to revive and adapt to their ‘know new normal’.
5 Key Areas for HR & Training Focus
In addition to workplace Covid-19 compliance, Hewlett Rand suggests focussing on 5 key areas where HR & Training teams can help their organisations to rebuild, re-engage and upskill teams.
1. Leadership : Firstly, to upskill leadership teams to ensure they have the capabilities to keep their teams safe, healthy and well and to bring leadership teams together to pivot their business strategies so that HR & Training teams can align people strategies for success.
2. Structures : Many organisations are now streamlining workforce structures with leaner management hierarchies, virtual workers, fluid workplaces and flexible working. Whilst this will bring challenges is it also bringing opportunities to redistribute their workforce.
3. Processes : Now is a time where HR & Training professionals should review and re-engineer their HR & training processes to make efficiencies for working virtually. Reviewing the employee life cycle to identify ways to optimise productivity through enhancing onboarding, performance management and recognition practices.
4. Technology : Employers should now reflect on whether their HR & Training technologies will deliver what they now need, to harness more autonomous features that will support line managers and employees. Also to now embed digital skills for technologies that have been harnessed during the pandemic, to upskill remote people management skills, virtual team working skills and digital capabilities needed to work effectively with customers.
5. Culture : Finally, Employers will need to reflect on how they re-engage employees with their purpose, vision and values in their ‘known new normal’ to rejuvenate a high-performance culture.
Overall attendees felt their employers were embracing the new way of working Covid-19 had imposed, but more work is now needed to re-engage, re-connect and upskill their teams and a general recognition that the new world of work has been unequivocally remodelled by the pandemic.
Covid1-9 Bounce Back HR & Training Checklist
To receive our one page Covid19 Bounce Back HR & Training Checklist following our webinar, email firstname.lastname@example.org
For HR & Training support, contact:
Richard Lowe, Director of Training and Digital Learning, Hewlett Rand, UK
Angela Tang, HR & Training Consultant, Hewlett Rand, Hong Kong
© Hewlett Rand 2020
The health contingency has knocked on the door worldwide and forced many companies to specialize or generalize activities, make the most of synergies, redistribute benefits, modify cost structure, process outsourcing, process optimization, etc.
If changes are made within the company or the business group to which they belong, the company results in a change in its assets, functions and risks, we are in the presence of a business restructuring.
According to OECD guidelines, company restructuring refers to the cross-border reorganization of commercial or financial relationships between associated companies, including the termination or substantial renegotiation of pre-existing agreements and, in consequence, whether accepted or imposed conditions that differ from those that would be agreed by independent companies exists. The profits of that company should be taxed accordingly.
Before any change within the group in relation to functions, assets and risks, it is important to take into account the current transfer pricing matter legislation which states that; transactions carried out between companies that are related parties must be entered into as if they were agreed with independent third parties in comparable transactions.
In case these changes are not agreed as with independent parties in comparable operations, the tax law empowers the tax authorities to apply the corresponding adjustments and to submit the imposition of profits obtained from the said business reorganization.
Therefore, it is relevant that if intercompany policies are modified or some types of intra-group restructuring fall into place, they comply with the arm’s length principle or “Arm’s Length” and, all in all, they have a valid and sustainable business reason to carry out the reorganization of functions, assets or risks, in which they demonstrate that benefits are flowing to the entity that carries out the said restructuring. Any change that occurs in the economic, commercial and operational relations, should take into consideration what it is mentioned on the tax legislation.
Written by Carlos Ramírez Gómez, Transfer pricing partner, LawBiz Consulting Group
In Hong Kong SAR, there is no statutory definition of what constitutes a charitable institution or trust of a public character (“Charity”) with a charitable purpose, nor is there a single piece of legislation which governs Charities in Hong Kong and how donations are applied. In 2017, the Hong Kong SAR Government’s Audit Commission reviewed various government departments’ supervisory measures on Charities and it advocated strengthening supervision thereon.
Four heads of charity
According to Section 88 of the Inland Revenue Ordinance (“IRO”), Charities should apply to the Commissioner of Inland Revenue if they wish to enjoy tax exemption. In processing tax exemption applications of Charities, the Hong Kong Inland Revenue Department (“IRD”) has all along made reference to the case law in the common law. In general, tax-exempt Charities must be of a public character and established solely for charitable purposes recognized by the law. According to past case law, “charitable purposes” include (a) relief of poverty; (b) advancement of education; (c) advancement of religion; and (d) other purposes of charitable nature that are beneficial to the community. These are commonly known as the “Four heads of charity”.
According to IRO S.88, where a trade or business is carried on by any Charity, the profits derived from such trade or business shall be exempt and shall be deemed to have been exempt from tax only if such profits are applied solely for charitable purposes and are not expended substantially outside Hong Kong and either: (a) the trade or business is exercised in the course of the actual carrying out of the expressed objects of such institution or trust; or (b) the work in connection with the trade or business is mainly carried on by persons for whose benefit such Charity is established.
Salient points from the revised Tax Guide
In April 2020, the IRD published a revised version of “Tax Guide for Charitable Institutions and Trusts of a Public Character” (“the revised Tax Guide”), giving more comprehensive explanations with examples to its earlier version in September 2019. For the revised Tax Guide, we would like to highlight some salient points:
- Indicia of carrying on business
- Primary purpose or ancillary trade/ business
- Financial investments
- Property letting
1. Indicia of carrying on business
Whilst the totality of facts would be considered, the IRD states that the key indicia in determining whether the activities carried on by the Charity amount to the “carrying on a business” are:
- The intention of carrying on a business;
- The nature of the activities performed, particularly whether they have a profit-making purpose;
- Whether such activities are repeated and regular or organized in a business-like manner;
- The size and scale of the Charity’s activities including the amount of capital employed; and
- Whether the activities are better described as a hobby or recreational activities.
2. Primary purpose or ancillary trade/ business
A charity can be exempt from profits tax in respect of the profits from a trade/ business that contributes directly to an expressed object of the Charity (i.e. a primary purpose of the trade/ business) and/ or an ancillary trade/ business. In the revised Tax Guide, sample activities are enlisted to illustrate what may be exempted from profits tax. It is specifically mentioned in the revised Tax Guide that a Charity’s trading transactions would not be regarded as ancillary simply because its purpose is to raise funds for the Charity.
3. Financial investments
The revised Tax Guide states that a Charity may invest in order to achieve a financial return so that it can further the Charity’s objects and, normally, such an investment is expected to be made in a proper and prudent manner to yield best return within acceptable level of risk. Also, the determination of whether the investments are of capital or revenue nature is a question of fact and degree. The investment mandate, pre-defined model portfolio and the “badges of trade” are all relevant factors to be considered.
4. Property letting
The guide clarifies that if a Charity’s property letting is not carried out in the course of the actual carrying out of its expressed objects, the rental income earned should be chargeable to profits tax.
The IRD’s clarified views on what income is exempt from tax would have significant impact on some Charities. We strongly recommend Charities to seek professional assistance to review their current tax position and consider if a restructuring is needed. This is not only for a Charity to preserve financial capabilities of deploying resources for charitable purposes, but to preserve its reputation.
For any enquiries, please contact our May Tung (T: 36430726: E: email@example.com ).
Written by May Tung, Tax Advisory Services, CW CPA
China Updates – August 2020
- China works to further stabilize foreign trade and investment
- China borders reopen for 36 European countries
- Notice Regarding Several Issues on Participation of Labor Dispatch Companies and Human Recourses Service Companies in Social Insurance Scheme
- China reinstated tax exemption and reduction for the importation of 20 commodities
- China’s State Administration of Taxation clarified issues related to the creation of permanent establishment as well as the residence status of companies and individuals during COVID-19 crisis
FOREIGN DIRECT INVESTMENTS
China works to further stabilize foreign trade and investment
In a circular published by the State Council on 12 August 2020, China urged efforts to further stabilize foreign trade, investment, and industrial supply chain. The circular contains 15 opinions in six areas, namely employment, people’s livelihoods, the development of market entities, food and energy security, stable operation of industrial and supply chains, and operations at grassroots levels. It also seeks to stabilize employment, finance, foreign trade, foreign investment, domestic investment and market expectations.
From CW’s perspective, we think the key highlights are:
- To facilitate foreign businessmen’s trips to China. With strict epidemic prevention and control measures in place, negotiations on green channels with other countries should continue in order to facilitate personnel exchanges in important business, logistics, production and technical services of foreign trade and foreign enterprises.
- To encourage foreign capital to flow to high-tech industries. China will promote the facilitation of management and services in qualifying “new and high technology enterprises”, and further strengthen the training and publicity of the application requirements for the recognition of new and high technology enterprises.
- To lower the threshold for foreign R&D centers to enjoy preferential policies. China will reduce the required number of full-time R&D personnel in foreign-invested R&D centers that are subject to preferential tax policies. (Currently, to set up a foreign-invested R&D center in China, personnel possessing a Bachelor’s degree or a higher degree and directly engaged in R&D activities shall constitute no less than 80% of the total staff number in China.)
Source: 国务院办公厅关于进一步做好稳外贸稳外资工作的意见 国办发〔2020〕28号 (http://www.gov.cn/zhengce/content/2020-08/12/content_5534361.htm)
China borders reopen for 36 European countries
The Embassy of People’s Republic of China in Denmark issued an announcement on 10 August 2020 stating that foreign nationals from the countries listed below who hold valid residence permits, including work permit, permit for family reunion and personal matters, may apply for visas for free at any Chinese embassy or consulate in these countries.
Upon entering China, these foreign nationals will be subject to the epidemic prevention regulations of the local governments.
List of applicable countries:
Albania, Ireland, Estonia, Austria, Bulgaria, North Macedonia, Belgium, Iceland, Bosnia and Herzegovina, Poland, Denmark, Germany, France, Finland, the Netherlands, Montenegro, Czech Republic, Croatia, Latvia, Lithuania, Luxembourg, Romania, Malta, Norway, Portugal, Sweden, Switzerland, Serbia, Cyprus, Slovakia, Slovenia, Spain, Greece, Hungary, Italy, United Kingdom
Source: Visa Facilitation for Some Foreign Nationals with Valid Chinese Residence Permits (https://www.fmprc.gov.cn/ce/cedk/eng/cs/t1805331.htm)
Notice Regarding Several Issues on Participation of Labor Dispatch Companies and Human Recourses Service Companies in Social Insurance Scheme
Given the common situation of “paying social security on behalf” in labor dispatching companies and human resource service companies, the Beijing Social Insurance Fund Management Centre issued the Notice which took effect on July 5, 2020.
By forcing the companies to fill in the information related to labor contracts when registering or adding new employees through the online service platform and the three-insurance business system, the Center takes strict control of such situations of these companies in advance. Especially for companies that have not yet registered entity in Beijing, if the actual labor entity entered does not exist in the system, there will be a corresponding prompt alert, which will not be able to complete the insurance registration or adding new employee. Labor dispatching companies and human resource service companies in Beijing can no longer pay social insurance on behalf in Beijing for employees who are hired by companies registered outside Beijing, nor can dispatch employees to companies registered outside Beijing.
Even though the notice applies to the city of Beijing, the notice may serve as a reference in other cities in regulating the labor dispatch and human resources service agencies paying local social insurance on behalf of companies registered in a different city.
China reinstated tax exemption and reduction for the importation of 20 commodities
From 5 August 2020, 20 categories of commodities, imported either by consumers or businesses, can now enjoy applicable tax exemptions and reduction policies. These commodities include TV, video cameras, video recorders, disc players, audio equipment, air conditioners, refrigerators, and freezers, washing machine, cameras, copiers, program-controlled telephone switches, microcomputers and peripherals, fax machines, telephones, wireless paging system, electronic calculators, typewriters and word processors, furniture, lamps and lanterns, meal (seasoning, meat, eggs, aquatic products, fruit, beverage, wine, dairy products).
Currently, duty-free customs clearance applies to items for personal use obtained abroad and brought in by Chinese nationals with a total value of no more than RMB 5,000 and items for personal use brought in by foreign nationals with a total value of no more than RMB2,000. Before 5 August 2020, cigarettes, alcohol, and the aforementioned 20 categories of commodities are excluded from the exemption. With the new announcement in place, the 20 categories of commodities can benefit from the duty-free policy.
Source: 财政部 海关总署 税务总局关于不再执行20种商品停止减免税规定的公告 (http://gss.mof.gov.cn/gzdt/zhengcefabu/202008/t20200813_3566883.htm)
FINANCE AND TAXATION
China’s State Administration of Taxation clarified issues related to the creation of permanent establishment as well as the residence status of companies and individuals during COVID-19 crisis
Due to the COVID-19 outbreak, many countries have imposed restrictions on entry and exit, resulting many key employees of many companies stranded and forced to work in other countries, which has raised a number of cross-border tax issues. On 14 August 2020, China’s State Administration of Taxation published responses to frequently asked questions related to the creation of permanent establishment and the residence status of a company (place of effective management) as well as issues related to a change to the residence status of individuals, based on the Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Singapore on Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and the Interpretations on the Articles in the Protocol [Guo Shui Fa (2010) No. 75]
- Home Office: The exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer.
- Agency PE: During the COVID-19 crisis, an employee or an agent temporarily working from home and exercising an authority to conclude contracts for a non-resident employer is usually considered as emergent behavior and unlikely to be regarded as habitual. However, a PE should be considered to exist where the relevant activities took place long before the COVID-19 crisis, or continue for the long term after the COVID-19 crisis, since such activities have a certain degree of permanency and are not purely temporary or transitory.
- Construction site PE: Many activities on construction sites are being temporarily interrupted by the COVID-19 crisis. Suppose there is a construction site that has not constituted or will not constitute a PE under the applicable tax treaty according to its original time schedule. However, due to the COVID-19 crisis, the construction and management personnel have all been evacuated from the construction site, causing the temporary interruption of the construction project. As a result, the actual duration of the construction site exceeded the PE time-threshold. In calculating the duration of the project, deductions shall be allowed for the dates of total shutdown due to the impact of COVID-19.
- Residence status of a company (place of effective management): Due to the temporary changes in the decision-making places of some senior executives due to COVID-19, the judgment on the location of the actual management will not be affected. A temporary change in location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency.
- Residence status of individuals: A person who is temporarily away from their home and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence in the host country, the “tie-breaker test” shall be used to determine the individual’s tax residency, based on the individual’s permanent residence, center of vital interests, habitual adobe and nationality (in the order in which they appear in the treaty).
Source: 疫情防控期间税收协定执行热点问题解答 (http://www.chinatax.gov.cn/chinatax/n810219/n810744/c101510/c101520/c5155584/content.html)
After more than two years of negotiations, the new trade agreement between Mexico, the US and Canada, now called the T-MEC has entered into force on 1 July 2020. Although most of the agreement did not have significant changes, some modifications will impact the way of operating companies within the region, as well as the performance of the North American economy.
From NAFTA to T-MEC
With the entry into force of NAFTA in 1994, trade within the North American region grew considerably. In 2018, total trilateral merchandise trade (the total of each country’s imports from one another) exceeded US$ 1.1 trillion. From 1994 to 2018, the volume of commercialization between Mexico and the US went from 82 billion dollars to 612 billion dollars, that is an increase of 651%. Also, the exchanges between Mexico and Canada increased 808% in the same period which from a much lower base ($ 2.7 billion). Trades between Canada and the US more than doubled.
Besides, the agreement has gradually eliminated tariffs on most products, the agreement came with investment opportunities, job creation, greater competitiveness, development of a variety of sectors of the regional economy, and mainly, fostering better practices in different sectors.
Despite the economic benefits that NAFTA brought, some important commercial considerations were not included, such as, digital trade, labour, environment, technical standards, etc. This and other aspects led to the renegotiation of the terms of the new trade agreement between Mexico, the United States and Canada for more than two years.
NORTH AMERICA REGION AND THE “NEW NORMAL”
The pandemic and trade war are forcing companies to redesign their supply chains. In this scenario, regional trade and investment agreements provide an ideal infrastructure to shorten and reduce the risk in supply chains. More than ever, companies are in need to have supply options within the same hemisphere of their main consumption centre, to avoid shocks in the supply and demand sides. In this sense, Mexico becomes an excellent opportunity to bring new value chains, new industries and new economic activities.
What are the main provisions on T-MEC that protect free trade and investment within the North America Region?
Chapter 2 on National Treatment and Market Access
- Free trade is maintained for all originating goods, the prohibition of export taxes, regulation for the application of import and export restrictions, refund and deferral of customs duties, and the prohibition of applying performance requirements for exemption from customs duties.
- Disciplines regarding temporary imports of goods, goods reimported after repair or alteration are updated; commercial samples and printed advertising materials.
- New disciplines on import and export license establishing commitments on notification and transparency.
- New disciplines to regulate the trade of remanufactured goods in the region to prevent these products.
Chapter 14 on Investment
- This Chapter updated the NAFTA disciplines on the protection of North American investors and outlined the mechanisms through which foreign investors may resolve differences that may arise from the alleged violation of the provisions of the Agreement.
Chapter 15 on Cross-Border Trade in Services
- The principles applicable to trade in services include: National Treatment, Most Favoured Nation Treatment, Market Access (prohibiting the implementation of quantitative limitations, economic necessity tests) and Local Presence (to avoid the obligation to establish or maintain a representative office or a company in a respective territory as a condition for the cross-border supply of service).
- Support for the development of trade in services for the benefit of Small and Medium-sized Enterprises (SMEs).
- Free and immediate transfers and payments related to the cross-border supply of a service.
There is no doubt that T-MEC will not only strengthen the North America regional economic integration but will also create opportunities for foreign companies to make successful investments in manufacture, financial and services sectors. As the trade war continues, companies need to redefine their business strategy taking advantage of the multiple trades and investment benefits included in regional free trade agreements.
IF YOU WANT TO KNOW MORE ABOUT COMMERCIAL REPRESENTATION SERVICES IN ASIA, DO NOT HESITATE TO CONTACT US.
Written by Susana Muñoz Enríquez, Managing Director in GBA LatAm Trade and Investment Advisors
The recent outbreak of COVID-19 has severely disrupted our daily lives and business operations. As of 19 July 2020, the total confirmed cases in Hong Kong has reached over 1,800. To minimize transmission of imported cases, a mandatory 14-day quarantine for persons entering Hong Kong was implemented on 8 February 2020. Under the travel restrictions, multinational companies requiring routine travelling have been forced to suspend business trips, changing their work patterns.
Recently, the Government of Hong Kong SAR announced that Hong Kong enterprises with manufacturing operations in the Mainland can apply for exemption from the compulsory quarantine arrangement. Under the amended section 4(1)(b) of Cap. 599C, the Chief Secretary for Administration has exempted the following category of persons from the compulsory quarantine arrangement with effect from 4 May 2020 –
(a) either the owner of a Hong Kong enterprise with a valid business registration certificate issued under the Business Registration Ordinance (Cap. 310) and with manufacturing operations in the Mainland, and up to one personnel employed and so authorized by the enterprise; or
(b) up to two personnel employed and so authorized by such an enterprise as described in (a).
Upon successful application, the exempted person may travel to and stay in the city where the Mainland factory of the enterprise’s manufacturing operations is located, for supporting the operation and business of the factory. When returning to Hong Kong, the person is exempted from the 14-day quarantine, but will be subjected to medical surveillance arranged by the Department of Health during his/her stay in Hong Kong, and will be required to wear masks and check body temperature daily, as well as to report to the Department of Health on any discomfort.
The above arrangement would allow flexibility for Hong Kong companies to send personnel to designated Chinese cities and support their manufacturing operations. The personnel are not subject to mandatory quarantine in Hong Kong when they return from their business trip. However, they may still be subject to local quarantine requirements in mainland China when they travel outbound from Hong Kong.
What CW can do for you:
CW can assist our clients with the application of the above-mentioned exemption including
- analyzing the application criteria, and
- preparing and submitting the application.
Written by Toby Wong, China Consultancy Team, CW CPA
FOREIGN DIRECT INVESTMENTS
The 2020 edition of the Negative List of Foreign Investment Access released.
On 23 June 2020, the National Development and Reform Commission and the Ministry of Commerce respectively issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2020 Edition) and the Special Management Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2020 Edition), effective as of 23 July 2020. The national negative list of foreign investment access has been reduced from 40 to 33, and the negative list of foreign investment access in pilot free trade zones has been reduced from 37 to 30. The main changes include the following:
- In the pharmaceutical industry, the prohibition on foreign investment in traditional Chinese medicines prepared in ready-to-use forms will be removed.
- In the education sector, wholly foreign-owned vocational education institutions with schooling are allowed to be established.
- In the financial sector, the restrictions on the ratio of foreign shares in securities companies, securities investment fund management companies, futures companies and life insurance companies will be removed.
- In the infrastructure sector, the provision that the construction and operation of urban water supply and drainage networks with a population of more than 500,000 must be controlled by Chinese investors will be removed.
- In the manufacturing sector, the restrictions on foreign shares in commercial vehicle manufacturing will be removed, and the provisions prohibiting foreign investment in radioactive mineral smelting, processing and nuclear fuel production will be removed.
- In the agricultural sector, the proportion of Chinese shares shall not be less than 34% on breeding of new wheat varieties and seed production.
China to tighten regulations on cosmetics business.
On 29 June 2020, The Regulations on Supervision and Administration of Cosmetics (hereinafter referred to as the “New Regulations”) was officially promulgated and will take effect on 1 January 2021.
Compared to the existing regulations, the new regulations have stepped up to tighten the administration and supervision of market players in the cosmetics industry. Highlights include:
- The new regulations clearly stipulate the types of new raw materials that need to be put on record and registered, as well as the specific procedures, the materials submitted, and the review period.
- Reclassify the categories of cosmetics.
- It further clarifies the responsibilities and obligations of relevant personnel, and their legal liability of noncompliance.
- The new regulations put forward requirements for the actual effect of efficacy components and raise higher expectations on cosmetics producer’s management and research and development.
- The new regulation has increase penalties for violations and committed drive serious offenders out of the market.
Personnel entering Guangdong Province at Guangdong Macao port will no longer be subject to centralized isolation from 15 July 2020.
Since 6:00 a.m. on July 15, personnel entering Guangdong Province from Guangdong and Macao ports will no longer be subject to centralized isolation for 14 days of medical observation, except for those diagnosed with COVID-19, suspected to be infected, having had close contacts with patients, showing signs of fever or respiratory symptoms, or having been visited by overseas personnel within 14 days prior to arrival in Guangdong province. Pre-entry preparations include: (1) Completion of nucleic acid testing. (2) Application for “Macao Health Code” and “YueKang Code”.
Personnel who enter the Guangdong province through Macao can only conduct activities in nine cities, namely Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, Zhaoqing.
For Macao residents who work or live in Guangdong province and mainland China residents who come back to Guangdong province after visiting Macao, their movements are limited to Guangdong province.
The People’s Bank of China to Launch Two Year Trials for Large-sum Cash Management.
The People’s Bank of China recently issued the “Notice of the People’s Bank of China on the launch of Large-amount Cash Management pilot project”, in which it has decided to carry out the pilot project in Hebei Province, Zhejiang Province, and Shenzhen from July 2020.
In all the pilot areas, cash transactions of 500,000 yuan or more in business accounts will be monitored and regulated.
For personal accounts, Hebei, Zhejiang and Shenzhen have set regulation thresholds at 100,000 yuan, 300,000 yuan and 200,000 yuan, respectively. Residents the pilot areas will need to provide information about the source of deposits or the purpose of withdrawals for transactions over the threshold.
Financial institutions should make sure personal deposits or withdrawals exceeding the threshold amount are traceable and associated with serial numbers of physical cash.
Greater Bay Area – “Cross-border Financial Management Link” is about to be implemented.
To support the development of Guangdong-Hong Kong-Macao Greater Bay Area (“GBA”) and facilitate cooperation between mainland China and Hong Kong as well as Macao, on 29 June, the People’s Bank of China, the Hong Kong Monetary Authority, and the Macao Monetary Authority decided to launch a “Cross-border Financial Management Link” program in the GBA .
“Cross-border Financial Management Link” facilitates cross-border investments of individual residents of GBA in financial products sold by the Banks in GBA. Mainland residents in GBA may open special investment accounts with banks in Hong Kong and Macao to purchase eligible investment products sold by these banks. Residents of Hong Kong and Macao can open special investment accounts with mainland banks in the mainland GBA cities to purchase eligible wealth management products sold by mainland banks.
Shenzhen issues guidelines on applying individual income tax subsidies in the Greater Bay Area.
On 2 July 2020, Shenzhen issued the Notice on implementing the Preferential Policies of Individual Income Tax in the Greater Bay Area of Guangdong province, Hong Kong and Macao, and the Guidelines for the Application for Subsidies of Individual Income Tax for 2019 for high-end talents and talents in short supply.
Eligible applicants will be granted subsidies according to the difference of individual income tax burden between the mainland and Hong Kong. And the subsidies will be exempted from individual income tax.
China announced new tax policies to support film businesses.
In order to support the development of film and other industries, the relevant tax policies are announced as follows:
- From 1 January 2020 to 31 December 2020, the income obtained by taxpayers in providing film projection services shall be exempted from VAT.
- The longest period for loss carried forward of film industry enterprises in 2020 will be extended from 5 years to 8 years.
- From 1 January 2020 to 31 December 2020, the construction fee of cultural undertakings will be exempted.
Written by China Consultancy Team, CW CPA