Your Taxes: World Business Tax Update

The EU allows countries to choose their own standard rate of VAT as long as it is at least 15%.

By LEON HARRIS
Chinese tax reform: We recently discussed the tremendous investment potential of China (Profiting from the China-Israel Express, Jerusalem Post, May 9, 2007, with guest writer Ziv Rtem-Bar) The new Corporate Income Tax Law establishes a unified 25 percent tax rate for almost all enterprises in China, whether domestic or foreign owned. This supersedes a 33% standard income tax rate for domestic companies and 0% or 15% or 24% for certain foreign invested enterprises. The Corporate Income Tax Law Implementation Regulations, dated December 6, were released by the State Council on December 11, 2007. The Chinese authorities are also expected to issue a series of circulars on various aspects. Various existing tax reductions applicable to "hi-new tech" enterprises, especially those located in National Hi-Tech Industrial Development Zones, will now be implemented nationwide. A company must satisfy all of the following criteria: (1) must be an owner of core proprietary intellectual property; (2) must be recognized as within the field of High-New technology supported by the Chinese government; (3) must have annual research and development (R&D) outlay of not less than a prescribed percentage of annual turnover; (4) must have income from High-New technology product or service of more than a prescribed percentage of the total income; (5) must have R&D personnel of more than a prescribed percentage of total employees. Infrastructure projects and environmentally friendly projects are entitled to a 3+3 tax holiday, i.e., a three-year exemption followed by a three-year 50% reduction starting from the first year in which the company receives its operation income. Projects involving agriculture, forestry, animal husbandry and fishery can be entitled to a complete exemption or a 50% reduction. A "catalogue" will be jointly issued by the Ministry of Finance and SAT in consultation with the relevant industry supervisory ministries. Companies engaged in the recycling business can be eligible for a 10% reduction in taxable income. Enterprises purchasing special equipment that is environmentally friendly can claim 10% of the purchase price as an income tax credit in the year of purchase. A 10% withholding tax will be imposed on passive income, including dividends, royalties, interest, capital gains, etc., which is equivalent to the treaty rate offered by many tax treaties to which China is a party, including Israel. Until the end of 2007, China did not impose withholding tax on dividends. Complex treaty rules apply to capital gains. With regard to transfer pricing, the required documentation includes contemporaneous pricing policies, calculation methods and explanations, comparables, profit levels, etc. The documentation must be submitted by the taxpayer within the deadline imposed by the tax authority. EU VAT reform The European Union allows countries to choose their own standard rate of VAT as long as it is at least 15%. In practice, the standard rate is usually in the 15%-25% range. Under the EU "VAT Directive 2006/112/EC" of 28 November 2006 the supply of services is in principle taxable at the supplier's place of establishment. However, several exceptions to this general rule have been introduced. In particular, electronically supplied services, supplied by non-EU suppliers (e.g. Israeli companies) to private consumers in the EU, will be taxable at the place where the customer resides or has a permanent address. For example: If a Swedish private consumer makes use of an Israeli on-line library, 25% Swedish VAT will have to be paid on the amount the Israeli company charges. There have been some well publicized cases of non-EU service and Internet suppliers basing themselves in Luxembourg or Madeira to qualify for a low 15% rate on supplies to private customers across the EU. The ECOFIN Council of the EU has just reached political agreement on new "place-of-supply" rules for EU VAT on business-to-business (B2B) and business-to-consumer (B2C) transactions in services. Commencing in 2010, VAT on B2B supplies of services will generally be accounted for in the country of the customer through the application of the reverse charge (self VAT assessment by customers). But for B2C supplies of services, the general rule will continue to be where the supplier is established. However, it is only in 2015 that B2C supplies of telecoms, broadcasting, and digitized services will become subject to VAT in the customer's country of residence. For B2C suppliers of telecoms, broadcasting, and electronically supplied services, the seven-year delay in implementing the place of supply changes will give comfort to those businesses currently located in VAT-favorable locations such as Luxembourg or Madeira. However, suppliers in less favorable locations - such as Israel or an EU country with a high VAT rate - should now review their position in light of the current VAT rules remaining in place until 2015. As always, consult experienced tax advisors in each country at an early stage in specific cases. leon.harris@il.ey.com Leon Harris is an international tax partner at Ernst and Young Israel.