Circular of the State Administration of Taxation (SAT) and the State Administration of Foreign Exchange (SAFE) on Strengthening Administration of Tax Collection on Shipping Income of Foreign Companies and Administration of External Payments in the International Ocean Shipping Industry

Promulgated on December 4, 2001 GuoShuiFa [2001] No.139

SAT bureaus, local taxation authorities in all provinces, autonomous regions, municipalities directly under the Central Government, and municipalities separately listed on the State plan; SAFE branches in all provinces, autonomous regions and municipalities directly under the central government, exchange administration offices, and SAFE branches in the cities of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo; and all designated foreign exchange banks:

A circular is hereby issued as follows in accordance with the country's tax laws and regulations and relevant provisions on foreign exchange administration with a view to implementing the Procedures Concerning Tax Collection on Shipping Income of Foreign Companies (CaiShuiZi [1996] No. 087) (hereinafter referred to as the Procedures) approved by the State Council and further strengthening and improving administration of tax collection on shipping income of foreign companies and administration of external payments in the international ocean shipping sector:

1. Withholding agents of tax payables as mentioned in Article 3 of the Procedures refer to the organizations or individuals (hereinafter referred to as withholding agents) that, according to relevant provisions of the State, are responsible for directly or indirectly paying freight charges to taxpayers as mentioned in Article 3 of the Procedures (hereinafter referred to as taxpayers), including solely foreign-funded shipping companies, international shipping agencies, international freight agencies, and other organizations or individuals that make external payments of international ocean shipping charges.

Withholding agents shall perform the duties of withholding and collecting tax payables from taxpayers and paying the taxes on their behalf according to relevant provisions of the country's laws and regulations.

2. Prior to an external payment of freight charges, a withholding agent shall always withhold tax payables directly from the freight charges payable to a taxpayer by taking as taxable income the full amount of freight charges for external payment and calculating tax payables at the "comprehensive computation and collection rate" as provided by Article 4 of the Procedures.

Meanwhile, a Statement of the SAT on Withholding and Paying on Agency of Income Tax on Shipping Income of Foreign Companies shall be submitted to the local bureau of the SAT, and a Statement on Withholding and Paying on Agency of Turnover Tax on Shipping Income of Foreign Companies shall be submitted to the local taxation authorities in accordance with relevant provisions. The statement required in Article 9 of the Procedures may not be submitted any more if there is no special requirement from the local taxation authorities.

3. When a withholding agent pays freight charges to a taxpayer under export account in international trade, it may, after authenticity verification by the designated foreign exchange bank, make the external payment directly from its relevant foreign exchange account by presenting the contract or agreement, and the invoice and bill of lading (or duplicate) issued by the shipping company outside the territory, and submit the certificates issued by the local taxation authorities that acknowledge full payments of enterprise income tax and turnover tax, or alternatively, the Certification Formula of the SAT of the People's Republic of China for Exemption of Enterprise Income Tax on Shipping Income of Foreign Companies (hereinafter referred to as Certification Formula for Exemption of Income Tax) and the Certification Formula of the SAT for Exemption of Turnover Tax on Shipping Income of Foreign Companies (hereinafter referred to as Certification Formula for Exemption of Turnover Tax). No external payment in foreign exchange shall be made without the necessary taxation certificates or tax exemption certificates.

Taxation certificates and tax exemption certifications may not be required for external payment of ocean shipping charges under import account in international trade.

4. If a taxpayer is to enjoy tax reduction or exemption treatment according to the treaties on avoiding double tax collection, treaties on mutual exemption concerning international shipping income of ocean shipping enterprises, ocean shipping treaties and other related agreements or exchanges of notes signed between China and other countries, he shall, either by himself or by authorizing his withholding agent, report by filling out the Certification Formula for Exemption of Income Tax to the local bureau of the SAT and the Certification Formula for Exemption of Turnover Tax to the local taxation authority.

The local taxation authority will issue to the taxpayer or his withholding agent the Certification Formula for Exemption of Income Tax or the Certification Formula for Exemption of Turnover Tax after examining and certifying the credentials of the said taxpayer issued by the taxation authority of the contracting party, or the legal person's certification papers issued by the shipping authority of the contracting party, or other valid certificates that are capable of proving the identification of the said taxpayer.

The Certification Formula is valid for three years starting from the day it is issued by the taxation authority. If the resident identity of a taxpayer changes within three years or if the taxpayer seeks renewal of the tax exemption treatment upon expiry of the Certification Formula after three years, a new application for the exemption shall be filed with the taxation authority.

Tax exemption treatment may not be enjoyed if due application fails to be filed or if related certification papers fail to be provided. If a taxpayer fails to submit tax exemption certificates in time, he may pay due taxes first in line with relevant provisions and seek reimbursement after all certificates are completed.

5. If a taxpayer collects freight charges directly from a payer outside the Chinese territory for transporting passengers, goods or mails by vessel out of the territory from a Chinese port, he shall declare by himself for tax payment to the local bureau of the SAT and local taxation authorities within the same jurisdiction where the port of departure belongs.

Upon knowledge of the above-mentioned freight payment terms, any organization or individual within the territory who handles related business for such a taxpayer shall timely report to the local bureau of the SAT and local taxation authorities with a Statement on Shipping Income of Foreign Companies Collected outside the Territory, and an account of the taxpayer's shipping operations in China.

Penalties shall be imposed according to relevant provisions of tax laws and regulations should the taxpayer fail to declare for tax payment in time, or should any organization or individual within the territory who is aware of the taxpayer's behavior fail to report to taxation authorities.

If a taxpayer fails to declare within one tax year the taxable amounts he has received, and in the meantime fails to apply for the tax exemption treatment under agreement, the local bureau of the SAT and local taxation authorities shall timely report the relevant circumstances of the said taxpayer level by level to the SAT.

6. Taxation authorities in all localities may pay withholding commissions to withholding agents according to relevant provisions of the Circular of the SAT on Readjusting the Proportion of Commissions Drawn on Withheld Taxes by Foreign Shipping Agency Branch Companies (GuoShuiHanFa [1990] No.380).

7. Starting from the date of issuance of this Circular, taxpayers who are eligible to enjoy tax exemption treatment according to relevant provisions may either apply on their own for tax exemption certificates at the county- or above-level taxation authorities at the location of ports, or alternatively, authorize their withholding agents to apply for the certificates at the county- or above-level taxation authorities at the location of the withholding agents.

8. Anyone who violates the above-mentioned provisions shall be punished in accordance with the Law of the People's Republic of China on the Administration of Tax Collection and relevant regulations, as well as the relevant provisions of the State on foreign exchange administration.

Taxation authorities of all localities, after granting shipping income tax exemption certificates to taxpayers, shall report all necessary information of the taxpayers level by level to the SAT for record.

Based on what is reported by localities, the SAT will release, in collaboration with the SAFE, a non-periodical list of foreign companies that enjoy tax exemption treatment.

Withholding agents may present duplicates of the tax exemption certificates to designated foreign exchange banks upon payment of freight charges to taxpayers that are included in the tax exemption list.

9. This Circular shall enter into force as of May 1, 2002.

Promulgated by The State Administration of Taxation, the State Administration of Foreign Exchange on 2001-12-4