e-Taxation

China has not released any general public reports nor taken any active measures on the taxation of e-business, although the State Administration of Taxation (SAT) has an internal committee looking at this particular issue. Certain tax incentives are, however, available for hi-tech companies, including Internet start-up companies. For example both Shenzhen and the Zhongquanchun area near Beijing are offering additional tax holiday incentives. Instead of the usual two years taxfree, three years 50% concessionally-taxed holiday period (2+3) available to most foreign investors, these companies may be eligible for an additional three to five years 50% concessionally taxed holiday period (Farrell & Yuen, 2000).

In the income tax context, given China's extensive tax treaty network, one highly relevant issue for non-residents doing business in China is whether their activities give rise to a permanent establishment (PE). The definitions of a PE in China's tax treaties generally follow the definition in the OECD model treaty. Provided the business profits from e-Commerce of a resident of a country that is a treaty partner of China are not attributable to a PE of that non-resident in China, the non-resident will not be liable for China income tax on those profits.

VAT is imposed on the sale of goods, the provision of certain services in China and importation into China. Because foreign companies are not permitted to carry on trading businesses in China, a foreign e-Commerce company should not have to account for VAT on its sales in China. However, the customers of a foreign e-Commerce company making sales into China may be liable for VAT, customs duty and consumption tax depending on the nature of the goods they are importing into China. Although the foreign e-Commerce company is not the taxpayer, this liability of its customers in China will affect the affordability of its products in China and may factor into pricing determinations.

If the e-Commerce income is in the nature of a royalty, the income will be subject to Chinese withholding tax. The government has unilaterally reduced the rate of withholding tax to 10% of the gross receipts, regardless of whether it is paid to a treaty country. If there is a treaty, it may be possible to further reduce the effective rate to 7% of the gross, subject to the provisions of the treaty protocol, if applicable.