e-Taxation

The 5% business tax, which is imposed on the transfer of intangible assets (including the right to use such assets) to a transferee in China (including by a foreign company that does not have a PE in China), represents a significant cost to the transferor. The business tax is levied in addition to any withholding tax and, because it is a tax on gross receipts, is unlikely to be creditable for foreign tax credit purposes in the foreign company's country of residence. The Chinese tax authorities have waived imposition of the business tax in certain instances to ease the tax burden on foreign corporations, provided China's Scientific Commission is satisfied that it represents a transfer of advanced technology into China.

With effect from March 1 2000, Chinese companies paying fees overseas must obtain a tax clearance, in the form of either an exemption certificate or a tax receipt, before they can proceed with remittance. In the case of a software fee payable for downloading via the Internet, the customer would likely be required to withhold tax at the rate of at least 10%. The customs duty and VAT implications of importing software by downloading it from the Internet have yet to be clarified. In practice, Chinese customs officials may challenge, or at least make inquiries, regarding the charging of a software fee or royalty to a Chinese company (Law & Lam, 2001).

In taxing e-Commerce, policymakers around the world are trying to strike a balance between securing sufficient tax revenues, ensuring equal treatment with conventional retail methods, and encouraging the growth of e-Commerce. Like other countries, China will eventually tax e-Commerce, but it is far from clear how the existing law on taxation of traditional business activities will be applied and enforced with respect to e-Commerce. On various occasions, government officials from the central tax authorities have indicated some directions China's taxation of e-Commerce might take:

• Although China will not forgo the right to tax business transactions on the Internet, it is likely that some preferential tax treatment will be given to e-Commerce in order to foster its development.
• It is unlikely that China will adopt a policy of imposing a new tax specially aimed at online business. Rather, the existing taxes on traditional business will be applied to online transactions.
• The central government has set up a special panel to work out a regulatory framework as well as technological solutions that ensure efficient supervision of e-Commerce taxation (Nelson & Leigh, n.d.).