The Ministry of Finance and the State Administration of Taxation have jointly announced the amendments to the Implementing Rules of VAT, Business Tax and Consumption Tax Regulations, which will all become effective from January 1, 2009.

A significant change is noted in the amended Business Tax Implementing Rules on the definition of “onshore service”. Under Article 4(1), the taxable services received or provided by an entity or individual “located within the territory of China” shall be regarded as “onshore services”, and as a result will be subject to Business Tax in China. However, in the previous version, the same was depicted as “taxable services performed within the territory of China”. Following such change, transfer of intangible assets shall also be subject to Business Tax if the assignee/transferee is located within the territory of China. This replaces the old rule which assess the tax depending on where the assets are used. Both changes represent an overhaul of the old business tax levying principle.

It is estimated that these new changes will increase the turnover tax cost for cross-border services and intangible assets transactions, including such kind of arrangements for special purpose, e.g. under a portal model. It is reported that the Chinese financial and tax authorities are contemplating a follow-up notice to exempt the Business Tax for the services provided by China-located enterprises/individuals to recipients outside of China in order to encourage export of labour service.

(Note: “Portal Model” is an investment arrangement by combining the onshore operating vehicle and offshore financing and management vehicle through a set of cross-border associated transaction arrangements for the purpose of bypassing the market entrance limitation under the Chinese law)