China has recently promulgated a new law which imposes tax on profits from freights of inbound routes. The objective of the new tax law titled ‘Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business’ (Bulletin of the State Administration of Taxation 2014, No. 37) is to strengthen the tax administration of foreign companies operating international transportation business with China. In that regard, Deloitte attempts to elaborate on future changes.
What has changed?
Until recently, China had only been taxing international outbound routes with an effective tax rate of 1.25% on the gross revenue. The new rules extend the scope of the tax to inbound routes, and increase the tax rate. As of August 1st, 2014, freights of non-resident shipping companies operating in international routes towards Chinese ports are expected to pay a new tax rate (Enterprise Income Tax – EIT) of 25% on profit. The tax is levied on freights on voyage charters and time charters.
How does this impact Greek shipping?
The Double Taxation Agreement (“DTT”) and the Merchandise Franchise Agreement (“MFA”), which Greece and China have in place, protect Greek shipping companies or non-Greek shipping companies that are managed by Greek management offices by exempting them from any tax on freight transportation income in Chinese ports. It is important to note that the exemption is not automatic; once the Chinese authorities finalize the filing requirements, close attention shall need to be paid to the completion of necessary documentation in order to secure the exemption. Additionally, the Greek Government is in the process of setting up further safeguards by amending laws related to tax residency certificates in order to ensure that the Greek shipping companies will be exempted from this new levy. In this case, the impact of the new law could only be compliance requirements and not actual tax costs. However, it is still unclear if the DTT and the MFA mentioned above and the submission of the necessary tax residency certificate will have the power to secure shipping companies exemption from this tax law. Deloitte is following closely any development and will keep its clients informed on any news.
Thomas Leventis, partner of Deloitte explains to chinaandgreece that Greek shipping companies ‘should monitor developments regarding changes in the Chinese law, in order to provide necessary documents according to guidelines and be exempted on the basis international agreements’. If no exemption is agreed, ‘Greek shipping companies will be charged at a rate of 3.75% on the fare,’ but ‘the cost could be precisely calculated when future actions will be defined‘.