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13/12/11 - A Successful Tax Appeal

One of our clients, a listed foreign company, provides design services in China. 10% on the contract value for their services performed in China is withheld by its customer and paid to the Chinese tax authority as WHT (“Withholding Tax”).  The WHT for the past three years amounts to approximate 10 million RMB.  However, according to the Double Tax Agreement between China and the home country of our client, the performance of this company shall be treated as pure services and no WHT shall be levied. Back in our client’s home country, the in charge tax authority would not allow the credit for the WHT paid in China and imposed local taxes, which left our client with a double taxation. Therefore, we, WTS China, were engaged to deal with this issue and to raise tax refund application to the Chinese tax authority.

According to the relevant Chinese tax regulations, the taxpayer is only eligible to claim tax refund within three years after the tax was paid. To meet this time limit, we firstly submitted a refund application to the in charge tax authority which was rejected with an official refusal notice. We, aligned with the client, decided to go for tax appeals at both local and state tax bureau in July 2011. After rounds of explanation and discussion with tax authorities of different levels from district to province, we successfully won the tax appeals at both local and state tax authorities. Our tax refund application was finally approved and the WHT paid till October 2011 was returned. Furthermore, it was agreed by the tax authority that no WHT shall be withheld going forward on the same services performed by our client.

This case lasted about one year starting from the initial information collection. At least 5 tax authorities were directly involved. What’s more, this case has been selected by the State Administration of Taxation as a typical case for an internal case study. Through this case both tax authorities and we have got a deeper understanding of each other. We have been keeping good communication with all involved tax authorities ever since and we would even consult each other regarding various tax topics.

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