China: taxation of non-resident enterprise subject to VAT pilot program clarifiedMarch 8, 2013
The State Administration of Taxation (SAT) issued an announcement on 19 February 2013 (Gong Gao  No. 9) clarifying that value added tax (VAT) shall not be included in the tax base in determining enterprise income tax of a non-resident enterprise as described in paragraph 3 of article 3 of the Enterprise Income Tax Law (EITL), if the non-resident enterprise is subjected to the VAT pilot program.
Paragraph 3 of article 3 of EITL provides that a non-resident enterprise without an establishment in China (or having an establishment, but income derived is not connected with such establishment) is liable to tax only on Chinese-sourced income, including the income from services, sales of goods, rental income, dividends, interest and royalties and so on.
In the VAT pilot program, a non-resident enterprise providing certain services is subject to VAT instead of business tax. This apparently raises a question for some taxpayers as to whether VAT is included in the tax base in determining enterprise income tax on the basis of paragraph 3 of article 3 of EITL.
The announcement clarifies that this is not the case.
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