The State Administration of Taxation (SAT) issued an announcement on 19 February 2013 (Gong Gao [2013] 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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