Listed firms face tax crackdown

PUBLISHED : Tuesday, 01 June, 2010, 12:00am
UPDATED : Tuesday, 01 June, 2010, 12:00am

Mainland tax authorities are getting stricter with companies listed overseas, ordering them to withhold the dividend tax.

However, tax professionals say that the tax on dividends is not new and the ruling is just to enforce the policy. The tax on dividends was announced in late 2007, but has not been strictly implemented by mainland companies.

Clement Yuen, China South tax leader at Ernst & Young, says the State Administration of Taxation (SAT) is cracking down on an existing policy which requires companies to withhold dividend tax.

SAT recently issued instructions to local tax authorities to examine the application of enterprise income tax (EIT) on dividends paid by publicly traded companies to non-resident enterprises.

The circular says authorities must investigate post-2007 dividends paid by enterprises that issued public shares (A-shares, B-shares, H-shares and other overseas shares) on domestic and foreign stock exchanges to confirm compliance with the requirements of the provisional administrative rules for withholding EIT on non-resident enterprises.

'The SAT ruling is for those companies that have not withheld the dividend tax and I think some of these firms may be penalised for it,' Yuen says. According to SAT, authorities are to inspect the withholding tax registrations, and filings of public companies, and obtain their dividend information to ensure that they inform non-resident enterprises of their EIT liability and withhold and pay taxes in accordance with the law. Mainland-listed companies that fail to withhold and pay the EIT will be given a deadline to complete the withholding obligations and will be subject to sanctions, SAT warns.

Yuen says that foreign funds investing in mainland companies will not withhold their investment as they have already factored in the dividend tax. However, a number of funds can take advantage of the double taxation treaty that exists between the mainland and Hong Kong. 'The impact of the dividend tax on the funds is not significant,' Yuen says.

According to the circular, local authorities must submit their investigation and settlement reports to SAT's international tax division by June 30. SAT has also called on authorities to enhance the administration and supervision of non-resident enterprises generally to protect the taxation rights and interests of the country.

Under the mainland's laws, withholding tax on dividends received by non-resident enterprises from resident enterprises is 10 per cent.