Journalism

Discussion on tax issues related to engineering design!

2021-07-14
Under the initiative of "one belt and one road", more and more EPC (equipment, design and construction) contracting projects are implemented and developed overseas. Among them, engineering design is the core link in the whole EPC general contracting, which plays an important role in controlling the construction period, quality, quotation and cost of overseas projects.The tax collection and management of engineering design in China and overseas host countries is also more complex and sensitive.The engineering design services provided by China's "going out" construction enterprises are mainly related to the issues of value-added tax and enterprise income tax between China and the host country (the country where the project is located). The author makes the following preliminary discussion for the relevant parties to discuss and discuss.

For cross-border services, China still follows the original business tax principle after replacing business tax with value-added tax That is, the principle of the place where the labor service takes place 。According to this, we can distinguish the service taxation in China and abroad. In practice, we mainly judge the place where the tax liability occurs and the place of collection and management by whether the service provider or the recipient (Beneficiary) is in China.In addition, there are foreign exchange controls in China. For non trade payment of foreign exchange, it is necessary to provide corresponding tax or tax-free certificates. Most basic tax authorities are very cautious and strict in the tax-free collection and management of service fees paid overseas. Only when both the service provider and the recipient are outside China can they directly judge whether VAT will be levied.The relevant provisions of China's value-added tax (VAT) on cross-border services (export of labor services) are exempted from one link of output VAT. Only a number of cross-border services (such as cross-border design services) listed in the positive list can enjoy "zero value-added tax", that is, like export goods, they are entitled to "offset and refund" related input value-added tax,In fact, only "zero value-added tax" cross-border services in the real sense of the "value-added tax" and "export" without tax.
In the host country, it is more complex and diverse to judge whether cross-border services should be subject to value-added tax.Many host countries refer to the EU regulations on cross-border service value-added tax and OECD guidelines on cross-border service value-added tax.In a nutshell;For the cross-border services of B2B, the destination principle or the final place of consumption is generally adopted. For the physical service, that is, the provider and the receiver of the general service are in the same place, the proxy is used to determine whether there is a legal registration agency or actual business place in the host country.For cross-border services, i.e. "imported" services, most countries adopt the "reverse charge mechanism" under the EU or OECD VAT guidelines. In other words, when an overseas party provides services to China, the domestic service recipient can pay VAT on behalf of the overseas party without tax registration in China,The value-added tax declared and paid by the domestic party constitutes its input value-added tax, and its output value-added tax can be deducted.Therefore, it does not constitute the cost of overseas service provider or domestic service receiver, which is a complete VAT deduction chain.
According to China's relevant regulations after "replacing business tax with value-added tax", in order to encourage cross-border design services and improve the competitiveness of Chinese design units, cross-border engineering design conforming to the provisions of value-added tax can enjoy the "zero value-added tax" preferential treatment of "exemption, deduction and refund" for goods export.In other words, Chinese design units that meet the requirements can not only enjoy the exemption of output value-added tax for cross-border design, but also apply to the local tax authorities for refund of all input value-added tax involved in the overseas engineering design services, so as to truly realize the "export" of cross-border design services without tax.When judging the conditions of "zero value-added tax" in practice, most Chinese tax authorities think that engineering design service belongs to professional technical service. To enjoy the preferential treatment of "zero value-added tax", the service must be "service consumed abroad".Generally speaking, the Chinese general contractor has signed an overseas project (EPC equipment design construction) general contract with the overseas owner (Party A), and then will subcontract the overseas design service part to the Chinese design unit.In order to prove that the overseas engineering design service meets the conditions of "zero value added tax".Chinese tax authorities generally require Chinese design institutes to provide some evidential materials: for example, the general contract signed between the Chinese general contractor and the overseas owner, the subcontract agreement signed between the subcontractor and the general contractor, as well as the bidding certificate of relevant engineering design service projects. In some cases, it is also required to provide a statement that the overseas project has nothing to do with the export of assets and goods in China,For example, whether the products are sold overseas and who owns the assets.In practice, if a design unit wants to enjoy the treatment of "zero value-added tax", in addition to providing the above-mentioned very complicated and detailed proof materials, it also needs to meet relevant requirements and consider relevant factors: for example, Chinese design units need to strictly distinguish, accurately calculate and report the design services at home and abroad,This has very high requirements for the financial and tax management standards of the design unit.Another example: in recent years, the VAT rebate policy and specific operation process have changed rapidly, which requires the design unit to timely understand, master and update, which undoubtedly increases the difficulty of tax compliance of design units.For example, because the preferential tax rebate policy may be affected by the time and the tax indicators of the local tax authorities, the local tax authorities are very strict and cautious in vetting the tax refund of cross-border design services. Generally, special value-added tax should be inspected before the tax rebate.In contrast, if the design unit only enjoys the treatment of value-added tax exemption for cross-border design services, its tax compliance is relatively simple and easy, it only needs to file with the local tax authorities, and the tax declaration is carried out along with the normal declaration, and no more declaration information is required.In terms of financial and tax treatment, only input value-added tax of relevant cross-border design services should be transferred out, and the output value-added tax can not be deducted, but it can be used as a cost in the front of enterprise income tax.Therefore, in reality, many Chinese design units give up the preferential treatment of "zero value-added tax" and choose the treatment of exemption from value-added tax.The author suggests that: for the design units with small cross-border design service income and less input value-added tax, they can also choose to be exempted from value-added tax.However, for the design units with large cross-border design services and more input value-added tax, they should strengthen and improve their own financial and tax management, be familiar with the relevant tax rebate policies and operations, and make full use of the national "zero value-added tax" preferential policy, so as to truly reduce the cost of cross-border design services and achieve a comparative competitive advantage without tax.
Generally speaking, whether the operation income generated by cross-border services is subject to enterprise income tax in the host country depends on whether the cross-border service provider constitutes a tax resident in the host country.If the service provider is registered with a legal institution (such as a subsidiary, branch or project company) in the host country, it will constitute a tax resident of the host country and need to declare and pay the relevant enterprise income tax.The main situation discussed here is that the Chinese cross-border engineering design service providers have not registered with the legal institutions in the host country for various reasons. For example, the Chinese design subcontractors do not register and establish legal institutions in the host country, but use the legal entity and tax number registered by the general contractor of China to provide relevant engineering design services,In other words, it is a "recessive" legal and tax status in the country where the project is located.Therefore, it is difficult for the "hidden" engineering design subcontractors to be judged as local tax residents by the tax authorities of the host country, and then be subject to corporate income tax?Another example: according to the double tax agreement between China and the host country, if the Chinese expatriates temporarily enter the host country and provide services on site within the agreed time limit (e.g. 183 days), the host country should not judge whether it constitutes a permanent establishment (PE), that is, if it does not constitute a local tax resident, it will not have to pay enterprise income tax in the host country of the project.
According to the author's previous practical experience, most of the Chinese engineering design subcontractors will not register with the legal institutions in the host country and apply for the tax number. They only enter the country temporarily to do some site investigation before the project starts, or send personnel to enter the country temporarily during the project implementation to optimize and adjust the design scheme, or do on-site acceptance and test at the end of the project.Even if the Chinese engineering design subcontractors enter the country where the project is located, they often apply for entry by personal business visa or travel visa, or by borrowing the local legal institutions of China general contractor.In most cases, the temporary entry time is relatively short, which can be controlled within the time limit stipulated in bilateral tax treaties (e.g. less than 183 days).In addition, different from the traditional cross-border services, cross-border design services are not "experiential" services. They can use modern means to provide online remote communication, exchange and delivery, and do not have to go to the host country's project site or "face-to-face" payment. To a certain extent, it has the characteristics of "digital economy".Because the Chinese engineering design subcontractor has no registered legal institution in the host country, or the temporary entry time is very short.Especially in China, when the subcontracting agreement between engineering design subcontractor and Chinese general contractor is signed in China, the subcontracting agreement is often not submitted to the tax authorities of the country where the project is located. In addition, the engineering design subcontract payment is often not directly paid by the owner of the country where the project is located, but is paid by the Chinese general contractor in RMB in China. There is no record of direct corresponding payment in the host country.The above reasons have brought challenges to the tax authorities of the host country to determine whether to levy local value-added tax and enterprise income tax, as well as difficulties in specific collection and management.Based on the current situation of tax collection and management in most developing countries, most of China's engineering design subcontractors have not paid the enterprise income tax or value-added tax in the host country, thus resulting in the fact that the value-added tax of cross-border engineering design services in China and the host country is double non taxation.
As mentioned above, according to the relevant tax laws and regulations of the host country, the absence of tax payment by the host country does not mean that the Chinese engineering design "hidden" subcontractor does not have any tax risk, and the risk of being inspected by the local tax authorities of the host country or the tax adjustment and tax supplement still exists.The tax authorities of the host country can still collect the enterprise income tax and cross-border value-added tax according to the principle of the final consumption place of cross-border labor services and its relevant specific tax laws and regulations.However, for cross-border design services that are subject to value-added tax in the host country, generally in countries with "reverse value-added tax mechanism", the input value-added tax of the receiving party (or payer) of the host country can be deducted from the corresponding output value-added tax.In other words, the value-added tax "imported" by the host country is a non price tax, which will not have a substantial impact on the price of the Chinese engineering design supplier.Some tax authorities in some host countries even determine that cross-border engineering design services are directly related to local construction or civil engineering services after reviewing relevant EPC contracts, and then continuously and cumulatively calculate the entry time of relevant Chinese engineering designers, and then judge that the "permanent establishment" of the host country is the local tax paying residents, so as to verify and collect enterprise income tax,In other words, the enterprise income tax is not only levied on the local construction or civil engineering services, but also consolidated or summarized related engineering design services.
In order to reduce the risk of value-added tax and enterprise income tax of the above engineering design, the author hereby suggests: in view of the fact that in many countries, the architectural design standards adopted are European standards, American standards, even local standards and professional department certification of local countries, rather than Chinese standards.Chinese engineering subcontractors can consider cooperating with qualified design companies and engineers of the host country, and they will complete the main design work in China, and only subcontract or entrust the design services of non Chinese standard parts that need localization or use of local qualifications with the design companies of the host country,The final design result (report) is also delivered by the design company of the host country to the owner of the host country, which is called "OEM operation".Because the design company of the host country is the local normal taxpayer, with its legal status in the host country and the isolation of the taxpayer from the Chinese design subcontractor, the tax risk of the Chinese Design Institute in the host country can be reduced to.
In addition to the corporate income tax on operating profits, the above-mentioned cross-border engineering design services in the host country will also involve the issue of withholding income tax on royalties in cross-border design?It will also involve the tax planning of the relevant EPC contract spin off. Is it possible for the host country to make tax adjustment on the transfer pricing of the EPC project?The author makes further discussion on this, and then needs to clarify and analyze the following four key issues.
(1) Is engineering design a technical service?Or proprietary technology license?
Is cross-border engineering design a technical service or a license or transfer of proprietary technology?To clarify this issue is the starting point and basis of withholding income tax related to royalties. If only technical services are provided, the host country can determine whether it constitutes a local tax resident or not according to the relevant provisions of bilateral tax treaties of the two countries;If the duration of the service is to determine whether it constitutes a local tax resident, if the service is continuous or accumulated for more than 183 days in any 12 months?If so, it constitutes a permanent establishment and the tax authorities of the host country can tax the operating profits (positive income).If not, there will be no tax.In case of proprietary technology license or patent technology transfer?Then the host country can determine the tax according to its tax law or bilateral tax agreement, that is, withholding income tax on royalty (passive income).

(2) What objective criteria should be used to determine the licensing of proprietary technology?
At present, the main basis for Chinese tax authorities to judge whether cross-border design is royalty is "Notice of the State Administration of Taxation on issues related to the implementation of royalty provisions in tax treaties" (GSH (2009) No. 507), which states that "the service provider still retains the ownership of the achievement, and the service recipient has only the right to use the achievement,The income from such services is a royalty. "That is to say, at present, China's main tax laws and regulations for cross-border engineering design are judged by the legal terms of ownership relationship of proprietary technology in the design contract. Some local tax authorities even determine the withholding and payment of royalties only by looking at whether there are restrictive exclusionary clauses or confidentiality clauses in relevant design contracts.However, in reality, the situation is often complex and diverse.For example, in many countries, the transfer or license of patent technology requires the performance of relevant legal procedures, such as the registration of property rights in the Patent Office of the host country, the publicity and disclosure of patent technology license, etc.In many countries, there are also requirements for the qualification of local qualified design institutions. For example, only the design institutes approved or permitted by the relevant government departments of the host country can provide relevant design schemes and drawings.The author thinks: is the cross-border design fee royalty?It is too abstract and discontinuous to judge according to the ownership clause of proprietary technology in law.It is too formal and arbitrary to only look at whether there are exclusive restrictions or confidentiality clauses in the design contract. In this regard, the determination of the franchise should take into account the relevant conventions (such as the interpretation of the model tax treaty, the special provisions of the bilateral tax agreement), and adopt multiple reference factors to determine the essence of its economic activities, and then judge whether the relevant design patent license is involved.In particular, we should pay attention to and understand the relevant specific tax laws and identification standards of the host country, so as to accurately and pragmatically estimate and judge whether the cross-border engineering design involves royalties and the withholding income tax.

(3) Engineering design has both technical service and proprietary technology license. How to divide the tax base?
According to the past practical experience of cross-border design, the specific content of general engineering design is not only the design drawings in the country of residence, the final delivery scheme (achievement) in the host country, but also the exploration and site selection of the personnel stationed in the construction site of the host country in the early stage, as well as the optimization of the later scheme in the host country, on-site verification, etc.Engineering design is different from other R & D designs. The products after engineering design do not have universal replication, but are customized products with special requirements of customers (owners).Only the design with duplication can have the ownership problem, and then it can be determined that the royalty is involved.In other words, cross-border engineering design technical services generally account for the vast majority, and only a small part if there is professional technology or patent licensing.If there is no clear division of design fee in cross-border design contract?How to further determine the tax base of technical services and professional technology licensing?The author suggests that it is necessary to improve the quality of the products;If there is no distinction in the design contract or the tax authorities of the host country think that the distinction between the design units is not reasonable, the tax authorities can use a reasonable proportion to verify the levy, but the design contract should not be fully approved for the Levy of withholding income tax.

(4) How to reasonably split and match the cross-border design part in the EPC contract value?
At present, in EPC projects, the cross-border design part is generally signed and delivered as a whole with equipment and construction.How to reasonably divide and match the payment of design part and equipment and construction part?This is a very challenging issue of tax planning and anti avoidance.Generally speaking, most engineering design subcontractors prefer technical services, that is, tax planning is based on the nature of services (such as estimated turnover tax, corporate income tax).That is, the EPC general contract will be divided into two parts, namely, the equipment (materials) will be planned as the offshore goods sales of trade, and the engineering design planning will be planned as the offshore service in the host country, rather than the onshore service in the host country, and the construction or civil engineering will be planned as the onshore service in the host country.In the overall EPC contract splitting, the value of the design part is even more divided or distributed to the equipment part, so as to make the operating profit and tax burden of engineering design in the host country.The author suggests that it is necessary to improve the quality of the products;Chinese design units should make overall EPC planning legally and reasonably, and the price (profit) of engineering design part should not be excessively transferred to the equipment part, and the objective composition of scientific value among equipment, design and construction in EPC contract, as well as the organic comparison between personnel, materials and machines should be respected,In particular, professionals are required to make data comparison and proof on the comparability of transfer pricing in the same industry (providing special transfer pricing analysis report).In order to prevent the host country's tax authorities to make a large adjustment of transfer pricing, and then verify the collection of higher corporate income tax.
As far as the development of overseas EPC projects in China is concerned, the engineering design lags behind the equipment and construction, and there is still a big gap with the leading design companies in Europe and America, which restricts the rapid and healthy development of China's projects to a certain extent.In order to further support and encourage China's "going global" enterprises to provide high-quality and low-cost engineering design services, China needs to continue to issue corresponding tax preferential policies. At the same time, "going out" enterprises should also pay close attention to and grasp the specific provisions and changes of the corresponding tax laws and regulations of overseas host countries, control tax risks, and make legal and reasonable planning,In order to make the engineering design of our country self-improvement and healthy development as soon as possible.


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