There is a surprising kink in the cable of the VAT / business tax reform in China. VAT is being withheld on royalties paid to foreign companies – see the articles below.
This is a serious matter, and so wide-spread that two of my clients have already complained about it.
Here is the issue: Chinese company uses copyrights/patents etc. from a U.S. company. Chinese company pays the U.S. company royalties. On the licensing service supplied by the U.S. company 6% VAT is due. This is collected by way of a reverse charge (self-assessment), by the Chinese company. So far, this is fine.
The U.S. company agreed that the royalty payment (license fee) would be “exclusive of any taxes”. This means that taxes must be added by the Chinese company. For the VAT, the expectation would be that the Chinese company has the right to credit or deduct the VAT on the license fee. Thus, VAT would not be a cost to the Chinese company. This is not in dispute.
According to the new rules, the Chinese company must withhold 6% VAT from the payment. Again, this VAT is recoverable to the Chinese company.
The solution is of course to change the license agreement in such a way that the U.S. company is compensated for the withheld VAT.
If you have any experience with this, please let me know!