Author: Jiang Yuesheng (Suzhou University International Taxation Strategy Research and Consulting Center) Foreign enterprises enter my country as non-residents to carry out business activities. my country taxes the operating profit income they receive except for negative income s

2025/03/0422:45:52 finance 1823

Author: Jiang Yuesheng (Suzhou University International Tax Strategy Research and Consulting Center)

Foreign enterprises entered my country as non-residents to carry out business activities. my country obtained excluding dividends, interest, royalties , rent There are two main forms of taxation for operating profit income other than negative income such as gold: one is to tax the tax residents of one party of the contracting party only for the profits that form permanent institutions in China and belong to permanent institutions in my country according to the provisions of the " Enterprise Income Tax Law " of my country. According to the time and space involved in the operation of non-resident enterprises in China, the factors of economic penetration and economic participation such as people, finance, and materials invested, permanent institutions belong to high-threshold connection and taxation rights, which reflects the preferential treatment for tax residents of the contracting countries, and institutions and places have low-threshold connection and taxation rights. The two are combined and each performs their respective duties, reflecting the integrity, pertinence and effectiveness of my country's taxation on the operating profits of non-resident enterprises. Compared with relevant regulations of the United States and other countries, what are the characteristics and shortcomings of my country's regulations on taxing the operating profits of non-resident enterprises in countries or regions that have not signed bilateral tax agreements with my country, what are the status of daily taxation and management, and what are the ideas and measures for further improvement and improvement? This article intends to put forward some of its own thoughts and opinions on the above issues.

1. Main features of my country's "institutions and places" tax clauses

my country's domestic legal provisions on taxing non-resident enterprises began with the "Foreign Enterprise Income Tax Law" (hereinafter referred to as the "81 Tax Law") issued on December 13, 1981 and the "Foreign Enterprise Income Tax Law Implementation Rules" (hereinafter referred to as the "82 Tax Law Rules") issued on February 21, 1982, which was popular in 1991 The " Income Tax Law for Foreign-invested Enterprises and Foreign Enterprises" (hereinafter referred to as the "91 Tax Law") issued on April 9, 2007 and the "Implementation Rules for Foreign-invested Enterprises and Foreign Enterprises" (hereinafter referred to as the "91 Tax Law Rules") issued on June 30, 1991, were in the "Enterprise Income Tax Law" (hereinafter referred to as the "07 Tax Law") issued on March 16, 2007 and the "Implementation Regulations for Enterprise Income Tax Law" (hereinafter referred to as the "07 Tax Law Regulations") issued on December 6, 2007. On July 26, 2010, the State Administration of Taxation issued the "Agreement of the Government of the People's Republic of China and the Government of the Republic of Singapore on the Avoiding Double Taxation of Income and Preventing Tax Evasion" and the Protocol Articles (hereinafter referred to as the "Interpretation of the Articles of the China-Singapore Agreement"), which comprehensively elaborated on my country's attitudes and positions on a series of issues including taxation of the operating profits of non-resident enterprises, and played a role similar to the model and interpretation of the Chinese royalty agreement. Since then, the Ministry of Finance and the State Administration of Taxation on the issue of taxing the operating profits of non-resident enterprises has mainly shifted to the implementation of policies for the determination of permanent institutions and their profit attribution under bilateral tax agreements, and has focused more on the resolution of daily collection and management issues such as accounting, declaration, remittance, and approval of non-resident enterprises. Whether the interpretation of permanent institutions in domestic law applies to institutions and places without tax agreements at the same time, various policy documents have become more vague.

Through the review of the above legal documents and relevant explanations of the Ministry of Finance and the State Administration of Taxation, my country's taxation of operating profits of non-resident enterprises in countries or regions that have not signed bilateral tax agreements with my country, with institutions and places as the core, has the following characteristics.

(I) Highlighting production and operation

"82 Tax Law Rules" Article 2, paragraph 1 stipulates: "The establishment of an institution mentioned in Article 1 of the Tax Law refers to a foreign enterprise that has an institution, place or business agent engaged in production and operation in China." Article 2 of the "91 Tax Law" also emphasizes that foreign enterprises refer to foreign companies, enterprises and other economic organizations that establish institutions, places and engage in production and operation in China. Articles 2 and 3 of the "91 Tax Law Rules" emphasize that income in China refers to the income from institutions and places to engage in production and operation.Article 5 of the "07 Tax Law Regulations" still adheres to the provisions of the previous tax laws, and clarifies that the institutions and places referred to in Article 2, paragraph 3 of the "07 Tax Law" refer to institutions and places that engage in production and business activities in China. It is worth noting that when Article 4 of the "91 Tax Law Rules" refers to business agents, it stipulates that companies, enterprises, other economic organizations or individuals engaged in business are entrusted by foreign companies to engage in business operations. Article 5 of the "07 Tax Law Rules" stipulates that business agents must engage in production and operation activities in China. In terms of the definition of business agent activities, the "07 Tax Law Rules" adds the word "production" before "operation" than the "91 Tax Law Rules", which is enough to show that my country's domestic laws recognize and attach importance to production and operation as the core of operating profits. This may be related to the development trajectory of my country's opening up to the outside world, starting from the manufacturing industry, and non-resident enterprises coming to China to carry out activities, and also starting from the manufacturing industry first.

(II) Focusing on institutions and places

"82 Tax Law Rules" set the stage first and the provisions are relatively rough. Article 2 and paragraph 2 stipulate: "The institutions and places mentioned in the preceding paragraph mainly include management agencies, branches, representative agencies and factories, places for exploiting natural resources, and places for contracting construction, installation, assembly, exploration and other projects." The issue of business agents has not been mentioned here. Article 3 of the "91 Tax Law Rules" stipulates that institutions and places refer to management agencies, business institutions, offices and factories, places for exploiting natural resources, places for contracting construction, installation, assembly, exploration and other engineering operations, places for providing services, and business agents. Compared with the "91 Tax Law Rules", the "91 Tax Law Rules" expresses institutions and places as business institutions and offices, which is more similar to the conceptual expression listed in the bilateral tax agreement on fixed places. The addition of business agents is also in line with the common practice of using business agents as permanent institutions in the tax agreement. The provisions of the China-Singapore Agreement include independent individual services in the scope of institutions and venues. Independent individual services have the requirements of fixed bases. The formation of a permanent institution for other labor activities mainly depends on whether the services are provided for more than 183 days and whether they accept the control and instructions of the headquarters. The venue is not one of the basic conditions for existence. The expression of institutions and places in Article 5 of the "07 Tax Law Regulations" is more similar to the terms of in the International Tax Agreement: (1) management agencies, business institutions, and service agencies; (2) factories, farms, places for exploiting natural resources; (3) places for providing labor; (4) places for engaged in construction, installation, assembly, repair, exploration and other engineering operations; (5) other institutions and places for engaged in production and operation activities. my country's domestic law clearly stipulates that business agents are institutions and places established by non-resident enterprises in China. The "Announcement of the State Administration of Taxation on Several Issues Concerning the Management of Income Tax for Non-resident Enterprises" issued on March 28, 2011 (Announcement of the State Administration of Taxation No. 24 of 2011) clearly states that if a non-resident enterprise appoints personnel to manage real estate in China or entrusts other units or individuals in China, it should be deemed to be the establishment of an institution and place in China.

From the above provisions, it can be seen that my country's institutions and places cover the scope of various permanent institutions such as fixed places, contracting projects, labor types, business agents, etc. in the tax agreement, and also includes independent personal labor. Non-resident enterprises engage in production and operation activities in my country, which constitutes an institution and place, that is, a tax connection degree that pays taxes in my country. Institutions and places have become synonymous with permanent institutions under conditions similar to tax agreements in my country's domestic laws. The conditions and thresholds for taxing the operating profits of non-resident enterprises under the conditions of no tax agreements are rare in similar domestic legislation around the world. This is also related to my country's process of opening up to the outside world and my country's system and procedures for foreign investment management. The first foreign permanent representative agencies and foreign enterprises that entered our country to conduct contracting projects usually need to be registered and approved as institutions, and both need office places or construction sites as support. Therefore, combining institutions with places to define the participation and tax connection of non-resident enterprises in my country's economic activities has an objective process and a reasonable side.

(III) There is a difference in the threshold of permanent institutions

According to international practices, the tax provisions of domestic laws on taxation of operating profits of non-resident enterprises must not only be close to the framework and definition of bilateral tax agreements, but also maintain a gap with bilateral tax agreements, reflecting the difference between the "high and low" thresholds stipulated by permanent institutions under bilateral tax agreements and domestic laws. my country's first bilateral tax agreement - the China-Japan Tax Agreement was signed in 1983, while the "81 Tax Law" provisions on institutions and places were implemented in 1982, proving that my country's provisions on taxation of the operating profits of non-resident enterprises are prioritized by domestic laws. Forty years, my country's domestic law provisions have tried to keep pace with and close to the provisions of the Organization for Economic Cooperation and Development (OECD) tax agreement template, the United Nations tax agreement template and the provisions of my country's bilateral tax agreement. Whether it is adjusted and modified to the concept of the organization and venue three times, or timely inclusion in business agents and independent individual services, this is a concrete manifestation of this practice. Compared with the provisions of the OECD tax agreement template, the United Nations tax agreement template and the bilateral tax agreement, there are mainly the following differences in my country's domestic legislation on institutions and places. First, there is a lack of duration requirement for the tax threshold for fixed places, contracting projects, labor-providing institutions, and places. Second, the regulations on the organization and place for storing and delivering goods are too broad. According to the logic of the relevant provisions of the OECD tax agreement template, it should be to regularly store goods from non-resident enterprises and deliver goods to customers as required, rather than just storing or simply delivering goods, which constitute taxable institutions and places. Third, preparatory and auxiliary activities were not clearly excluded. The "Notice of the State Administration of Taxation of the Ministry of Finance and the State Administration of Taxation on the Issuance of Industry and Commerce Unified Tax and Enterprise Income Tax on Permanent Representative Institutions of Foreign Enterprises" [(85) Foreign Taxation No. 197] once stipulated that the permanent representative institution only conducts preparatory and auxiliary activities such as liaison and negotiation, collecting business information for its head office to engage in self-operated commodity trade, and the price difference income and other income obtained by the commodity purchase and sale may be exempted from taxation. This provision has been abolished, and there are no provisions on exemption of taxes for institutional and venue preparation and auxiliary activities in domestic laws since then. Fourth, there is no clear whether the controlled connection formed by the parent and subsidiary due to equity relations constitutes an institution and place in my country, and there is no clear exclusion clause for independent agents. Fifth, the tax method for institutions and places is to deduct the relevant expenses of the total part of the income accounted for, or to divide the functions, risks and assets between institutions and places, and headquarters. The current policy is not clear enough. Article 3 of the "Regulations on the Approval and Collection of Income Tax for Non-resident Enterprises" (GuoShefa [2010] No. 19) requires non-resident enterprises to accurately calculate and declare and pay corporate income tax based on the principle that their actual functions are matched with the risks they bear. However, Article 7 also emphasizes that the labor income of non-resident enterprises in China should be fully declared and paid in China. If the domestic and foreign income cannot be reasonably divided, the tax authorities can deem that all the services they provide occur in China. This provision forms a certain contradiction with Article 3, indicating that, except for the total amount of the allocated expenses, non-resident enterprises do not have the possibility of dividing profits with the headquarters based on functions, risks, and assets. The above differences have led to the low tax threshold for institutions and places in my country. As long as non-resident enterprises form institutions and places in my country, they will be taxed regardless of the length of operation and whether they engage in preparation and auxiliary activities. This not only forms an excessive contrast with the permanent institutions under bilateral tax agreements, which is not conducive to the connection between domestic law and bilateral tax agreements, but also affects cross-border trade exchanges and personnel flow to a certain extent, and is not conducive to the implementation of bilateral and multilateral free trade agreements.

2. The inherent inadequacy of the tax clauses of my country's "institutions and places"

The domestic law on the "low threshold" of taxing the operating profits of non-resident enterprises under the conditions of no tax agreements and the "high threshold" applicable to permanent institutions under the conditions of bilateral tax agreements is a difficult task in legislation and collection and management.The provisions of domestic laws in most countries in this regard are rough and fragmented, and are mainly flexibly applied by court precedents and policy interpretations of the Ministry of Finance and Taxation Bureau. The domestic legal system formed in my country over the past 40 years, with production, operation, institutions, places, and approval and collection as its core content, reflects the openness of the application of international tax agreement rules and the specificity of the formation based on my country's opening process and management system. However, compared with developed countries, analysis from a sound and perfect perspective still has shortcomings in the following aspects.

(I) Business activities and production and operation

OECD tax agreement templates and notes and domestic laws of various countries lack clear definitions of "operation" and "operation activities". It can be seen from the judicial precedents of various countries that the business activities taxed by non-resident enterprises have specific, exclusion and profit-oriented requirements. my country's domestic law emphasizes the production and operation characteristics of business activities that tax non-resident enterprises. On the one hand, it does reflect the core requirements of taxing positive income generated by business activities of non-resident enterprises. On the other hand, the self-setting of production and operation brings about the following legal and logical internal contradictions.

1. The coverage is not wide enough. Over the past 40 years, the three corporate income tax laws involving non-resident enterprises all divide non-resident enterprises from my country's income into production and operation income from establishment of institutions and places, and negative income from dividends, interest, royalties, rents and other negative income from establishments and places but originating from my country. However, my country's corporate income tax laws follow international practices and clearly stipulate that income related to institutions and places (the "91 Tax Law Rules" clearly include negative income such as dividends, interest, royalties, etc.) are taxed as active income attributable to institutions and places. The principle of actual connection can attribute negative income to institutions and places to tax them according to positive income, which makes it difficult for non-resident enterprises and places to limit taxable activities to production and operation.

2. The accuracy of the exclusion is insufficient. The "91 Tax Law Rules" lists production and operation income as production and operation income engaging in manufacturing, mining, transportation, construction and installation, agriculture, forestry, animal husbandry, fishery, water conservancy, commerce, finance, service, exploration and development operations, and other industries, which can be said to be full of production and operation income. Although the "07 Tax Law Regulations" deleted the positive list of these industries, the understanding of production and operation scope is basically the same. According to the OECD tax agreement template and the domestic laws of other countries, agriculture, forestry and animal husbandry are included in real estate management, and international transportation income is treated as tax-free income alone and is no longer taxed as permanent institutions or institutions or places. In addition, in the judgment of permanent institutions, the controlled relationship formed by domestic and foreign parent and subsidiary companies due to equity is excluded, and the policy of not forming permanent institutions is clarified if overseas non-resident enterprises entrust domestic processing and do not have control over the processing site. This greatly reduces the probability of non-resident enterprises using institutions and places to carry out production and manufacturing activities in my country.

3. The key lack of for-profit. Profitability is the most core element in judging whether the business activities of non-resident enterprises have formed taxable existence. Article 28, paragraph 2, and third item of India's Income Tax Law clearly defines that systematic activities for profit-making are business activities. In the judgment of the Norwegian court, it emphasized that the core feature of business activities is commerciality. German tax law stipulates that business activities must be carried out independently with profit-making purposes, and activities based on interests or non-profit organizations should be excluded. According to a court judgment, the primary condition for forming business activities in the United States is "legitimate profit motivation." In the context of domestic tax legislation in my country, production and operation activities seem to be naturally given profit motives. The interpretation of the provisions of the China-Singapore Agreement points out that the actual meaning of the word "business" not only includes production and operation activities, but also any situation in which non-profit institutions engage in activities. Excluding the latter being non-profit, the former being naturally all profitable. This indirect and obscure feature of giving production and operation profitability is not only undesirable in legislative technology, but also logically flawed.Not only production and operation activities are profitable. In addition, many business activities are profitable. Not all production and operation activities are profitable. Preparatory and auxiliary activities, activities carried out by non-profit organizations, and activities carried out by non-resident enterprises based on interests and hobbies without profitability are not profitable.

(II) Transactions, business and institutions, and places

For non-resident enterprises, the business activities carried out in the country where they operate are profitable is only the starting point for taxable activities. Only when such profitable activities reach a certain scale, sustainability and repetitive characteristics will it constitute a tax connection and form a taxable threshold. India calls this threshold business connection, emphasizing that business activities that non-resident enterprises in India should have a certain degree of sustainability, and accidental and isolated transaction activities should be excluded. In the United States, this threshold is called "trade or business." The U.S. Supreme Court explains its characteristics in the Groetzinger case: considerable, continuous, and regular. my country's domestic law follows the internal logic of the evolution of the three corporate income tax laws, and has always defined this threshold as "institutions and places". Although it directly or indirectly contains the characteristics of scale, sustainability and repetition to a certain extent, there are still some shortcomings.

1. Lack of requirements for the duration of institutions and places. Of course, institutions and places have a certain degree of time-sustaining, and the development of fixed places activities is of course more large-scale and repetitive than activities without places. Otherwise, there will be a clear imbalance between the input and output of business activities. However, this indirect deduction logic cannot be an excuse to not put forward continuous time requirements for institutions and venues in legislation. The requirement of defining duration in domestic law is that it cannot be handled at a high threshold of 183 or even 365 days like a bilateral tax agreement. At the same time, how many days the low threshold can be determined can only be handled individually based on facts, gradually accumulate experience and grasp the standards. For example, the United States has only set a 90-day safe harbor time threshold when determining independent individual labor services.

2. Lack of a certain degree of exclusion of prepared and auxiliary activities. The domestic laws of some countries clearly propose to impose a certain degree of exclusion for prepared and auxiliary activities, but the degree of exclusion should be lower than the level excluded by permanent institutions in the tax agreement. The United States also has a vague exclusion of prepared and auxiliary activities, because once the threshold for exclusion is lower, taxable activities will be reduced a lot. my country's domestic law has proposed policy provisions to exclude the preparation and auxiliary activities of permanent representative agencies, but the content of the exclusion is extremely narrow, and the subsequent policy provisions have not been extended and involved; but the failure to exclude it has also lowered the threshold for taxation too much. The new difficulty in dealing with this problem is that typical preparation and auxiliary work in traditional economy such as collecting information and storing goods will transform into non-preparatory and auxiliary activities with core functions in the for-profit activities of the cross-border Internet.

3. Lack of comprehensive coverage of tax-related objects. In determining taxable activities of non-resident enterprises, business agents mainly depend on whether they habitually exercise binding contract signing rights. For labor-based activities, they mainly depend on the time of stay and the degree of control and command by the parent company or employment company. Using institutions and places as standards to determine the taxable threshold for operating activities that do not require fixed places is not thorough and rigorous in legislative technology. What's more, under the future multinational e-commerce model, the acquisition of cross-border income will not rely on institutions and places. Using the traditional standards of institutions and places to measure and judge can only greatly restrict the tax rights of the source country.

4. Whether it contains machines and equipment is not explained in detail. Article 5, paragraph 1 of the OECD Tax Agreement Annotation, interprets "business premises" as: factory facilities, or equipment, etc. in specific circumstances. When explaining the office or fixed place of business, the U.S. Treasury regulations also consider it to be a location, place, building, or facility, or equipment.my country's domestic law has not yet refined or expanded the institutions and places to machines and equipment, and whether these contents are included involves the size of the scope of taxation rights, involves the determination of taxable behaviors for computer equipment under the e-commerce model, and involves the ownership of profits obtained by actual connection with facilities and equipment applicable in institutions and places, and should be clarified as soon as possible.

5. Non-resident enterprises have not specified whether the legal rights of the legal rights of forming institutions and places to use fixed places for fixed places, whether they are ownership, right of use or actual control.

6. Whether the business activities are "located" to an institution, place or "through" the institution, place is not clearly defined. This issue that has been resolved in our bilateral tax agreement should be clarified as soon as possible in our domestic laws. From international experience, the early OECD tax agreement notes define the development of business activities as "located" (at) fixed places, and there are clear restrictions on the scope of the space for the development of activities. The current OECD tax agreement comments will change "local" to "pass" greatly expand the scope of activities. As long as the space, facilities, equipment and personnel activities of the fixed places become material and chemical factors generated by the operating profit of non-resident enterprises, the relevant profits can be attributed to the permanent institutions of the fixed places. Article 5, paragraph 20 of the OECD Tax Agreement Notes clearly states that the term "through the business premises" must give it a broad meaning so that it can cover any situation in which the business engages in business activities in a specific place under its dominance.

(III) Effective contact with reality

The provisions of my country's domestic law on taxation of income related to institutions and places actually begin with the "91 Tax Law" and "91 Tax Law Rules". Article 3 of the "91 Tax Law" stipulates: "Foreign enterprises pay income tax on income derived from China." Article 6 of the "91 Tax Law Rules" is refined as "the income from foreign enterprises establishing institutions and places in China to engage in production and operation, as well as the actual connection between the institutions and places established by foreign-invested enterprises and foreign enterprises in China and the institutions and places established in China and abroad with foreign-invested enterprises and foreign enterprises in China." As for the specific meaning of the actual connection, the relevant tax laws do not provide specific explanations. Although negative income from abroad is mentioned, there are no rules for dividing the source of income from within and abroad in China. There are new changes in the provisions of the "07 Tax Law" and the "07 Tax Law Regulations". Article 3 of the "07 Tax Law" stipulates: "If a non-resident enterprise establishes an institution or place in China, it shall pay corporate income tax on the income obtained from its institution or place that originates from China, as well as the income that occurs outside China but is actually connected to its institution or place." It should be noted that domestic income will no longer mention the income that is actually connected to the institution or place, and the income that is actually connected to the foreign institution or place has also expanded from negative income to various types of income. Article 8 of the "07 Tax Law Regulations" specifically explains the meaning of actual connection: "The actual connection referred to in Article 3 of the Enterprise Income Tax Law refers to the institutions and places established by non-resident enterprises in China that own equity and debt rights based on the acquisition of the income, as well as owning, managing, and controlling the property based on the acquisition of the income, etc.." In short, actual connection is the equity, debt rights and property rights owned by the acquisition of the income. The property rights here of course include both tangible assets and intangible assets. Article 7 of the subsequent interpretation of the provisions of the China-Singapore Agreement gives another caliber: if an enterprise constitutes a permanent institution in China, China has the right to tax the profits obtained by the permanent institution, but it should only be limited to the profits attributable to the permanent institution. The "profit attributable to the permanent institution" mentioned here not only includes the profits obtained by the permanent institution from China, but also includes various incomes obtained from it inside and outside China that have actual connections with the permanent institution, including dividends, interest, rents and royalties. The caliber here returns from the "07 Tax Law Regulations" to the "91 Tax Law Rules", emphasizing that the actual connection with institutions and places is various negative income at home and abroad.

Author: Jiang Yuesheng (Suzhou University International Tax Strategy Research and Consulting Center)

1. Main features of my country's "institutions and places" tax clauses

(I) Highlighting production and operation

(II) Focusing on institutions and places

(III) There is a difference in the threshold of permanent institutions

2. The inherent inadequacy of the tax clauses of my country's "institutions and places"

(I) Business activities and production and operation

(II) Transactions, business and institutions, and places

(III) Effective contact with reality

reflect the different perspectives of my country's domestic law on actual connections and attributed income and the focus emphasized at different stages, but the lack of stable and accurate explanations and definitions also reflects that the grasp of the essence of this issue and the sorting of internal logic still need to be deepened. From international experience, the profit attribution of permanent institutions defined in Article 7 of the OECD Tax Agreement mainly refers to the profit division and respective attribution between permanent institutions and overseas non-resident enterprises based on functions, risks and assets. The OECD Tax Agreement notes on the various types of business income in the country where the permanent institution is located and which income belongs to the permanent institution due to the specific connection with the permanent institution are not answered positively, but only a principled objection to the application of the "principle of gravity", that is, the taxation rights of the permanent institution in the country where the permanent institution are located are not extended to the profits that the enterprise may obtain from the country but do not belong to the permanent institution. The principle of priority for the provisions of permanent institutions and the provisions of the Protocol to the Sino-Singapore Agreement on the payment of dividends, interest, royalties, rights or property, etc., which have actual connection with the permanent institutions and the taxation of profits that should belong to the permanent institutions, provides a specific basis for the priority of negative income such as dividends, interest, royalties, etc. that have actual connection with the permanent institutions to be taxed based on operating profits. Of course, the solution to this problem also depends on the definition of various types of income by domestic laws of various countries, the classification standards for various types of income and foreign sources, and the specific explanation of the specific connection between these domestic and foreign income and the tax thresholds under permanent institutions or domestic laws. The United States has special legislation that domestic and foreign income that is effectively linked to the taxable threshold "transaction or business" in domestic laws of the United States will become valid contact income (ECI) and taxes will be paid in the United States based on net income. Now, based on international experience, we will conduct a detailed analysis of the provisions on actual connections between my country's institutions and venues from the following perspectives.

1. Non-resident enterprises rely on institutions and places to provide services, contract projects, and business profits obtained as business agents based on contracts, agreements, etc. Excluding reasonable expenses shared by foreign head offices or the income divided by functions, risks, and assets between institutions and places according to the OECD tax agreement templates, all taxes are paid in the same way as legal person enterprises collected by the audit, and have nothing to do with the application of the actual principle of connection.

2. Whether other profits obtained by non-resident enterprises in the country where the institutions and venues are located are actually related to institutions and venues, the OECD Tax Agreement Annotation opposes the "gravity principle", and the United Nations Tax Agreement Sample retains the attitude. The US Tax Agreement Sample denies the "gravity principle", but in practice, some identical or similar activities are retained to use the "gravity principle". If a non-resident enterprise sets up a distribution office in the United States to sell goods A to US customers, and the non-resident enterprise directly sells goods B to US customers that are the same or similar to goods A to US customers, the income from commodity B obtained by non-resident enterprises is closely related to the distribution office's distribution office's income tax. my country's "07 Tax Law Regulations" deletes negative domestic income from the actual types of income, one of the purposes is to worry about causing suspicion of the use of the "gravity principle".

3. After a non-resident enterprise forms an institution and place in China, the negative income obtained by the institution and place from home and abroad based on its own equity, debt and property rights. Any income determined to be derived from my country according to the income source rules of my country's Income Tax Law should be paid tax in my country. The author believes that since the institutions and places formed by non-resident enterprises in China are regarded as independent enterprises and are processed according to the principle of independent transactions, the domestic and foreign income brought by these institutions and fields based on their three rights, equity, debt, and property rights, should also be tax-free as the same income obtained by other legal person enterprises. They are divided into domestic and foreign income. Overseas income is exempted from foreign tax credits, and taxes are only paid on the tax rate difference between domestic and foreign countries. Therefore, the sources of these income have nothing to do with the application of the principle of "actual connection".

4. The processing of dividends, interest and royalties generated by non-resident enterprises rather than their institutions and places in China own equity, debts, and property rights is directly related to the application of the actual connection principle. If it comes from my country and has nothing to do with the institutions and places in my country, withholding income will be levied according to gross income; if it is actually related to the institutions and places in my country, the income belonging to China and places will be taxed according to net income. If the income determined to be foreign sourced according to my country's tax laws, if there is no actual connection with our institutions and places, then my country has no right to collect taxes. If there is an actual connection, the income from foreign source to Chinese sourced income will be taxed according to operating profits in my country. From this point of view, there is a very important coupling relationship between the domestic and foreign source rules and the principle of "actual connection" of institutions and places. The division of domestic and foreign sources, especially the sources of negative income, is the more matters determined based on the identity of corporate residents, the larger the scope and frequency of institutions and places convert foreign source income into domestic sources based on the principle of "actual connection". For example, in the US tax law, whether dividends and interest are foreign-sourced income is based on whether the dividend payer and interest debtor are foreign companies or foreign residents, and whether the personal assets and intangible assets are sold, the criteria for determining whether they are foreign-sourced income is also whether the seller is foreign-sourced tax resident. Article 7 of my country's "07 Tax Law Regulations" clearly states the principle of judging income from within and outside China. Among them, dividends and interest income are the location of dividends, interest allocators or payers, and the income from transfer of movable property is based on the location of the transferor of the movable property. Because there is spatial inconsistency between the resident identity, where the behavior occurs, and where the place where the place is located in a cross-border situation, the room for close contact between the United States is greater than the application of the principle of "actual connection" with institutions and places. As for the specific standards for determining actual connections, the "07 Tax Law Regulations" mentions the management and control of property. The interpretation of the provisions of the China-Singapore Agreement emphasizes related activities, but they are all relatively scattered and do not constitute systematic and stable testing standards. The US legislation is relatively standardized and the system is used to determine whether dividends, interest, royalties, rents and other incomes derived from inside and outside the United States constitute close-knit income in the United States: one is to apply asset tests to see whether income comes from the use of assets during trading or business activities in the United States; the other is to test business activities to see whether transactions or business activities in the United States have become material factors to achieve income.

3. The main ideas for improving the tax management of non-resident enterprises in my country

Although my country's domestic legislation on taxing non-resident enterprises' operating profits has started early, it is not practical enough due to its inherent technical defects. In addition, my country has more than 100 bilateral tax agreements, and a very small number of non-resident enterprises in countries or regions that have not signed bilateral tax agreements with my country often establish institutions in countries or regions that have bilateral tax agreements with China and then conduct operations in my country. In this case, there is limited room for using domestic laws to deal with taxation of operating profits of non-resident enterprises. With the development of the digital economy, the use of Internet means and the widespread use of tax planning by non-resident enterprises, it is becoming increasingly difficult for non-resident enterprises to be judged as permanent institutions in my country in accordance with the provisions of bilateral tax agreements.In order to control the tax sources, some places will normalize the tax payments when designated withholding, verified collection, and outbound payments in daily collection and management, and do not determine and remittance the permanent institutions, and do not distinguish whether non-resident enterprises have bilateral tax agreements with my country, and do not pay attention to whether they are handled according to bilateral tax agreements or institutions and places under my country's domestic laws. As a result, the tax management of non-resident enterprises is extensive and has caused certain negative consequences. Bilateral and multilateral free trade rules such as RCEP have brought about an increasing and complex and diverse cross-border service trade, making the determination of permanent institutions under tax agreements and the application of relevant domestic taxable thresholds under tax agreements one of the focus. The challenges and shortcomings in tax management of non-resident enterprises in my country currently reflect to a certain extent that our awareness of alternately flexibly using bilateral tax agreements and domestic laws and obtaining tax initiatives internationally needs to be further improved. On the basis of understanding the current situation, we must fully understand the challenges we face, and improve the relevant systems and policies for taxing operating profits of non-resident enterprises as soon as possible.

First, we must pay equal attention to permanent institutions, institutions and places. Adhere to our position as a major country for importing capital and a major country for trading services, promote the cross-border flow of capital, labor and personnel, and safeguard the national tax rights and interests to promote each other and advance in parallel. Learn from international experience, in the tax system design, we will achieve two-wheel drive and two-layer promotion of permanent institutions under bilateral tax agreements and tax threshold management under domestic laws, and unswervingly promote the improvement and perfection of relevant domestic laws and regulations.

The second is to improve the criteria for determining institutions and places. Adhere to keeping pace with the times, solve the thinking and historical inertia of non-resident enterprises’ tax legislation over the years, downplay the orthodox nature of production and operation, replace it with emphasis on the profitability of business activities, weaken the dominance of institutions and places, and replace it with the essential requirements of strengthening the important, continuous and repetitive business connection.

The third is to achieve the connection between institutions, places and various regulations of permanent institutions. Domestic law stipulates that it should be connected with bilateral tax agreements as much as possible and consistent with the common practices of other countries. Agriculture, forestry, animal husbandry and international transportation income should be excluded from the scope covered by operating profits, professional and independent labor provisions should be included in the scope of operating profits, and the control relationship formed by independent agents and parent and subsidiary companies should be excluded from the domestic tax threshold. Preparatory and auxiliary activities should be moderately excluded at a level lower than the exclusion of preparation and auxiliary activities in permanent institutions. Facilities, equipment, computers and other objects should be included in the scope of fixed places in a timely manner. It is clear that the control of fixed places where institutions and places are located is not limited to ownership, and it is emphasized that business activities should be carried out through fixed places.

Fourth, the determination and testing standard for establishing "actual connections" of institutions and places. Adjust and improve the classification standards and basis for China's source income and foreign source income according to the needs of development of the situation. We can learn from the US legislative technology to define the meaning of "actual connection" in the domestic taxation threshold, and conduct property and business activities testing on income that forms "actual connection" to improve the pertinence and effectiveness of the income attribution rules with "actual connection". The US legislation uses the test of operating activities that apply asset testing to determine whether dividends, interest, royalties, rents and other income derived from inside and outside the United States constitute close-knit US income. When the United States uses two tests to conduct close-related income determination of foreign-source income, it emphasizes the role of material factors in the realization of foreign-source income in offices or fixed places owned by non-resident enterprises in the United States. my country can refine the provisions on property in the "07 Tax Law Regulations" into asset testing, expand the provisions on related activities explained in the provisions of the Sino-Singapore Agreement to test business activities, and provide technical tools for the correct ownership of institutions and places in connection with the actual income.

Fifth is to strengthen the daily management of tax revenue of non-resident enterprises. We will effectively correct the problem of excessive and excessive deduction and approval of designated withholding and taxation in some regions.It is necessary to implement digital monitoring, from temporary tax registration to payment of the last payment, conduct full-process tracking and analysis of the project, take the external payment information of non-resident enterprises provided by the foreign exchange management department as the main pulse, and compare the foreign exchange management information with the registration information and withholding information through analysis of the registration information and contracts, grasp the flow of people, logistics, timely, and space involved in the capital flow, and timely determine the tax threshold of permanent institutions and domestic laws, and carefully conduct remittance and assessment of non-resident enterprises that implement the accounting check and collection method and cross-year periods. In order to improve the efficiency of tax collection and management, diversified strategies should be implemented in the method of profit attribution, exploring the functions, risks and asset division methods specified by the OECD, and adhering to the traditional method of income deducting reasonable expenses distributed overseas by my country's domestic law. It not only draws on India's practices, implements the formula distribution method stipulated in the interpretation of the provisions of the Sino-Singapore Agreement, but also does not deny the unique effect of the approved collection method, and works hard to determine the income caliber and the approved profit margin.

Sixth, it focuses on the guiding role of institutions, places or cases in practice. In response to the different, complex and changeable operating profit management situations of non-resident enterprises, and the provisions of written laws are often principled and lagging, pay attention to the summary and refinement of successful cases in the practical process of tax management, attach importance to the guiding role of administrative reconsideration cases and court case cases. At the same time, based on the accumulation of management experience, try to issue safe harbor rules for various judgment standards, simplify the tax system as much as possible, and improve the efficiency of collection and management of non-resident enterprises.

(This article is an excerpt, the original article was published in the 9th issue of "Tax Research" 2022.)

welcomes citations in the following format:

Jiang Yuesheng. Analysis of the "institutions, places" clauses in my country's Enterprise Income Tax Law [J]. Tax Research, 2022 (9): 104-112.

3. The main ideas for improving the tax management of non-resident enterprises in my country

(This article is an excerpt, the original article was published in the 9th issue of "Tax Research" 2022.)

welcomes citations in the following format:

Jiang Yuesheng. Analysis of the "institutions, places" clauses in my country's Enterprise Income Tax Law [J]. Tax Research, 2022 (9): 104-112.