At a briefing on the new law and other issues, Norton Rose Fulbright partner Jim James said the law arose out of confused tax position where there was no uniformity. The new law, which came into effect on 1 August, is supposed to impose taxes on non-resident taxpayers “engaged in international transportation business”.
Under this very broad definition it is expected that practically any owner whose vessels call in China on various terms including time charter, voyage charter and possibly even bareboat charter, will be affected and liable to higher taxes.
This will see a sharp jump from the previous minimum tax rate of 6.25% to 15% under the new rules, James said. Waivers would be possible for jurisdictions which China has double taxation agreements with but these need to be carefully worked out and James advised that it is now even more important to decide which entity to use.
Ship management company Langton Shipping Group managing director Michael Birley raised the question of how the tax authorities would keep track of payments due. The response that the Chinese counterparty is considered the agent and able to withhold the tax at source was met with some skepticism although James nevertheless warned that particular attention will now have to be paid to clauses for such provisions in contracts.
Shipping industry players however were of the opinion that the collection of the correct amount of tax was unenforceable and that owners and lessors would have the law on their side should Chinese counterparties try to withhold payment of charter fees to pay tax.
“The authorities are using fear or the threat of enforcement to try and raise tax revenue,” said one shipping company operations manager.
In an earlier paper, Ince & Co had said: “The new regulations are in their infancy. There is at present uncertainty surrounding their scope and the extent to which and manner in which they will be enforced.”
The firm noted however that they “serve as a signal that the Chinese tax authorities intend to tighten up the regulations regarding income tax payable by non-PRC resident companies that engage in international transportation business”.
It therefore warned: “Consequently, the new regulations are likely to have a significant potential impact on owners with vessels chartered to Chinese counterparts.”
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