1.
Transaction taxes in mainland China mainly include Value Added Tax (VAT) and
Business Tax (BT) that are suitable for different types of transactions, and with
different tax treatment.
The cloud industry chain combines a variety of services
(
hardware and software design, platform maintenance, information services, etc.),
royalties of intangible assets (such as technology, patent, or trademark), transfer, or of
high-price equipment (such as server, server room) investment. This whole industry and
transaction chain can easily be impacted by VAT and BT. If lacking of proper planning,
profits of the enterprises can easily be eroded by these transaction taxes. For example,
the high investment by the enterprise in server room can get high withholdings on VAT, but
the information services business is levied on business tax. This situation results in the
amount of VAT not creditable to cost, which can hurt the corporate profits.
Therefore, in addition to considering vertical or horizontal division to enhance the
enterprise efficiency, careful assessments should be done on the loss of profit due to the
overall transaction tax from refined trading patterns. If there is a significant impact on tax,
the control of trading patterns on double taxation can be considered. In addition, the
“
business tax restructuring VAT" implemented in a number of provinces and cities can be
used to further manage Mainland China’s indirect tax burden on the profit of the industry.
2.
Establishment Tax Risks
The locations that foreign enterprises engaged in business activities in Mainland China
may be regarded as “establishments”, which obligates the foreign enterprises tax liable.
Since the definition of “establishment” can be quite broad, the cloud industry when
partnering with e-commerce for cross-country operations, need to pay special attention to
the aforementioned risks. For example, if a Taiwan’s businessman invested in establishing
an enterprise in Mainland China that constructed server rooms and server equipment (i.e.,
cloud platform) to be rented to a foreign company for running its Internet transaction
platform, with a sizable daily dollar amount; in this situation the foreign company may have
completed transactions activities via the server room equipment belonging to the Taiwan
businessman’s company in Mainland China. Should this company in Mainland China be
treated as the establishment for the foreign company in Mainland China and will
potentially be tax liable in Mainland China? How will the potential tax be assessed? This
will be of significant impact to the tax burden of the Taiwan businessman and should be
carefully considered.
3.
Risks of income stipulation
Based on its virtual characteristics, its income stipulations are usually not as concrete as
the traditional physical trading, production, and services industry. For example, the
