Business tax is a tax payable against turnover by all enterprises and individuals undertaking the following business activities: providing taxable services, including communication, transport, construction, finance and insurance, telecom, culture, entertainment and service industries; transferring the provision of intangible assets; and selling immovable properties.

The basic formula is: tax payable = turnover x tax rate

The Ministry of Finance and the State Administration of Taxation jointly issued the revised Implementation Rules for Provisional Business Tax Regulations on December 15, 2008, for the amended Provisional Business Tax Regulations, which were issued by the State Council on November 10, 2008. The revised implementation rules, which took effect as of January 1, 2009, contain some fundamental changes to the taxing principals of the business tax regulations.

Under the old rules, the service provider is only liable for business tax in China if the taxable service is rendered within China. Thus when the foreign enterprise provided service to a Chinese client and such service was conducted outside China, the foreign enterprise would not be subject to business tax in China. However, under the new rules, the definition of taxable service subject to business tax has been expanded to include services performed where either the service provider or the service recipient is located in China, without regard to where the service is actually being rendered. As long as the service provider or service recipient is located in China, the service will be taxable for business tax purposes, regardless of whether they are onshore or offshore services. The only exclusion is where both service provider and service recipient are located outside China.

Financial institutions used to be subject to business tax on the trading of foreign exchange, marketable securities and futures, but non-financial institutions and individuals were not. However, under the new regime, the trading of foreign currency, marketable securities, non-commodity futures and other financial commodities by any taxpayer is subject to business tax.

Formerly, deemed sales applied only to a company transferring immovable property to other parties without any consideration. Under the new rule, deemed sales apply to either a company or an individual transferring immovable property or land use rights to other companies or individuals without any consideration.

The change in China's business tax rules has increased the amount of tax paid by multinational service providers with clients in China, therefore service providers need to consider modifying billing arrangement with Chinese clients by charging business tax from Chinese clients or arranging for the overseas office to bill and collect the payment from their Chinese clients' international affiliates if possible, as well as separating the billing or invoices of the international office and the China office to minimize the impact of double business taxes charged.

The author is senior legal associate of Dezan Shira & Associates Beijing Office (www.dezshira.com).