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1. Please write your name on the cover page of your answer.
2. This exam accounts for 80% of the marks for the course. You must answer all questions.
3. Page limit is indicated for each question. Please use Times New Roman, font 12, “normal”
margin, and single spacing in typing your answers. Please start a new question on a new
4. Independent work: This exam must be your own work. All reliance on sources, including the
work of colleagues and other students, must be fully and properly acknowledged. Plagiarism
will result in a fail mark for this course and must be reported to the Dean of the Law Faculty.
5. Citation: In your answers, please give specific references to such provisions of the Chinese
tax legislation, SAT circulars, or an applicable tax treaty. If secondary sources are cited,
please make sure such source is clearly identified so that the Examiner can track down the
source for verification purposes.
6. Acronyms: You may use: “IIT” for “Individual Income Tax”, “IITL or IITR” for “IIT Law or IIT
Implementation Regulations”; “EIT Law or CIT Law” for “Enterprise Income Tax Law”, “EIT
Regs. or CIT Regs.” for “Enterprise Income Tax Regulations”, “SAT” for “State
Administration of Taxation.”
7. Assumptions: If you need to make assumptions, please make “reasonable” assumptions.
You can assume that the exchange rate is 5 yuan (or RMB) for one Australian dollar.
2 Chinese Int’l Taxation (2014) Exam
Question 1 (15 marks, maximum 3 pages)
Assume you work for a consulting firm that provides tax advice to clients. One of your clients is a hot Australian rock band, named AB/CD based in Sydney Australia. You are asked to advise the Band about the possible Chinese income tax consequences of the following activities in China.
AB/CD has four members, Ms. A, Ms. B, Ms. C and Ms. D, each is a resident of Australia for Australian tax purposes. The band entered into a contract with Beijing Grand Hall of Music to play one concert a month there from May to October in 2013, for a total of six concerts. The band arrived two days before each concert. They were each given a dressing room and were allowed to use the building in order to conduct their rehearsal. They left China the day after they performed the show. The band was paid RMB1million per appearance. At their June concert, one of the audience members, Rocky Mao, enjoyed the show so much that he decided he would like them to play at his 40th birthday party. Rocky called up his lawyer, Magic Wang, and told him to do whatever it took to get the band to play at his birthday party on September 11, 2013 which took place at his villa in Tsingdao. The contract was negotiated by Magic and the band’s Australian agent who flew out to Tsingdao to complete the negotiations. Rocky paid the band RMB 1.5 million for the private appearance. The band spent four extra days in China in order to do the performance on September 11.
What are the Chinese income tax consequences of these transactions for each member if the band? Please consider both Chinese domestic law and the applicable tax treaty.
3 Chinese Int’l Taxation (2014) Exam
Question 2 (15 marks, maximum 3 pages)
Adam and Eve live in Sydney, Australia. They own and run a small, yet prosperous, engineering company – A&E Engineering Ltd. (AEEL), based in Sydney. AEEL designs solar panels and is gaining an international reputation for its expertise. In May of 2013, AEEL was approached by the City of Taiyuan, China to design solar panels to be mounted on all government and publicly-owned buildings in order to help develop a cleaner energy source than coal-burning.
On 1 July 2013 Adam and Eve went to Taiyuan to work on the project full-time, remaining there until December 20, 2013 when they returned to Sydney. They spent the month of January in Sydney to finish the preliminary technical drawings and design. From February 14 to March 13, they returned to Taiyuan to complete the project. The Mayor of Taiyuan gave Adam and Eve exclusive permission to use two offices in the City Hall as a work space. The project was a huge success. AEEL received RMB 3 million at the end of 2013 and another RMB 7 million in April 2014 after all of the work was completed and Adam and Eve went back to Sydney.
AEEL incurred the following cost and expenses in respect of the project in Taiyuan: RMB 800,000 salaries to Adam and Eve; RMB600,000 travel expenses (air tickets, local transportation, hotel and living expenses in Taiyuan); RMB 5,000 insurance premium to cover travel risks for Adam and Eve; RMB 20,000 entertainment expenses in Taiyuan; and RMB10,000 on telephone and Internet access.
Was AEEL liable to Chinese Enterprise Income Tax? If so, what is its Chinese tax liability?
4 Chinese Int’l Taxation (2014) Exam
Question 3 (15 marks, maximum 2 pages)
Aco and Bco are both resident companies in Australia. They are contemplating an investment in building a “toll highway” in Western China. They have secured a Chinese company (China Ltd) as a partner who can obtain the necessary regulatory approvals and land-use right to the land for the highway. In light of the Chinese government’s policy to stimulate economic growth in Western China, Aco and Bco are confident that the project will be successful. To structure the investment, Aco and Bco plan to form a holding company in Singapore (Holdco) to be equally owned by Aco and Bco. Holdco will form JVC, a joint venture company with China Ltd. under Chinese law. JVC will build the highway. Once the highway is built, Aco and Bco want to divest and sell their interest to another company who is more interested in managing the operation of the highway. Technically, they want to sell their shares in Holdco. In anticipation of a significant amount of capital gain from such sale, Aco and Bco want to know if the gain will be taxed in China.
They have come to you for advice. Please prepare a brief memorandum that explains the applicable Chinese tax law and administrative policies on the treatment of capital gains and provides your opinion.
Question 4 (15 marks, maximum 3 pages)
Explain in your own words the meaning and purpose of Articles 23 and 24 of the Enterprise Income Tax Law. Use at least one example to illustrate the application of these provisions.
Question 5 (20 marks, maximum 4 pages)
Assume that you are an associate of a firm and your boss asked you to write a brief memorandum on the State Administration of Taxation’s position on the relevance of “location specific advantage” in Chinese transfer pricing practice and your critique of such position.
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