Taxation Without Representation: Nonresident Taxpayers Face Additional Cost of Doing Business in China as a Result of New Provisional Measures

Brittany A. Smith | Comment

“No taxation without representation!” This battle cry rings in the minds of many who have studied the history of the United States. In order to recoup some of the losses incurred while defending the American colonies during the Seven Years’ War (1756-1763) and the French and Indian War (1754-1763), the British Parliament implemented direct taxation upon the colonists. One of these taxes was imposed by the 1765 Stamp Act, under which Great Britain levied a tax on paper, legal documents, and other commodities. Denouncing the law, colonial assemblies and colonists alike claimed the 1765 Stamp Act was an illegal infringement on their rights as Englishmen. Amidst boisterous protests and mounting pressure, Parliament repealed the law the following year; however, the colonial response provided an impetus for the American independence movement.

Despite its revolutionary roots, this phrase still resonates today and can describe, on an unstigmatized level, recent provisional measures that went into effect in China on August 1, 2014. The new regulation, which is reported in the Notice on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business [2014] No. 27 (Measure 37), repeals previous measures that generated confusion concerning corporate income taxation of foreign transportation companies and provides new guidance on how nonresident transport businesses are taxed. In particular, the regulation mandates that nonresident enterprises conducting international transportation business in China that receive income from voyage and time charter hire, freight, stevedoring services, and warehousing will be subject to an enterprise income tax (EIT).

This Comment will critically examine the EIT imposed by the new regulation on nonresident enterprises as well as its practical implications. To do so, Part I will describe the current condition of the Chinese maritime industry–the landscape in which this regulation is being implemented. Parts II and III will then examine the current Chinese tax regime for international transportation business and contrast the Chinese tax consequences between Chinese- and foreign-flagged vessels. Next, Parts IV through VI will illustrate the practical implications of the EIT, analyze whether the EIT is permissible under the General Agreement on Tariffs and Trade (GATT), and examine the challenges to administering and enforcing the tax. Finally, in Parts VIII through IX, this Comment will propose amendments that would remedy remaining confusion regarding the regulation and will recommend proactive measures that shipowners and charterers may take not only to comply with the new law, but also to minimize tax exposure until China’s State Administration of Taxation (SAT) provides further clarity.