Tax Issues for Servicing Work

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More and more China studios are shifting from providing outsource services to foreign companies to creating their own IP. Based on our recent observations, there seems to be more and more China studios looking at outsourcing their work.

In fact, due to the weak euros and also the decline of western economy, we might see growing opportunities coming from China than the West in next few years.

One thing to take note about getting service work from China is withholding tax.  In the past, many countries outsource their work to China tapping on its low labour cost. However things are changing now. Chinese Companies have started to look at outsourcing their work as labour cost is raising in Beijing and Shanghai. This is all new. No one exactly know how much withholding tax they must hold back if they were to outsource their work to foreign companies. So on the safe side, some will just hold back the maximum. Which is 17%. This is based on our own experience. E.g if your client ask you to do a job at $1000. They might withhold up to 17%. Meaning they might eventually pay you only $830.

If the value is high, you might want to seek a tax advisor for help. Singapore has many companies in Shanghai. Hence many of them are familiar with the tax issue. IE has introduced me to the following company who has served many Singapore companies in China. They have offices in various part of China. This is important as different province has a slight different tax regulations. http://www.sbasf.com/

What they will do is to help you look through your Chinese Contract. Advise you how to word it to protect yourself and also in a way easier for them to negotiate with the China Tax Department. You need to prove that the service work is not executed from China. From there, the tax consultant will discuss with the China tax department to lock down a rate. For my case, they help me to bring down from 17% to 6%. This is a huge saving.

Once the tax rate has been locked down, you can show the documentation to your client. So that your client cannot hold you at e.g 17%. I am not an expert in this. I can only share with you what we have gone through. Hope it helps you too.

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