Taxation of Representative Offices in China (5) - Deemed Revenue and Deemed Profits

After replacing the business tax with Value-added tax, the formula for calculating income tax payable of representative office in China of foreign enterprise based on the total expenses has been modified accordingly, and the revised formula is as follows:

1. Deemed Revenue
   
   The following gross-up formula is prescribed by the tax bureau to estimate the taxable revenue from the costs of the Permanent Representative Office:
   
   Deemed Revenue = Total expenses of the RO / (1 - Deemed profit rate)
   
   This may be an easier way to understand the rationale behind estimating tax revenue.
   
   The present deemed profit rate is normally 15%.
   
   Deemed Revenue = Total expenses + Deemed profit
   = Total expenses / (1 - 15%)
   = Total expenses / 0.85
   
   
2. Deemed Profits (ie. Taxable revenue)
   
   Deemed profits = Total expenses of the RO / (1 - Deemed profit rate) × Deemed profit rate
   =  Estimated taxable revenue × Deemed profit rate (currently at least 15%)
   
   Since 'total expenses' of a Permanent Representative Office is used in the above estimation, the deemed revenue for the Permanent Representative Office could be overestimated if part of the RO's expenses is attributable to the tax-exempt activities of the Permanent Representative Office. If such a case does happen, representatives from the RO may wish to discuss with the tax bureau in charge to ensure the Permanent Representative Office is fairly treated.