If a Permanent Representative Office maintains the accounting books and business records (e.g. service agreements, vouchers and receipts) in China, these can be audited by a registered CPA firm to reasonably ascertain the income and profit amounts.

The Permanent Representative Office may apply to the tax bureau to file the tax returns on the actual results basis.

In practice, many Permanent Representative Offices do not maintain a full set of accounting records in China. In addition, many FEs do not enter into separate contracts or charge a separate service fee for the work done by their Permanent Representative Offices in China for the FE's suppliers or customers. In such situations, the tax bureau prescribes the use of one of the following methods to estimate their taxable revenue and assessable profits for filing tax on a deemed results basis. Once the method is approved, it should be consistently applied.

(1) ROs of a consultation service nature, engaged in law, tax, accounting, auditing activities etc. shall establish and complete their accounting books and properly calculate their revenues and taxable income and file tax returns based on their genuine income;

(2) For ROs that are engaged in various forms of brokerage, agency and trade (trading on their own AND on behalf of others) and other service activities under the instruction of their headquarters, since they don’t enter into contracts or agreements with recipients of their service and their service fees are usually collected by their headquarters, their revenues shall be calculated and determined by converting their costs and expenditures and be taxed thereon. The conversion formula is: revenues =amount of costs and expenditures /(1-profit rate of 10%-business tax rate of 5%)

(3) For ROs other than those mentioned in sections (1) and (2) above, they shall file their tax returns regularly in accordance with their actual revenues (inclusive of those received by their headquarters) generated from their operational activities; in the event that there is no business revenue during a fiscal year, they shall report its operation of that year within one month of the end of that year.

With respect to the costs and expenditures referred to in section (2) above, such costs and expenditures include their staff’s salaries, bonuses, allowances, welfares, cost for purchasing goods (including cars, office equipments and other fixed assets), communication fee, travel expenses, house rentals, equipment leasing expenses, transportation fee, entertainment cost and other costs and fees. The income of such ROs shall be calculated by multiplying the revenues (determined according to section (2) above) by 10% (a profit rate assigned by the tax authority).

However, according to a reply circulated by the China State Administration of Taxation, a RO that only conducts activities for its headquarters such as market survey, provision of market information and other preparatory and supporting activities shall not be subject to any tax, provided that its headquarter can demonstrate with proof that its trading with China has been carried out for its own account not on a commissioning basis.

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