China: The Challenges of Taxing Cross-border Third Party Payment

In line with the rapid growth of e-commerce, cross-border third-party payment transactions increase accordingly. Hence, the growing demand for international payment has created a spacious international market for cross-border third-party payment. 

One of the cross-border third-party payment platforms, Alipay has captured its significant market of international trade payments with its unique advantages where it serves as an intermediary who offers credit assurance to the seller. 

The process of Alipay is detailed as follow: 

(1) Buyer transfers money to Alipay’s account 

(2) Buyer and seller agreed a deal on the internet 

(3) Alipay deducts money from buyer’s account after receiving buyer’s paying notification, and sends Notice of Payment Received and Delivery Permit to seller (the notices) 

(4) Upon receipt of the notices, seller delivers goods to buyer 

(5) Buyer sends payment instruction to Alipay upon receipt of goods 

(6) Alipay then transfers money to Seller’s account 

The same process applies to the cross-border payment, although buyer and seller are in different countries or regions. 

In the past, e-commerce companies declare its income under the tax item “Service Industry – Other Service”. However, in accordance with the Third Article of “Management Method of Payment Services in Nonfinancial Institutions”, any non-financial institutions or individuals shall not engage in or disguised engage in payment business without obtaining approval from People’s Bank of China. Thus, third-party payment is grouped into the financial service category and the correct tax item for cross-border third-party payment is “Finance and Insurance Industry”. 

Third-party payment should be declared and taxed in place where the service is provided. Since thirdparty payment is a network server based service, the location of the network server can be easily moved thereby shifting the place where the service is declared and taxed. This results in the uncertainties of where third-party payment should be declared and taxed. In this situation, the principle “Substance over Form” is applied, i.e. third-party payment should be declared and taxed in accordance with its “substance” hence in China. 

Due to the complexity of the transactions, taxing cross-border third-party payment is a real challenge that requires tax legislation to be enacted.

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