China Tax Intelligence
At China Corporate Income Tax field, what our country practice is different from of double track system for Domestic and Foreign Companies, scilicet versus the Foreign Investment and Foreign Enterprises apply of is 《Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises》, versus Domestic Companies what to support enterprise application is 《Provisional Regulations of the People's Republic of China On Enterprises Income Tax》.
Dual income-tax structures were quite necessary in the past and played a crucial role in attracting foreign investment and facilitating China's economy, but it have long been the subject of intense debate. Many Chinese economists, government officials and business leaders have openly criticized the tax policies as being unfair to domestic businesses, while offering advantages to foreign-invested enterprises .
Transfer pricing means to decide the amount charged by one segment of an organization for a product or service that it supplies to another segment of the same organization, that is, the act of pricing on the transaction between the related parties. The amount charged is called transfer price. During auditing and adjusting the Transfer Pricing, the Tax Authorities mainly focus on the “Reasonable Profit” in the transaction. It is a Tax Authorities’s responsibility to supervise the Transfer Pricing in the transaction among affiliated enterprises in China.
We suggest that our client should refer to the following factor to decide a Transfer Pricing:
(1) The average Profit Margin from industrial products;
(2) The Profit Margin of the “Like Products” approved by the Custom Authorities;
(3) The Profit Margin of the “Like Products” or “Product Similar” in world.
In addition, the method of Negotiated Pricing has been adopted by Chinese laws and administrative regulations. So, our client may also select this method to decide a Transfer Pricing.
The content of the relevant law & regulation:
1. Law
Law of the People’s Republic of China Concerning the Administration of Tax Collection (2001.04.28)
Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (1991.04.09)
Enterprise Income Tax Law of the People’s Republic of China (2007.03.16)
2. Administrative Regulations
Detailed Rules for the Implementation of the Law of the People's Republic of China on the Administration of Tax Collection (2002.09.07)
Detailed Rules for the Implementation of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (1991.06.30)
3. Administrative Rules
Notice of the State Administration of Taxation on the Tax Administration of Transfer Pricing of Business Transactions among Affiliated Enterprises (2006.09.28)
Circular of the State Administration of Taxation on Clarifying the Force of the Relevant Documents on Tax Administration Regarding the Business Operations among Affiliated Enterprises (2006.08.23)
Circular of the State Administration of Taxation on the Issue of Capital Adjustment in the Taxation Administration of Transfer Pricing (2005.07.28)
Notice of the State Administration of Taxation on Distributing the (Trial) Implementing Rules for Negotiated Pricing for the Transactions among Associated Enterprises (2004.09.03)
Official Reply of the State Administration of Taxation concerning the Adjustment of the Business Transactions between Enterprises and their Related Enterprises (2003.11.13)
The Notice of Revision to the Rules for the Business Transaction among the Related Enterprises (2004.10.22)
...... etc.
4. Relevant Tax Treaties
(1) Taxpayers
Taxpayers of Business Tax include all enterprises, units, household businesses and other individuals engaged in provision of taxable services, transfer of intangible assets or in sales of immovable properties within the territory of the People's Republic of China.
(2) Taxable items and tax rates
Table of Business Tax Taxable Items and Rates:
Taxable items Tax rates
1. communications and transportation 3%
2. construction 3%
3. financial and insurance businesses 8%
4. post and tele-communication 3%
5. culture and sports 3%
6. entertainment 5%-20%
7. services 5%
8. transfer of intangible assets 5%
9. sales of immovable properties 5%
(3) Computation of tax payable
The amount of Business Tax payable is equal to the turnover times the applicable tax rate. The computing formula is:
Tax payable = Turnover × Applicable tax rate
(4) Major exemptions
Business Tax may be exempt for: nursing services provided by nurseries, kindergartens, old people's homes, welfare institutions for the handicapped, matchmaking and funeral services; services provided individually by the disabled to the public; medical services provided by hospitals, clinics and other medical institutions; educational services provided by schools and other educational institutions, and services provided by students in part-time work; agricultural mechanical ploughing, irrigation and drainage, prevention and treatment of plant diseases and insect pests, plant protection, insurance for farming and animal husbandry, and related technical training services, breeding and the prevention and treatment of diseases of poultry, livestock and aquatic animals; admission fees for cultural activities conducted by memorial hall, museum, cultural centre, art gallery, exhibition hall, academy of painting and calligraphy, library and cultural protective units, admission fees for cultural and religious activities taking place at religious premises.
Wealth Finance Consulting - China Manufacturing Delivered
We believe that solid information is the backbone of a sound China strategy. To support our friends we're launching a periodic newsletter where we'll focus on important issues relevant to US companies doing business in China.
In this first newsletter, we take a look at how a recent major change in China tax policy impacts the cost of exports as well as how the USD / RMB exchange rate will impact your business.
While we hope this information is useful, there is no one-size-fits-all formula for success in China. To discuss how we can help solve your complex problems in China, contact us anytime at wealthconsultingcn@gmail.com - we're here to help.
Inside this Newsletter
•Changes to Chinese tax law and increased prices of exports to the US
•The quickening RMB appreciation
•Recommendation: Increase communication with suppliers to improve your operational performance
The Changing Chinese Landscape
In 2007, two influential government policy shifts had a major effect on the export prices of Chinese products and the dynamics of US/China commercial relations. The first policy shift was a significant reduction in Value-Added-Tax (VAT) refund rates for exporters. The second was a shift in the government's approach toward the RMB's (Renminbi/Yuan) appreciation against the US Dollar. These two policies, along with 2008's expected trends in continued inflation and increased labor law enforcement will warrant close scrutiny on the part of US buyers from China throughout 2008 and into 2009. The prognosis: it's time to tighten up the relationships with your manufacturing partners in China.
Export Subsidies and Your Bottom Line
The Chinese input VAT is a 17% tax paid on the raw materials purchased by Chinese manufacturers. The Chinese government gives rebates on this tax at the time of export as a way to encourage growth in China's export industry. These rebates favor exports over domestic sales and are in effect a commodity specific export subsidy. Not surprisingly, Chinese exporters typically build the VAT refund into their FOB (Free On Board) price quotes to foreign customers. When the Chinese government wants to affect industrial growth rates and investment in a specific industry, it modifies the VAT refund for exporters of that product. Chinese manufacturers may have very little warning of changes in this tax rebate policy and many have manufacturers may have very little warning of changes in this tax rebate policy and many have recently been blindsided by sudden decreases in their VAT refund rate.
In July 2007, the Chinese government announced a drastic decrease in VAT refunds as part of a raft of policies to discourage exports of energy-intensive, polluting products or products that were seen as exploiting China's natural resources. They lowered or removed entirely VAT refunds for 37% of all product categories (2,800 different products); including many which had not yet been touched by VAT refund rate cuts. Around 80% of the affected products saw their VAT refund rates decrease by 2-8%, causing a corresponding increase in the manufacturer's effective total costs of approximately 1-5%. Combined with other factors such as rising labor costs, increasing energy prices, and rising prices for raw materials, the timing of these VAT refund cuts was very bad for Chinese suppliers and particularly lethal for the many Chinese exporters already working with operating margins of 5% or below. These manufacturers had to choose between operating at a loss and hoping for a miracle, cutting corners on quality (there has been a great deal of media coverage on various quality problems with Chinese made goods), or passing on the increases to the buyers in order to survive. Many manufacturers have recently shuddered in the wake of these changes.
What should US buyers do?
Your team needs to work to develop a detailed understanding and economic model of your supplier's input costs and commodity-specific VAT refund rate to ensure you have a clear picture of how continued VAT changes may affect your products.
The RMB On The Rise
The Chinese government instituted the recent VAT refund cuts in part to cool sectors of the economy it believes are in danger of overheating. The US Dollar has weakened against a range of currencies over the last year, but the Chinese government has allowed the RMB to strengthen against the US Dollar at an unprecedented speed. Beijing unpegged the RMB from the US Dollar in July 2005 and now allows a controlled float of the currency. Since this shift in monetary policy, the RMB has risen significantly against the US Dollar, including 7.1% in 2007 alone, and it will continue to rise. The pace of appreciation increased sharply in the fourth quarter of 2007 and has already risen 4.5% since January 1, 2008.
Although the RMB has already strengthened by 18.5% since its unpegging, most analysts and investors believe that the RMB still remains undervalued relative to the US Dollar and other major currencies and predict a further rise of between 6% and 14% over the course of the next 12 months.
Active management and close communication with your Chinese suppliers will be more critical than ever for US companies looking to minimize the impact of these shifts.
Opportunity Within the Challenge
While many of these trends will continue to put upward pressure on landed savings from China sourcing, almost all of these factors are outside US buyers' control. These eroding system-wide margins place significant strains on the supply relationships and product quality. The bankruptcy of a key supplier or well-intentioned, but unapproved materials substitutions can wreak havoc on your international supply chain.
There is a bright side. By increasing the corporate focus on the China supply chain, opportunities for improvement are often discovered that increase efficiencies in the system, offsetting some of these increasing costs discussed. Doing this entails establishing clear communication and cooperation with the key suppliers and a willingness of all supply chain partners to invest in the future. Keeping an open-mind and developing a better understanding of how China will continue to evolve over time are key to a company's success. Long term profitability is driven by optimizing the entire supply chain to deal with the dynamic manufacturing landscape that China presents.
Successful US companies with eyes and ears on the ground in China don't read about change in the Wall Street Journal – they develop contingency plans and execute them before change strikes.
(1) Taxpayers
The enterprises of any nature, units, individual household businesses and other individuals (excluding enterprises with foreign investment, foreign enterprises and foreigners) who are obliged to pay Value Added Tax, consumption Tax and/or Business Tax are the taxpayers of City Maintenance and Construction Tax.
(2) Tax rates and computation of tax payable
Differential rates are adopted: 7% rate for city area, 5% rate for county and township area and 1% rate for other area. The tax is based on the actual amount of VAT, Consumption Tax and/or Business Tax paid by the taxpayers, and paid together with the three taxes mentioned above. The formula for calculating the amount of the tax payable:
Tax payable = Tax base × tax rate Applicable
(1) Taxpayers
The taxpayers of Consumption Tax include all enterprises, units, household businesses and other individuals engaged in production or importation of taxable consumer goods within the territory of the People's Republic of China. The taxable consumer goods exported by the taxpayers are exempt from Consumption Tax, unless the taxable consumer goods are restricted by the State from exportation.
(2) Taxable items and tax rates
Table of Consumption Tax Taxable Items and Rates:
Taxable items Tax rates (tax amount) Note
1. Tobacco (1) Grade A Cigarettes (2) Grade B Cigarettes (3) Grade C Cigarettes (4) Cigars (5) Cut tobacco 50% 40% 25% 25% 30%
2. Alcoholic drinks and alcohol (1) white spirits made from cereal (2) white spirits made from potatoes (3) yellow spirits (4) beer (5) other alcoholic drinks (6) alcohol 25% 15% 240 yuan per tonne 220 yuan per tonne 10% 5%
3. Cosmetics 30%
4. Skin-care and hair-care products 8% Perfumed soap currently taxed at 5%
5. Precious jewellery, pearls, precious jade and stones (1) Gold and silver jewellery (2) Other jewellery, pearls, precious jade and stones 5% 10%
6. Firecrackers and Fireworks 15%
7. Gasoline (1) Unleaded (2) Leaded 0.2 yuan per litre 0.28 yuan per litre
8. Diesel 0.1 yuan per litre
9. Motor Vehicle Tyres 10%
10. Motor-cycles 10%
11. Motor cars 3%,5%,8% Rate applied on the basis of the type and cylinder capacity of the car
(3) Computation of tax payable
The computation of Consumption Tax payable shall follow either the ad valorem principle or quantity-based principle. Generally, the producers of taxable consumer goods are the taxpayers and the Consumption Tax shall be paid on sales of the goods by the producers. The computing formula is:
a. Tax payable = sales amount of taxable consumer goods × Applicable tax rate , or b. Tax payable = sales volume of taxable consumer goods × Tax amount per unit
Imported taxable consumer goods to which Ad valorem method is applied in computing the tax payable shall be assessed according to the composite assessable price and the applicable rate.
Business Tax
(1) Taxpayers
Taxpayers of Business Tax include all enterprises, units, household businesses and other individuals engaged in provision of taxable services, transfer of intangible assets or in sales of immovable properties within the territory of the People's Republic of China.
(2) Taxable items and tax rates
Table of Business Tax Taxable Items and Rates:
Taxable items Tax rates
1. communications and transportation 3%
2. construction 3%
3. financial and insurance businesses 8%
4. post and tele-communication 3%
5. culture and sports 3%
6. entertainment 5%-20%
7. services 5%
8. transfer of intangible assets 5%
9. sales of immovable properties 5%
(3) Computation of tax payable
The amount of Business Tax payable is equal to the turnover times the applicable tax rate. The computing formula is:
Tax payable = Turnover × Applicable tax rate
(4) Major exemptions
Business Tax may be exempt for: nursing services provided by nurseries, kindergartens, old people's homes, welfare institutions for the handicapped, matchmaking and funeral services; services provided individually by the disabled to the public; medical services provided by hospitals, clinics and other medical institutions; educational services provided by schools and other educational institutions, and services provided by students in part-time work; agricultural mechanical ploughing, irrigation and drainage, prevention and treatment of plant diseases and insect pests, plant protection, insurance for farming and animal husbandry, and related technical training services, breeding and the prevention and treatment of diseases of poultry, livestock and aquatic animals; admission fees for cultural activities conducted by memorial hall, museum, cultural centre, art gallery, exhibition hall, academy of painting and calligraphy, library and cultural protective units, admission fees for cultural and religious activities taking place at religious premises.
Legislation Date of issue and issued by Effective Date
1.Provisional Regulations of the People's Republic of China on Value Added Tax Detailed Rules for Its Implementation 13 Dec. 1993, by State Council 25 Dec. 1993, by Ministry of Finance 1 Jan.,1994 1 Jan.,1994
2.Provisional Regulations of the People’s Republic of China on Consumption Tax Detailed Rules for Its Implementation 13 Dec.1993, by State Council 25 Dec.1993, by Ministry of Finance 1 Jan.,1994 1 Jan.,1994
3.Provisional Regulations of the People’s Republic of China on Business Tax Detailed Rules for Its Implementation 13 Dec.1993, by State Council 25 Dec.1993, by Ministry of Finance 1 Jan.,1994 1 Jan.,1994
4.Provisional Regulations of the People’s Republic of China on Enterprise Income Tax Detailed Rules for Its Implementation 13 Dec.1993, by State Council 4 Feb.1994, by Ministry of Finance 1 Jan.,1994 1 Jan.,1994
5. Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises Detailed Rules for Its Implementation 9 Apr.1991, by the Fourth Session of the 7th National People's Congress (NPC) 30 Jun.1991, by State Council 1 Jul.,1991 1 Jul.,1991
6. Individual Income Tax Law of the People's Republic of China Regulations for Its Implementation 10 Sep.1980 passed by the Third Session of the 5th National People’s Congress and revised and re- issued by the Fourth Session of the 8th NPC on 31 Oct.1993 28 Jan.1994, by State Council 1 Jan.,1994 28 Jan.,1994
7.Provisional Regulations of the People’s Republic of China on Resource Tax Detailed Rules for Its Implementation 25 Dec.1993, by State Council 30 Dec.1993, by Ministry of Finance 1 Jan.,1994 1 Jan.,1994
8.Provisional Regulations of the People' s Republic of China on Urban and Township Land Use Tax Detailed Rules for Its Implementation 27 Sep.1998, by State Council to be made by the People' s Government at Provincial Level 1 Nov.,1998
9.Provisional Regulations of the People' s Republic of China on City Maintenance and Construction Tax Detailed Rules for Its Implementation 8 Feb.1985, by State Council to be made by the People' s Government at Provincial Level 1985
10.Provisional Regulations of the People’s Republic of China on Farmland Occupation Tax Detailed Rules for Its Implementation 1 Apr.1987, by State Council to be made by the People’s Government at Provincial Level 1 Apr.1987
11.Provisional Regulations of the People’s Republic of China on Fixed Assets Investment Orientation Regulation Tax Detailed Rules for Its Implementation 16 Apr.1987, by State Council 18 Jun., 1991, by the SAT 1991 1991
12.Provisional Regulations of the People' s Republic of China on Land Appreciation Tax Detailed Rules for Its Implementation 13 Dec.1993, by State Council 27 Jan.1995, by Ministry of Finance 1 Jan.,1994 27 Jan.,1995
13.Provisional Regulations of the People’s Republic of China on House Property Tax Detailed Rules for Its Implementation 15 Sep.1986, by State Council to be made by People’s Governments at Provincial Level 1 Oct.,1986
14. Provisional Regulations Governing Urban Real Estate Tax Detailed Rules for Its Implementation 8 Aug.1951, by the Central People’s Government Administration Council to be made by People’s Governments at Provincial Level 8 Aug.,1951
15. Inheritance Tax (to be legislated)
16.Provisional Regulations of the People's Republic of China on Vehicle and Vessel Usage Tax Detailed Rules for Implementation 15 Sep., 1986, by State Council to be made by People ' s Governments at Provincial Level 1 Oct.,1986
17.Provisional Regulations Concerning the Vehicle and Vessel Usage License Plate Tax Detailed Rules for Its Implementation 20 Sep.1951, by the Central Government Administration Council to be made by People’s Governments at Provincial Level 20 Sep.,1951
18.Provisional Regulations of the People’s Republic of China Concerning Stamp Tax Detailed Rules for Its Implementation 6 Aug.1988, by State Council 29 Sep.1988, by Ministry of Finance 1 Oct.,1988 1 Oct.,1988
19.Provisional Regulations Governing Deed Tax Detailed Rules for Its Implementation 7 Jul.1997, by State Council 28 Oct.1997, by Ministry of Finance 1 Oct.1997 1 Oct., 1997
20. Security Exchange Tax (to be legislated)
21.Provisional Regulations Concerning Slaughter Tax (administered by local governments) 19 Dec.1950, by the Central Government Administration Council
22.Provisional Regulations of the People’s Republic of China on Banquet Tax (administered by local governments) 22 Sep.1988, by State Council
23.Provisional Regulations of the People’s Republic of China on Agriculture Tax Detailed Rules for Implementation 3 Jun.1958, by the 96th Session of the Standing Committee of the 1st NPC to be made by the People' s Government at Provincial Level 3 Jun.,1958
24.The Rules of the State Council on Levying Agriculture Tax on Agriculture Specialities Measures for Its Implementation 30 Jan.,1994, by State Council to be made by the People' s Government at Provincial Level 30 Jan.,1958
25. Animal Husbandry Tax: no national legislation If levied, rules should be made by the provincial governments concerned
26. Regulations of the People ' s Republic of China on Import and Export Customs Duty 7 Mar.1992, by State Council; Second revision by State Council on March 18,1992 1 Apr.1992
27. Rules of Levying Customs Duty on Entry Passengers ' Luggage and Personal Postal Articles 18 May,1994, by the Customs Tariff and Classification Committee of the State Council 1 Jul.,1994
28. Law of the People's Republic of China on Tax Administration and Collection Detailed Rules for Its Implementation 4 Sep.,1992, passed by 27th Session of the Standing Committee of the 7th NPC, and revised and re- promulgated by the 12th Session of the Standing Committee of the 8th NPC on 28 Feb.,1995 4 Aug.,1993, by the State Council 28 Feb.,1995 4 Aug.,1993
29. Supplementary Rules of the Standing Committee of NPC of the People’s Republic of China on Punishing Tax Evasions and Refusal to Pay Taxes 4 Sep.1992, by the 27th Session of the Standing Committee of the 7th NPC 1 Jan.,1993
30.Measures of the People’s Republic of China on Invoice Management Detailed Rules for Its Implementation 12 Dec.,1993, approved by State Council and issued by Ministry of Finance on 23 Dec., 1993 28 Dec., 1993, by the SAT 23 Dec.,1993 23 Dec.,1993
31. Resolutions of the Standing Committee of NPC of the People’s Republic of China on Punishing Any False Issuance, Forgery and/or Illegal Sales of VAT Invoices 30 Oct.,1995, by the 16th Session of the Standing Committee of the 8th NPC 30 Oct.,1995
32. Rules on Tax Administrative Appealing 6 Nov.,1993, by the SAT 6 Nov.,1993
Note: The provisions of criminal responsibilities in Supplementary Rules of the Standing Committee of NPC of the People's Republic of China on Penalizing Tax Evasions and Refusal to Pay Taxes and Resolutions of the Standing Committee of NPC of the People's Republic of China on Penalizing Any False Issuance, Forgery and/or Illegal Sales of VAT Invoices have been integrated into the Criminal Law of the People's Republic of China revised and promulgated on 14 March 1997.
There are 14 kinds of taxes currently applicable to the enterprises with foreign investment, foreign enterprises and/or foreigners, namely: Value Added Tax, Consumption Tax, Business Tax, Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, Individual Income Tax, Resource Tax, Land Appreciation Tax, Urban Real Estate Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Slaughter Tax, Agriculture Tax, and Customs Duties.
Hong Kong, Macau and Taiwan and overseas Chinese and the enterprises with their investment are taxed in reference to the taxation on foreigners, enterprises with foreign investment and/or foreign enterprises. In an effort to encourage inward flow of funds, technology and information, China provides numerous preferential treatments in foreign taxation, and has successively concluded tax treaties with 60 countries (by July 1999): Japan, the USA, France, UK, Belgium, Germany, Malaysia, Norway, Denmark, Singapore, Finland, Canada, Sweden, New Zealand, Thailand, Italy, the Netherlands, Poland, Australia, Bulgaria, Pakistan, Kuwait, Switzerland, Cyprus, Spain, Romania, Austria, Brazil, Mongolia, Hungary, Malta, the UAE, Luxembourg, South Korea, Russia, Papua New Guinea, India, Mauritius, Croatia, Belarus, Slovenia, Israel, Vietnam, Turkey, Ukraine, Armenia, Jamaica, Iceland, Lithuania, Latvia, Uzbekistan, Bangladesh, Yugoslavia, Sudan, Macedonia, Egypt, Portugal, Estonia, and Laos, 51 of which have been in force.
(1) Taxpayers
The taxpayers of Resource Tax include all units and individuals engaged in the exploitation of mineral resources or production of salt prescribed in the Resource Tax Regulations within the territory "of the People' s Republic of China.
(2) Taxable items and tax rates
Table of Resource Tax Taxable Items and Tax Amount per Unit:
Taxable items Tax amount per unit
1. crude oil 8-30yuan per ton
2. natural gas 2-15 yuan per 1000 cubic metres
3. coal 0.3-5 yuan per ton
4. other non-metal ores 0.5-20 yuan per ton or per cubic metre
5. ferrous metal ores 2-30 yuan per ton
6. non-ferrous metal ores 0.4-30 yuan per ton
7. salt (1) solid salt (2) liquid salt 10-60 yuan per ton 2-10 yuan per ton
(3) Computation of tax payable
The amount of Resource Tax payable is based on the quantity of the taxable products by applying the applicable tax amount per unit. The formula is:
Tax payable = Quantity of taxable products × Applicable tax amount per unit
(4) The main tax reductions and exemptions
a. Crude oil used for heating or repairing wells in the course of exploiting crude oil may be exempt;
b. For taxpayers suffering huge losses due to such reasons as accidents or natural disasters in the course of exploiting or producing taxable products, tax reduction or exemption may be given by taking into consideration the seriousness of the situation;
c. The Resource Tax payable on iron ores and on the non-ferrous metal ores by independent mines may be reduced.
Urban and Township Land Use Tax
(1) Taxpayers
The taxpayers of Urban and Township Land Use Tax include all enterprises, units, individual household businesses and other individuals (excluding enterprises with foreign investment, foreign enterprises and foreigners).
(2) Tax payable per unit
The tax payable per unit is differentiated with different ranges for different regions, i.e., the annual amount of tax payable per square meter is: 0.5-10 yuan for large cities, 0.4-8 yuan for medium-size cities, 0.3-6 yuan for small cities, or 0.2-4 yuan for mining districts. Upon approval, the tax payable per unit for poor area may be lowered or that for developed area may be raised to some extent. (3) Computation
The amount of tax payable is computed on the basis of the actual size of the land occupied by the taxpayers and by applying the specified applicable tax payable per unit. The formula is:
Tax payable = Size of land occupied ×Tax payable per unit
(4) Major exemptions
Tax exemptions may be given on land occupied by governmental organs, people's organizations and military units for their own use; land occupied by units for their own use which are financed by the institutional allocation of funds from financial departments of the State; land occupied by religious temples, parks and historic scenic spots for their own use; land for public use occupied by Municipal Administration, squares and green land; land directly utilized for production in the fields of agriculture, forestry, animal husbandry and fishery industries; land used for water reservation and protection; and land occupied for energy and transportation development upon approval of the State.
Tax legislation
State organs that have the authority to formulate tax laws or tax policy include the National People's Congress and its Standing Committee, the State Council, the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs.
Tax laws are enacted by the National People's Congress, e.g., the Individual Income Tax Law of the People's Republic of China; or enacted by the Standing Committee of the National People's Congress, e.g., the Tax Collection and Administration Law of the People's Republic of China.
The administrative regulations and rules concerning taxation are formulated by the State Council, e.g., the Detailed Rules for the Implementation of the Tax Collection and Administration Law of the People' s Republic of China, the Detailed Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China, the Provisional Regulations of the People's Republic of China on Value Added Tax.
The departmental rules concerning taxation are formulated by the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs, e.g., the Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value Added Tax, the Provisional Measures for Voluntary Reporting of the Individual Income Tax.
The formulation of tax laws follow four steps: drafting, examination, voting and promulgation. The four steps for the formulation of tax administrative regulations and rules are: planning, drafting, verification and promulgation. The four steps mentioned above take place in accordance with laws, regulations and rules.
Besides, the laws of China stipulates that within the framework of the national tax laws and regulations, some local tax regulations and rules may be formulated by the People's Congress at the provincial level and its Standing Committee, the People's Congress of minority nationality autonomous prefectures and the People's Government at provincial level.
The State Council released the Implementation Rules to the CIT Law on 6 December 2007.
In this blog, I highlight some of the key changes brought by the new Implementation Rules.
1. Withholding Tax
The withholding tax rate under the CIT Law on China-sourced passive income(for example,dividends,interests,royalties,rentals,gains on transfer of properties,etc.)received by a non-tax resident enterprise is 20%. Under the Implementation Rules,the withholding tax rate is generally reduced to 10%,which may be further reduced under a bilateral income tax treatly to which China is a party.
In contrast with the current exemption of withholding tax on cross-border dividends in China, the 10% withholding tax may further increase the tax cost in China of offshore holding structures. The effective use of the China treaty network will become more important once the CIT Law comes into effect.
2. High and new technology enterprises
The CIT Law provides a preferential tax treatment for "high and new technology"enterprises in the form of reduced CIT rate of 15%. The Implementation Rules emphasises the ownership of "core proprietary intellectual property" being essential to the qualification for this preferential rate.
The Implementation Rules also refer to certain categories of products and services to be prescribed in a catalogue by relevant government agencies,as well as certain threshold requirements for R&D expenditures,the number of R&D personnel,and so on. Neither the catalogue nor the thresholds,however,have been promulgated as the date of this publication. Enterprises,therefore,cannot be certain whether they will quality for this substantial tax reduction under the new CIT Law.
In addition,enterprises involved in high and new technology related activities may be entitled to other incentives under the Implementation Rules, including:
3. Tax incentives
Existing tax incentives under the current income tax law are om most cases teminated with limited grandfathering relief,while new incentives are introduced under the Implementation Rules.
Enterprises investing in qualified infrastructure projects and qualified environmental protection and energy and water conservation projects will be entitled to three-year tax exemption,followed by a three-year 50% reduction,with the incentive beginning from the first year when income is derived. The existing "two-year holiday/three-year reduction"preferential treatment for manufacturing enterprise established prior to the promulgation of the CIT Law os one of the tax incentive that is grandfathered.
Tax incentives that will be terminated under the Implementation Rules include:
The Implementation Rules also set out certain preferential tax treatment that is not available under the existing corporate income tax rules. For example, a reduced tax rate of 20%,as opposed to the regular rate of 25%,for small scale enterprises with low profits and a 50% bonus amortization on certain R&D expenditures.
More concerning points on this issue, will be continued.......
Types of taxes
Under the current tax system in China, there are 26 types of taxes, which, according to their nature and function, can be divided into the following 8 categories:
• Category of turnover taxes. It includes three kinds of taxes, namely, Value-Added Tax, Consumption Tax and Business Tax. The levy of these taxes are normally based on the volume of turnover or sales of the taxpayers in the manufacturing, circulation or service sectors.
• Category of income taxes. It includes Enterprise Income Tax (applicable to such domestic enterprises as state-owned enterprises, collectively-owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises), Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals.
• Category of resource taxes. It consists of Resource Tax and Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources.
• Category of taxes for special purposes. These taxes are City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, and Vehicle Acquisition Tax. These taxes are levied on specific items for special regulative purposes.
• Category of property taxes. It encompasses House Property Tax, Urban Real Estate Tax, and Inheritance Tax (not yet levied).
• Category of behaviour taxes. It includes Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax (not yet levied), Slaughter Tax and Banquet Tax. These taxes are levied on specified behaviour.
• Category of agricultural taxes. The taxes belonging to this category are Agriculture Tax (including Agricultural Specialty Tax) and Animal Husbandry Tax which are levied on the enterprises, units and/or individuals receiving income from agriculture and animal husbandry activities.
• Category of customs duties. Customs duties are imposed on the goods and articles imported into and exported out of the territory of the People's Republic of China, including Excise Tax.
1) Taxpayers
The VAT taxpayers include any enterprise, unit and other individual engaged in sales of goods, importation of goods, provision of services of processing, repairs and replacement (hereinafter referred to as 'taxable services' in short) within the territory of the People's Republic of China.
(2) Taxable items and tax rates
Table of VAT Taxable Items and Rates
Coverage of collection Rates
Exportation of goods (except otherwise stipulated by the State) 0%
1. Agriculture, forestry, products of animal husbandry, aquatic products;
2. Edible vegetable oil and food grains duplicates;
3.Tap water, heating, cooling, hot air supplying, hot water, coal gas, liquefied petroleum gas, natural gas, methane gas, coal/charcoal products for household use;
4.Books, newspapers, magazines (excluding the newspapers and magazines distributed by the post department);
5.Feeds, chemical fertilizers, agricultural chemicals, Agricultural machinery and plastic covering film for farming;
6.Dressing metal mineral products, dressing non-metal mineral products, coal. 13%
Crude oil, mine salt and goods other than those listed above, and services of processing, repairs and replacement. 17%
(3) Computation of tax payable
a. Normal taxpayers
To compute the VAT payable, the normal taxpayers need to separately calculate the output tax and the input tax for the current period. Then the difference between the output tax and the input tax shall be the actual amount of VAT payable.
The formula for computing the tax payable is as follows:
Tax payable = Output tax payable for the current period - Input tax for the current period
Output tax payable = Sales volume in the current period × Applicable tax rate
b. Small taxpayers
Small taxpayers are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates (4% for commercial sector, and 6% for other sectors). The computing formula is:
Tax payable = Sales amount × Applicable rate
c. Importation
The imported goods are taxed on the basis of the composite assessable price by applying the applicable tax rate.
d. VAT refund for exporters
In case of 0% rate applicable to the exported goods, the exporters may apply to the tax authorities for the input tax refund on those goods exported. At present, the refund rates consist of 5%, 6%, 9%, 11%, 13% and 17%.
(4) Tax exemptions
The exempted items include: self-produced primary agricultural products sold by agricultural producing units and individuals; imported goods being processed for exportation; the self-use equipment imported out of the total investment for the projects with foreign investment or domestic investment which are encouraged by the State; contraceptive medicines and devices; antique books purchased from the public; instruments and equipment imported for direct use in scientific research, experiment and education; imported materials and equipment granted by foreign governments or international organizations; articles imported directly by organizations for the disabled for exclusive use by the disabled.
(1) Taxpayers
At this moment, this tax is only applied to the enterprises with foreign investment, foreign enterprises, and foreigners. The users of the taxable vehicles and vessels are taxpayers of this tax.
(2) Tax amount per unit
The tax amount per unit is different for vehicles and vessels:
a. Tax amount per unit for vehicles: 15-80 yuan per passenger vehicle per quarter; 4-15 yuan per net tonnage per quarter for cargo vehicles; 5-20 yuan per motorcycle per quarter. 0.3-8 yuan per non-motored vehicle per quarter.
b. Tax amount per unit for vessels: 0.3- 1.1 yuan per net tonnage per quarter for motorized vessels; 0.15-0.35 yuan per non-motorized vessel.
(3) Computation
The tax base for vehicles is the quantity or the net tonnage of taxable vehicles The tax base for vessels is the net-tonnage or the deadweight tonnage of the taxable vessels. The formula for computing the tax payable is:
a. Tax payable = Quantity (or net-tonnage ) of taxable vehicles × Applicable tax amount per unit b. Tax payable = Net-tonnage (or deadweight tonnage) of taxable vessels × Applicable tax amount per unit
(4) Exemptions
a. Tax exemptions may be given on the vehicles used by Embassies and Consulates in China; the vehicles used by diplomatic representatives, consuls, administrative and technical staffs and their spouses and non-grown-up children living together with them.
b. Tax exemptions may be given as stipulated in some provinces and municipalities on the fire vehicles, ambulances, water sprinkling vehicles and similar vehicles of enterprises with foreign investment and foreign enterprises.
(1) Taxpayers
Taxpayers include enterprises, units, individual household businesses and other individuals who possess and operate vehicles and/or vessels within the territory of the People's Republic of China (excluding enterprises with foreign investment, foreign enterprises and foreigners).
(2) Tax base, tax amount per unit and computation of tax payable
The tax base are classified into two categories respectively for vehicles and vessels: the tax base for vehicles is the number of the taxable vehicles or the net-tonnage of the taxable vehicles; the tax base for vessels is the net-tonnage or the deadweight tonnage of the taxable vessels.
The annual amount of tax payable is separately computed for vehicles and vessels:
a. For vehicles: 60 to 320 yuan per passenger vehicles; 16 to 60 yuan per ton ( net-tonnage ) for cargo vehicles; 20 to 80 yuan per motorcycle; 1.2 to 32 yuan per non-motorized vehicle.
b. For vessels: 1.2 to 5 yuan per net tonnage for motorized vessels; 0.6 to1.4 yuan per deadweight tonnage for non-motorized vessels.
The formula for calculating tax payable is:
(a) Tax payable = Number (or net-tonnage ) of taxable vehicles × Applicable tax amount per unit
(b) Tax payable = Net-tonnage (or deadweight capacity) of the taxable vessels × Applicable tax amount per unit
(4) Major exemptions
Tax may be exempt on the vehicles and vessels self-used by governmental organs, people's organizations and military units; the vehicles and vessels self-used by units financed by financial fund allocation; the fishing vessels with a deadweight capacity not in excess of one ton; the pontoons and floating docks used exclusively for passengers, the loading or unloading of cargo and the storage of goods; the vehicles and vessels used by police department, fire department, health department and environmental department; the vessels subject to payment of Vessel Tonnage Tax according to Rules; special vehicles designed for the convenience of the handicapped; and the tractors used mainly in agriculture production.
China plans to enact a bill that would eventually unify income tax rates for domestic and foreign companies at 25 percent after years of criticism that the tax policies are unfair to domestic entities.
The Standing Committee of the National People's Congress (NPC), or China's top legislature, has initiated the lawmaking process to discuss a bill on corporate income tax on Sunday.
China's taxation administration said on January 17 that the administration is still working on a proposal for a unified income tax system both for domestic and overseas-funded firms.
At the moment, the rate stands at 15 percent for foreign companies, but 33 percent for their domestic peers.