Chapter 18 Tax law Chapter 18 Tax law

1 1 Overview

2 2 Income tax

3 3 Turnover tax

4 4 Land appreciation tax

5 5 Taxation administration

1 Overview

1.1 Concept

1.2 Types of taxes

(1) Compulsory

(2) Gratuitous

(3) Fixity

Types of taxes Types of taxes

• 1994 tax law reform 32 types of industrial and commercial tax were reduced to 22 falling into 5 categories

Categories Subcategories Tax rates

Income tax

Individual income tax 5-45%; 5-35%

Enterprise income tax

Domestic enterprises income tax 33%

FIEs and foreign enterprises income tax 33%

Turnover tax

VAT 17%; 13%;0

Business tax 3-20%

Consumption tax 3-45%

Customs duty

Property tax

Real property tax 1.2-12%

Land appreciation tax 30-60%

Deed tax 6%

Resources tax Resources tax

Activities tax

Stamp tax

Adjustment tax on fixed asset investment

Vehicle and vessel use tax

Vessel tonnage tax

Slaughter tax

Urban land use tax

Urban maintenance and construction tax 1-7%

Farming land occupancy tax

Securities trading tax

1.3 Sources of law Sources of tax lawSources of tax law

Name of legislation Issuance authorities Issuance time

Taxation TAL SCNPC 1992, 1995, 2001

TAL Regs State Council 1993, 2002

Income tax

IITL NPC, SCNPC 1980, 1993, 1999

IREIT State Council 1993

FIEITL NPC 1991

Turnover tax

IRVAT State Council 1993

IRBT State Council 1993

IRCT State Council 1993

SCNPC Decision SCNPC 1993

Property tax IRLAT State Council 1993

1.3.1 Unified taxation law

1.3.2 Income tax laws

1.3.3 Turnover tax laws

1.3.4 Land appreciation tax law

2 Income tax

2.1 Individual income tax

• Fiscal residence and the source of the income when determining tax jurisdiction

• Individual having domicile in China or having resided in China for 1 year or more in absence of domicile shall pay tax for incomes sourced in and out of China

• Those not residing in China in absence of domicile or residing in China for less than 1 year in absence of the domicile shall pay tax only for the incomes sourced in China

2.1.1 Taxpayers

2.1.2 Taxable incomes

(1) wages and salaries (2) IICH’s incomes from production and business operation (3) incomes from contracting management or leasing

management of enterprises or institutions (4) service remuneration (5) copyright royalty (6) royalty (7) incomes from interest, dividends and bonuses (8) incomes from property leasing (9) incomes from property transfer (10) accidental incomes (11) other incomes to be taxed depending upon the decision

by the MOF

2.1.3 Tax rate Tax rate of individual income tax Tax rate of individual income tax

Monthly taxable salary Tax rate Annual taxable

income Tax rate Deduction

1 <RMB 500 5% <RMB5000 5%

(1) Wage & salary: RMB 800.

(2) Incomes of IICHs: expenses, costs and losses deductible.

(3) Incomes for contracting & leasing management: reasonable fees deductible.

2 RMB500-2000 10% RMB5000-10000 10%

3 RMB2000-5000 15% RMB10000-30000 20%

4 RMB5000-20000 20% RMB30000-50000 30%

5 RMB20000-40000 25% > RMB50000 35%

6 RMB40000-60000 30%

7 RMB60000-80000 35%

8 RMB80000-100000 40%

9 > RMB100000 45%

Copyright royalty 20% 30%

Service remuneration, royalty 20% <RMB 4000: RMB 800

>RMB 4000: 20%

Incomes from property transfer 20% Original value and

reasonable fees

Incomes from interest, dividends and bonuses 20% ╳

2.1.4 Tax exemption and deduction

(1) awards in science, education, technology, culture, health, physical sports and environmental protection granted by provincial government, ministries or commissions under State Council or above and foreign organisation and international organisation

(2) interest of bank savings, and interest of treasury bonds and financial bonds issued by the State

(3) subsidies and allowances granted according uniform standard of the State

(4) welfare money, survivor's pensions and relief payment

(5) insurance indemnities

(6) military severance pay and demobilization pay for soldiers of the armed forces

(7) severance pay, retirement salaries and life subsidies for retired cadres and staff granted in accordance with uniform standard of the State

2.1.4.1 Tax exemption

(8)incomes of diplomatic officials, consular officials and other personnel of foreign embassies and consulate in China which should be free from tax under the law of China

(9) incomes which shall be free from tax in accordance with international conventions acceded to by China and bilateral agreement concluded by China

(10) other incomes which the financial department under the State Council approves to exempt from tax.

2.1.4.2 Scope of deduction

2.1.5 Tax credit

If the taxpayer obtains incomes outside of China, taxes paid outside of China for that part of incomes may offset taxes in China for that part of incomes.

2.2 Enterprise income tax

(1) SOEs

(2) collective enterprises

(3) private enterprises

(4) jointly operated enterprises

(5) CLS and LLC

(6) other entities obtaining incomes from production and business operation and other incomes

2.2.1 Taxpayers

2.2.2 Taxable incomes (1) incomes from production and business operation

(2) incomes from property transfer

(3) incomes from interest

(4) incomes from leasing

(5) incomes from royalty and licensing fees

(6) incomes from dividends

(7) other incomes

2.2.3 Scope of deductions Costs, expenses and losses related to the incomes of taxpayer are deductible

 

Not deductible items: (1) expenditure of a capital nature(2) expenditure on acquisition and development of intangible as

sets(3) fines in relation to illegal business operation and losses incur

red on confiscation of property(4) surcharge on over due tax payments, fines and penalties in r

elation to various types of taxes(5) the portion of losses incurred due to natural disasters or acci

dents covered by compensations receivable(6) donations for community benefits and charitable donations i

n excess of deductible amounts; and donations other than those for community benefits or charitable donations

(7) expenditure for any sponsorship, which refers to one for non-advertisement purpose

(8) other items of expenditure not incurred in the earning the income

2.2.4 Tax rate

2.2.5 Tax credit

33%

If taxpayer obtains incomes outside of China, taxes paid outside of China for that part of incomes may offset taxes in China for that part of incomes

2.3 FIEs and foreign enterprises income tax

(1) SFEJVs(2) SFCJVs(3) WFOEs(4) foreign companies and other economic entities having

establishments or sites in China and engaging in production or business operations, and those having income sources within China in absence of establishments or sites in China.

2.3.1 Taxpayers

2.3.2 Taxable income (1) incomes from production and business operations of the FIEs

and foreign enterprises having establishments and sites in China, as well as profits (dividends), interests, rents, royalties and other earnings sourced inside and outside China and actually related to their establishments or sites in China

 

(2) the following incomes of foreign enterprises not having establishments in China:

(a) profits (dividends) obtained from enterprises inside China (b) interests on savings, loans, bonds, payments for others or

deferred payments in China (c) rents from property leasing in China (d) royalties from assignment and licensing of patent, know-how,

trademarks and copyrights in China (e)other incomes sourced inside China deemed to be taxed by MOF

2.3.3 Tax rate

30% + 3% local income tax

2.3.4 Tax preferential treatment 2.3.4.1 Tax incentives for foreign investments (1) Deduction and exemption for manufacturing FIEs (2) Geographic and industrial reduction for FIEs and foreign enterprises (3) Tax refund (4) Deduction of withholding tax (5) Local preferential treatments

2.3.4.2 Tax incentives for additional foreign investments

3 Turnover tax

3.1 VAT

3.1.1Taxpayers Any entity or individual selling goods or providing services of processing, repairing and supplying replacements or importing goods in China shall pay VAT.  

3.1.2 Tax rate

VAT rates VAT rates

Sector of trades Tax rate

Selling or importing most goods 17%

Selling or importing five specific types of goods 13%

Exporting goods 0

Such service as processing, repairing and supplying replacements 17%

3.1.3 Tax calculation

Taxable sales volume = sales volume inclusive of tax 1 + tax rate (17%) 

If taxpayer sells RMB100 worth of goods, in which the tax at the sales level is included, thus the taxable sales volume is RMB85.47 rather than RMB100. The VAT at the sales level is RMB14.529 instead of RMB17.  Small-scale taxpayers: 6%

3.1.4 Tax exemption (1) agricultural products sold by producer itself (2) contraceptive (3) antiquated books (4) imported devices and equipment to be directly used in scientific research and experiment and education (5) imported materials and equipments gratuitously given by

foreign governments or international organizations (6) imported equipment for compensation trade and

processing with overseas customers materials and assembling with overseas customers parts

(7) articles imported directly by organizations of the handicapped people and used for the handicapped people specially

(8) selling one's own second hand articles

3.1.5 Tax authority • Regular taxpayer: pay tax to competent tax authority at

location of its organization• If head office and branch are located in different county,

pay to their respective competent tax authority where they are located

• Upon approval by SAT, the tax may be paid together to the competent tax authority at the location of the head office

• Irregular taxpayer: pay tax to competent tax authority where the goods are sold

• Import of goods: pay to Customs

3.1.6 Implications for FIEs

3.2 Business tax

3.2.1 Taxpayers Any entity or individual providing certain category of services, assigning intangible assets or selling immovable property shall pay business tax.

3.2.2 Tax rate

Business tax rates Business tax rates

Sector of business Tax rate (%)

Communication and transportation, construction, post and telecommunications and culture and sports

3

Banking and insurance, service trades, assigning intangible assets and selling immovable property

5

Entertainment 5-20

3.2.3 Tax calculation

• Sum of business tax is the sum of business volume multiplied by tax rate

 

• In principle no deductions are allowed for business volume

• 6 circumstances allowing deductions:

(1) transportation entity transports goods or passengers out of China and changes the goods or passengers to other transportation entities, the business volume shall be the remaining sum of total freight by deducting those fees paid to the latter carrier

(2) travel entity sends touring party out of China and changes to other travel entities, its business volume shall be the remaining sum of total fees by deducting the those fees paid to the latter travel entities

(3) if contractor subcontracts its project to others, its business volume shall be the remaining sum of the total prices of contract by deducting prices paid to subcontractor

(4) for sub-loan business, the business volume shall be the remaining sum of the interest of loan by deducting interest of lending

(5) for buying and selling business of foreign exchange, securities and futures, the business volume shall be the remaining sum of selling price by deducting purchase price

(6) other circumstances provided by MOF

3.2.4 Tax exemption

• Taxable services: tax authority where the service is offered

• Transportation: competent tax authority at location of its organization

• Land-use-rights assignment, competent tax authority at location of the land

• Transfers other intangible assets, competent tax authority at the location of its organization

• Sale of immovable property, competent tax authority at location of immovable property

3.2.5 Tax authority

• Should business volume not reach the minimum standard of business tax starting point, such business tax is exempted • 6 categories of services exempted from business tax

3.3 Consumption tax It only applies to 11 categories of products  

3.3.1 Taxpayers Any entity or individual producing, manufacturing for commission order and importing consumer goods prescribed by IRCT shall pay the consumption tax  

3.3.2 Taxable consumer goods and tax rate

Consumption tax ratesConsumption tax rates

Applicable goods Tax rate

Specific tax

Millet wine RMB 240/T

Beer RMB 220/T

Gasoline RMB 0.2/L

Diesel oil RMB 0.1/L

Ad valorem tax

Cigarettes Class A: 45%; class B and cigar: 40%; cut tobacco: 30%

Liquor and alcohol Cereal spirit: 25%; potato spirit: 15%; other liquors: 10%; alcohol, 5%

Cosmetics 30%

Skin & hair products 17%

Valuable jewellery 10%

Firecrackers 15%

Motorcycles 10%

Car Sedan cars: 3-8%; cross country vehicles & mini-bus: 3-5%

3.3.3 Tax calculation

• If taxable consumer goods produced by taxpayer are sold, it shall be taxed in the sales level.  

• Sum of CT: sum of sales volume multiplied by tax rate or unit tax  

3.3.4 Tax authority

• Competent tax authority where taxpayer’s business accounting is carried out

• Taxable consumer goods for commission order, competent tax authority at location of agent.

• Imported taxable consumer goods: Customs where goods are declared

4 Land appreciation tax

4.1 Taxpayers

Any entity of individual obtaining incomes from assignment of right to use State owned land buildings and facilities shall pay land appreciation tax

4.2 Taxable value-addition and scope of deduction

Value-addition: the remaining sum of incomes sourced from real estate assignment including incomes in cash, in kind and other revenues Deductible items: (1) payment for acquisition of land-use-rights (2) costs and expenses of land development (3) costs and expenses of new buildings and their coordinate facilities, or evaluated prices of used houses and buildings (4) taxes and charges related to assignment of real estate (5) other deductible items prescribed by the MOF

4.3 Tax rate Land appreciation tax rates Land appreciation tax rates

Value addition Progressive tax rate

1 Value addition ≤50% 30%

2 51%≤Value addition≤100% 40%

3 101%≤Value addition≤200% 50%

4 200%< Value addition 60%

4.4 Tax exemption • Taxpayer builds residences of ordinary standard whose value addition does not exceed 20% of the sum of deductible items, the land appreciation tax is exempted

• Should real estate is taken back or expropriated by State according to prescribed procedures necessitated by national construction, such tax is exempted

5 Taxation administration

5.1 Taxation registration

5.2 Tax declaration

5.3 Tax collection

5.3.1 Prompt payment Failure to pay tax within such period and the withholding agent fails to transfer the tax within such period, the taxation authorities can levy 0.5‰ delay charge per day on the overdue payment starting from overdue date in addition to ordering him to pay tax in a set period of time

5.3.2 Power of reasonable adjustment

(1) unnecessary to establish the account book according to laws and administrative regulations

(2) fails to establish account book though required to do so by laws and administrative regulations

(3) destroy account book by melting or burning, or refuse to provide materials regarding taxation

(4) though account book has been established, accounts are chaotic or the cost materials, income documents and expense documents are incomplete rendering difficult to check the accounts

(5) upon occurrence of taxation obligations, fails to declare the tax in the period of time specified and after the taxation authorities order him to do so in prescribed time, still fails to do so after expiry of such time limit

(6) basis to calculate the taxable amount as declared is evidently low without justified cause

5.3.3 Guarantee and enforcement

If there are obvious signs that taxpayer is moving awayand hiding its taxable goods, goods and other assets ortaxable incomes, they may order taxpayer to provide taxpayment guarantee. If unable to provide such guarantee, they may:

(1) give a written notice to the its account bank or other financial institutions requesting them to suspend withdrawing the portion of its deposits equivalent in value to the taxes

(2) detain and seal up the portion of goods and other assets equivalent in value to the taxes

5.4 Tax inspection

(1) inspecting the taxpayer's account books, book-keeping documents, statements and related materials, and inspection of the withholding agent’s withholding and collecting account books, book-keeping documents and related materials

(2) visiting its production and operations sites and goods storage sites for inspecting its taxable commodities, goods or other assets and for inspecting the withholding agent's business operations pertinent to withholding and collecting taxes

(3) ordering it or withholding agent to supply documentation, evidence and related materials in connection with tax payment or tax withholding and collection

(4) inquiring it and withholding agent about the issues and situations relating to tax payment or tax withholding and collecting

(5) visiting stations, wharves, airports, postal and telecommunications enterprises and their subsidiaries for inspecting the relevant documentary certificates, documents and related materials of the taxable commodities, goods or other assets consigned and sent by the taxpayer

(6) checking its deposits accounts and that of withholding agent at banks or other financial institutions upon approval by director of tax bureau above county level and upon presentation of certificate in nationwide uniform format permitting inspection of deposits accounts

5.5 Legal responsibilities

5.5.1 Responsibilities for violating taxation administration

Rectification within prescribed time, cancellation of businesslicense by AICs, and fine between RMB 2000-50000 (1) fails to make declaration and go through formalities for

tax registration, alteration or cancellation within the specified time

(2) fails to establish and keep account books or accounting documents and related materials according to provisions

(3) fails to submit the financial and accounting system or methods to the taxation authorities for file

(4) fails to report all the bank accounts to the taxation authorities

(5) fails to install and use the devices with tax control or destroy or change such devices

(6) fails to use the taxation registration certificate, or lend, tamper with, damage, transfer or forge such certificates

(7) withholding agent fails to establish and keep withholding and collection account books or keep the accounting documents and related materials in connection with tax withholding and collection

(8) taxpayer fails to declare the tax within the specified time, or withholding agent fails to submit tax withholding and collecting reports to the taxation authorities within specified time

5.5.2 Responsibilities for tax evasion and rebellion against tax collection

Payment of evaded taxes and overdue charges, fine between 50% and 5 times of evaded taxes

In 1990 Enwei Group established a JV entitled Chengdu Enwei Shiheng Pharmaceuticals Company with the HK partner, i.e. HK Shiheng Trading Company. Such JV terminated in 1994 with an actual 4 years operation, thus it should make up the FIE income tax of RMB 44.693 million resulting from the FIE’s tax exemption and reduction. In October 1993 Enwei Group entered into JV with another HK resident to establish the Chengdu Enwei Pharmaceuticals Company. The HK venturer did not make actual capital contribution, but the JV enjoyed a total amount of RMB 37.1223 million as the enterprise income tax preferences. In addition such company employed blank receipts to withdraw fees and evaded an amount of tax RMB 2.2381 million in the 1993 fiscal year. In 1994 and 1995 such company made no entry for part of the exported products and evaded an amount of tax RMB 1.7126 million. In 1998 such company forged accounts, hided part of the revenues and evaded an amount of tax RMB 1.2672 million.

Illustration:Illustration: Enwei Group’s tax evasion Enwei Group’s tax evasion

Illustration:Illustration: Nangong city’s false VAT invoice Nangong city’s false VAT invoice According to the investigation by the Henan provincial SAT which lasted for half a year, as many as 49 enterprises issued VAT invoices fraudulently. For a period of two years such enterprises fraudulently issued 17587 pieces of VAT invoices with a total value of RMB 1065 million among which the value addition was RMB 916 million and VAT tax was RMB 149 million. However such enterprise merely paid an amount of VAT RMB 12.72 million, thus the State suffered a total loss of VAT RMB 137 million.

5.5.3 Responsibilities of taxation officer’s offences

(1) taxation officer conspires with the taxpayer and/or withholding agent, instigates or assists it and/or withholding

agent in committing tax evasion

(2) tax officer takes advantage of the conveniences in his duties and take or requests money and/or property from the taxpayer or withholding agent

(3) tax officer neglects his duties thus collects none, or less than the payable tax causing great losses to the State

(4) tax officer illegally begins, terminates, reduces, exempts or rebates taxation or collects back tax

 

Administrative punishments: warning, fine and confiscation of illegal incomes