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I. income Tax on Corporate Business (EIT) 3

2. Income Tax on Foreign Investment Enterprises (FElT) 19

3. Value Added Tax (VAT) 36

4. Business Tax (BT) 50

5. Customs Duty (CD) 59

6. Stamp Tax (ST) 67

7. Land Appreciation Tax (LAT) 73

8. Income Tax on Individuals as Employees or Individual 78

Enterpriser (lIT)

9. Overview of Tax System and Administration 95

Appendix

Past examination papers analysis 106




                                                             1
Income tax on corporate business (EIT)
1. TAXPAYER
Income tax on corporate business refers to the income tax imposed on domestic enterprise.
The taxpayers that subject to the tax are enterprises or organization which are
independently economically accountable entities, including state-owned enterprises,
collective enterprises, private enterprises, joint enterprises, joint-stock companies and other
organizations with operational income and other income.
State-owned enterprises are enterprises owned by the people through public agencies and
governmental bureaus and registered pursuant to relevant government regulations.
Collective enterprises that's mean of production is collectively owned.
Private enterprises are enterprises whose means of production are owned by
individuals.
Joint enterprises are enterprises owned by several parties.
Joint-stock enterprises are enterprises whose registered capital is in the form of stock.
Other organizations are entities with production, operation and other income, such as
institutions and social groups.
2. BASIS OF ASSESSMENT
Taxable income =Total income - deductible items
                                    -



The total income includes income from production and operation, income from property
transfers, income from interest, leasing, royalties, dividends and other income that obtained
within and outside China. To avoid double taxation, tax paid overseas can be used as a tax
credit.
The total income includes:
Income from production and operation refers to the revenue from the taxpayer's major
business activities. It refers to the income from sales of goods, services
rendered, operation, construction, other activities.
Gain on property transfer refers to the gain on the disposal of fixed assets, investment,
inventories and intangible assets.
Interest refers to the income from bank deposit, bonds, debtors and others.
Leasing refers to the rental income from fixed assets, packaging, and other property.
Royalties refer to the income from providing or transferring patent, trademark, copyright
and proprietary technology.
Investment refers to the dividends, etc. from investment in stock company.
Other income refers to the gain from disposal of fixed assets, cash or inventory,
ACCA-2004-China Taxation 3




                                                                                              2
Penalty receipt     , non settlement of creditor due to the creditor¡¯s reason, refund of Education
surcharge.
If the amounts of discount and the sales are printed on the same invoice, the discount can be net off
to arrive a net sales figure. if it is not printed on the same invoice, the discount cannot be deducted.
Any deduction or refund of turnover taxes is taxable under the corporate income tax.
Any use of the self-manufactured products for construction or staff welfare purpose is deemed as
income of the taxpayer.
Any grant from the government should be included into the income in the year of money receipt.
Any income generated from the construction in progress should be included in the total income but
not to set off the cost of construction in progress.
Any non-monetary consideration must be valued according to the market value and included into
the total income.
Interest from government bonds is not taxable but other bonds, like enterprises bond is taxable.
Donation receipt in form of assets can be treated as capital reserve and not subject to income tax at
the time of receipt. It becomes taxable at the time of transfer of that assets or liquidation at the
higher value of transfer price and the value of the assets at the time of donation receipt.
For the payment by installments, the time for income can be recognized at the delivery of the
product or the date of invoices issuance or the payment date specified in the sales contract.
For installation of machinery, construction, ship building that lasting over 1 year, income can be
recognized according completion percentage method.
3. DEDUCTIBLE EXPENSES
All expenses can be classified into revenue or capital nature. The capital nature expenses can only
be deducted through depreciation and amortization over a number of years specified by the tax
authority. The general rules is that revenue expenses incurred in the course of carrying on the
business, such as cost of goods sold. taxes on sales, non-operational gains/losses, selling expenses,
administrative expenses and financial expense. They are deductible in computing taxable income.
They include:
3.1 Cost of goods sold
It includes manufacturing cost, transportation cost, consumption tax, custom duty, resource tax and
non-deductible value added tax. The valuation method of issuing goods can be first-in-first-out,
weighted average, moving average, standard cost or retails sales method. The taxpayer can choose
any one of the methods and it should be consistently applied. Any change in the valuation method
should be approved by the tax authority.
3.2 Taxes on sales
It includes consumption tax, business tax, resource tax, custom duty, education surcharge, city
maintenance and development tax.
ACCA-2004-China Taxation 4



                                                                                                           3
3.3 Non-operational loss
It includes investment loss, loss on the disposal of fixed assets and intangible assets.
3.4 Selling expenses
It includes advertising, transportation of finished goods to the buyers, agency fee, packaging,
exhibition fee, insurance, the traveling expenses, wages and salaries of sales department
3.5 Administrative expenses
It includes the amortization of intangible assets and pre-operating expenses, depreciation of office
furniture and fixture, provision or write off of bad debts, stamp duty, audit fee, legal fee, research
and development expenses, social security payment, entertainment, staff training, wages and
salaries of administrative development, expense of board of directors meeting and investors¡¯
meeting.
@A company calculates the provision of bad debts, the collectable debtor balance is
RMB5,000,000, collectable bill balance is RMB400,000, receipt in advance balance is
RMB200,000 at the end of the year. Calculate the allowable deduction of the provision of bad debts
for the year.
The collectable debts include the amount of collectable bills at the end of the year, so the allowable
deduction of the provision of bad debts to the taxable income for the year (5,000,000 + 400,000) x
5% RMB27,000
3.6 Financial expense
It included the net interest expense, exchange gain or loss, bank charges and other financial
handling charge.
For interest, the maximum allowable amount is the loan with interest rate not higher than the rate
offered by the commercial banks for the same length of loan period and the similar degree of risk.
Some special cases for paying attention:
The interest for borrowing money to invest should be capitalized into the cost of investment.
If the money borrowed from the related company is more than 50% of the taxpayer’s registered
capital, the interest in relation to the excess portion is not deductible.
For property developer, the interest incurred before the completion of the property should be
capitalized as the cost of development.
Interest incurred during the pre-operation period should be capitalized as pre-operation expense.
3.7 Wages and salaries
ACCA-2004-China Taxation 5




The allowable wages and salaries is RMB 800 per month per person. There is a 20%
upward for some developed areas. It includes the basic wages, bonus, allowance and

                                                                                                         4
overtimes. For an approved software enterprises, the full amount of actual wages and
salaries payment are deductible.
3.8 Staff benefits
The provisions for trade union fund and workers education fund that are equivalent to 2%
and 1.5% of the total allowable wages and salaries respectively are tax allowable. The
deductible amount for staff welfare is the actual amount incurred. The staff welfare refers
to the recurring staff welfare e.g. medical expense. It is tax allowable for all the
contribution paid to the compulsory social security funds according to the relevant rules,
e.g. retirement fund, unemployment fund, etc.
3.9 Entertainment expense
The maximum allowable is the lower of the actual amount and the amount per the
following table. All the excess are not allowable and cannot be carried forward.

a An enterprise's annual sales income is RMB55,000,000, sales discount is RMB300,000, sales
returns RMB100,000, other business income RMB 1,500,000, and how much is deductible amount
for the year.
(55,000,000 + 1,500,000-300,000- 100,000) x 3% + 30,000 = RMB 198,300
3.10 The actual write off of fixed assets or current assets is allowable after the tax bureau's
approval. However it should be noted that the input VAT associated with the inventory written off
should be deductible under income tax but not to be set off the output VAT.
3.11 If the taxpayer can provide the documents issued by the headquarter concerning the scope, the
basis and the method of allocation of the central administrative expenses, the share of
headquarters¡¯ administrative expenses is tax allowable after the approval from the tax bureau. The
maximum deductible is 2 % of the total income.
3.12 Research and development (R&D) expenses for new product / new technology / new method.
It includes the research staffs¡¯ wages and salaries, depreciation of machinery, material cost,
designing fee, etc. and is tax allowable. For nationalized and collectively owned enterprise, if the
current R&D expenses is more than 10% of the last year's figure, it is 150% of the current year’s
R&D that can be tax deductible. However, the extra 50% deduction is not allowed for the
enterprises suffering losses during the current year. If after the extra 50% deduction, there is a loss
suffering for the year, the net loss cannot be carried forward.
3.13 The expenses for transfer of fixed assets are allowable.
ACCA-2004-China Taxation 6




Annual turnover (in RMB)                      Allowable % (Fast addition factor)




                                                                                                          5
The portion equal or below 15 million                       0.5% (0)

The portion exceeding 15 million           0.3%(RMB3O,000)




3.14 Advertisement expense
Advertisement that used for the business operation can be classified into two types:
(a) Advertisement expense through the media:
The maximum allowable limit of 2 % of turnover (8% for the industries of pharmaceutics,
food, home electric appliance, telecommunication, software development, integral circus,
property development, sport and culture, etc.) is generally allowed and the exceeding part
can be carried forward without time limit. The taxpayer may apply to the State
Administration of Taxation for the higher percentage of deduction.
The advertisement expense incurred by enterprise in white wine industry is non tax
deductible. To encourage the high technology industry, the advertisement expenses
incurred in the first 5 years after the establishment of the enterprise in the industry of soft
development, integral circus, Internet, venture capital can be fully deducted without
limitation. After the first 5 years, the above rule of 8% applies.
To be deductible, the advertisement should be:
produced by the unit approved by the Commercial and Industrial Bureau.
paid and the legitimate invoice thereof is obtained.
conducted through the media.
(An white wine production collectively owned enterprise has RMB 18,000,000 turnover in
the year of 2001, cost of sales RMB7,000,000, sales tax and surcharge are RMB5,000,000,
all other costs RMB4,500,000. The costs above include RMB900,000 for research and
development expenses for new product (the current R&D expenses is 20% more than last
year’s), and advertisement expense of white wine RMB600,000. Calculate the income tax
payable for the enterprise.
The current R&D expenses is more than 10% of the last year’s, therefore 150% of the
current year’s R&D can be tax deductible. Advertisement expense of white wine cannot be
deducted before tax. So, the taxable income for the year = 18,000,000 7,000,000-5,000,000-
                                                                         -



4,500,000 -(900,000 x 50%) + 600,000 = RMB 1,650,000, the tax payable for the year =
1,650,000 x 33% = RMB544,500
(b) For others not satisfying all the above condition, it should be classified as promotion
expenses.
Advertisement expenses not conducted through the media or promotion expenses The
maximum limit is 0.5% of turnover and the exceeding part is neither deductible nor carried
forward.

                                                                                                  6
@An industrial enterprise had income RMB38,000,000 for the first year, advertisement
expense RMB 1,000,000 and promotion expense RMB400,000. The income in second year
was RMB42,000,000, advertisement expense RMB800,000
ACCA-2004-China Taxation 7

and promotion expense RMB200,000. Calculate the allowable deduction for advertisement expense
and promotion expense for the second year.
It had RMB 1,000,000 of advertisement expense in the first year, the allowable deduction limit =
38,000,000 x 2% = RMB76O,000. The exceeding part of RMB24O,000 cannot be deducted in first
year but can be carried forward without time limit. For promotion expense RMB400,000, the
allowable limit = 38,000,000 x 5% = RMB 190,000, the exceeding part ofRMB21O,000 is neither
deductible nor carried forward.
In the second year, it had RMB 800,000 of advertisement expense, the allowable deduction limit =
42,000,000 x 2% = RMB84O,000. The unused portion of RMB4O,000 can be deducted by using the
brought forward RMB24O,000 from the first year. The allowable deduction for the advertisement
expense for the second year = 800,000 + 40,000 = RMB84O,000; for promotion expense
RMB200,000, allowable deduction = 42,000,000 x 5% = RMB2 10,000, the unused portion cannot be
deducted, so the allowable deduction for promotion expense is RMB200,000. Therefore, the total
amount of allowable deduction for advertisement expense and promotion expense for the second
year = 840,000 + 200,000 = RMB 1,040,000
3.15 Purchase of domestic made machinery
The enterprises can claim back 40% of the cost for purchase of domestic made machinery that used
in the upgraded technology projects approved by the government if the income tax is higher than
the preceding year.
If the deductible cannot be fully be used up in the current year, the exceeding portion can be used in
the following next 5 years if the income tax of each year in next 5 years is higher than that of
immediate preceding year.
For an example, enterprise purchased qualified machinery in year 2 for RMB 200, 000 and the
income tax of that year is RMB 100, 000. The income tax for year 1, year 3 and year 4 are RMB
80,000, 90,000 and 160,000 respectively. The allowable amount = 200,000 x 40% = RMB8O, 000

3.16 Sponsorship to unrelated research institutes
The sponsorship to unrelated institutes is allowable with full amount but if it results in a
loss, the loss cannot be carried forward. The unrelated institutes refer to the approved
institutes and the results of the research are not exclusively to the donor.
3.17 Traveling, conference and board of directors meeting

ACCA-2004-China Taxation 8

          Income tax Additional Used up Final income tax


                                                                                                     7
Year 1 80,000          --            --         80,000

Year 2   100,000       20,000        20,000     80,000

Year 3   90,000        10,000        10,000     80,000

Year4    160,000       80,000        50,000     110,000




The reasonable amount of above cost with supporting can be fully deducted.
3.18 Commission
The commission paid must be legitimate with supporting. The payee must have the right to
provide service within his business scope and if the payee is an individual, h cannot be the
employee of the taxpayer and the amount is limited to 5% of the service amount.
3.19 Membership fee
Membership fee paid to the approved trade union, association and academic club is
allowable.
3. 20 Bad debt provision
The allowable general bad debt provision is limited to 0.5% of the year-end balance of
accounts receivable. The actual bad debt incurred is allowable upon approval.
4. NON-DEDUCTIBLE EXPENSES
The tax laws prohibit he deduction of the following items:
Capital expense, such as purchase or construction of fixed assets, acquiring or developing
intangible assets, cost of investment. See more in the section 5 set at
below.
Fines, penalties or interest on overdue tax or confiscation are not deductible if they are
resulted from committing an offence under the laws. Therefore interest
on overdue bank loan is tax deductible.
The portion of losses suffered from natural disasters or accidents that can be recovered
from the insurance company.
Donations that are not for the business operation of the taxpayer. e.g. donations to the
public welfare institute established outsides China is not tax deductible. However, for
donation by non-financial enterprise to public welfare institute established within China,
the maximum deductible limit is the lower of 3% of the taxable income before donation
and the actual amount of donation.
One important point to be remembered is that the donation directly paid to the receiver is
not deductible. To be deductible, it must be paid through the social group or institute
approved by the government in PRC to the particular donator. The approved ones include
the Hope Project Foundation, the Chinese Red Cross, the Song Qing Ling Foundation, and

                                                                                             8
the Chinese Federation of the Handicapped.
For the housing that were sold to the employees, since the legal title of the house is no
longer belonging to the employers, any expense, e.g. depreciation or
ACCA-2004-China Taxation 9




maintenance is not deductible.
The kickback to the purchaser by the seller of the goods is not deductible.
The general provision for inventory, impairment of fixed assets and investment are not deductible.
However for the provision of bad debt, the tax authority generally approves the maximum provision
0.5% of debtor¡¯s balances as at year- end. Further, the actual bad debt can be deductible if
(i) the debtor is in bankruptcy, liquidated, missing, deceased-or suffered from natural disaster and
the debt is irrecoverable from the person or the estate of the deceased
(ii) it is aged over 3 years from the due date and is still outstanding.
However, no provision is allowed for the related company. It is only allowable if the related
company is ordered to bankrupt and the debt is for trading purpose.
Loss from the guarantee in favor of other individual that does not incur for the
course of trade.
Any expense of non-business purpose is non-deductible.
An enterprise has RMB 1,800,000 sales income from products, cost of sales RMB 1,000,000, sales
tax and surcharge 120,000, management fee RMB300,000, sales expense RMB3O,000, income
from interest of national debenture RMB 15,000, net amount of non-operating expenses
RMB3O,000. Other expenses include:
I) Total employees¡¯ annual income is RMB 180,000, excluding 17.5% of it for staff welfare, trade
union fund and labour education fund. The tax allowable wages of the enterprise for the year is
RMB 150,000.
ii) Entertainment expense for the year is RMB3O,000
iii) Non advertisement donation expense RMB35,000
iv) Donation to the approved public welfare institute RMB25,000
Calculate the taxable income for the enterprise.
Accounting profits for the enterprise: 1,800,000 1,000,000 120,000 300.000 30,000 ¡À 15,000
                                                   -           -.          -       -              -



30,000 = RMB335,000
Tax adjustments:
Non allowable wages 180,000 150,000 RMB3O,000
                                 --



Non allowable staff welfare, trade union fund and labour education fund 30,000 x
17.5% = RMB5,250.

                                                                                                       9
Non allowable entertainment = 30,000 -(1,800,000 x 5%o) = RMB2I,000
Non advertisement donation expense is non deductible.
Interest of national debenture is non taxable.
Taxable income before the donation: 335,000 + 30,000 + 5,250 + 21,000 + 35,000        --



15,000 + 25,000 = RMB43 6,250
Calculate deductible limit of the donation: 436,250 x 3% = RMB 13,087.5
The taxable income for the enterprise is: 436,250 I ,3087.5 = RMB423, 162.5
                                                    -



(a The enterprise income tax payable for an enterprise in first year was RMB600,000, the second
year RMB 1,000,000. The following events were found for the second year
ACCA-2004--China Taxation 10

subsequently:
i) in December of the second year, purchase of fixed assets RMB8O,000 was directly recorded as
management fee
ii) collected bad debts RMB900,000 that was written off before but not recorded as income.
iii) non-operating expense included donation for a charity activity of RMB 18,000. iv) The purchase
of domestic-made fixed assets to perform research and development for new technology was
RMB2,400,000. It was an approved project. Calculate the tax payable for the second year.
The purchase of fixed assets is not allowable. The collection of written off bad debt is taxable.
Donation directly to the charity activity is not allowable.
Taxable income = 1,000,000 + 80,000 + 900,000 + 18,000 = RMB 1,998,000 Tax payable = 1,998,000
x 33% = RMB659,340 before the consideration of domestic-made machinery
The maximum allowance for domestic made fixed assets = 2,400,000 x 40% =
RMB96O,000
In second year, the additional tax payable = 659,340 600,000 = RMB59,340
                                                        -



Therefore, tax payable for the second year = 659,340 59,340 = RMB600,000 and the remaining
                                                            -



allowance = 960M00-59,340-- RMB900,660 can be carried forward for next 5 years.
5. TREATMENT OF CAPITAL EXPENDITURE
The capital expenditure is the purchase of assets that can be used for more than one year or
improvement that increasing the capacity or new function of the existing assets. The revenue
expenditure is the cost of restoration of an asset so that the asset can maintain its original capacity
and function. The revenue expenditure should be charged into the income statements in the year it
incurs; while the capital expenditure (including equipment or tools with unit value over RMB2,000
and the useful lives more than 2 years) should be capitalized and depreciated or amortized over a
period for an enterprise as follows:
5.1 Tangible assets

The depreciation should be provided in the next month following the month of usage of
fixed assets and stop depreciation in the next month of cessation of the usage. There is a

                                                                                                          10
presumed 5% of scrap value in the calculation of the deprecation for tax
ACCA-2004--China Taxation 11



                        Allowable shortest
                        depreciation period
Items                   20 years
                        10 years
                        5 years

Construction and buildings
Trains, ships, machinery, equipment
Electronic equipment, other transportation vehicles and other tools or furniture
Machinery for integrated circuit industry (after tax bureau’s approve)

3 years




purpose. The taxpayer can apply to the tax bureau ftr the shorter life or tower scam value with
reasonable ground.
The allowable annual depreciation = (Original cost scrap value) / depreciation
period
5.2 Low vaIue article
They can he written off upon purchase or amortized over periods.
5.3 Intangible asset
Intangible asset should be amortized over the shorter of the beneficial period specified in the
contract and the period under the relevant laws e.g. patent law. If no specification under the contract
or the laws, the minimum amortization period is 10 years (software that purchased independently
from the computer, it is 2 -5 years after approval).
5.4 Deferred assets
(a) Pre-operating expenses
The pre-operating expenses include the wages, salaries, training, traveling, registration, and
exchange less, interest expenses incurred during the pre-operating period. it is the period from the
date of approval of establishment of (he enterprise to the sort of production (including the trail run).
therefore it does not include the feasibility study cost as it incurred before the approval of
establishment of the enterprise.
It starts to be amortized from the next month following the start of production (including the trail
run) over not shorter than 5 years. The amortization would be made on straight line basis without
any scrap value.

                                                                                                       11
(h) Leasehold improvement
it is the improvement made to the asset that is not belonging to the taxpayer. E.g. the taxpayer
makes decoration to it office that is leased from the land load. The improvement can be amortized
evenly without scrap value over not shorter than 5 years.
(c) Assets improvement
if the expenditure satisfies one of the following conditions, it can be treated as capita) expenditure:
the expenditure is more than 20% of the original cost of the assets;
the assets can be used for more than 2 years after the improvement;
the assets can have new function.
Once satisfied, the expenditure can be added to the cost of original assets. lithe assets
ACCA- 2004-China Taxation 12

are already fully depreciated, the expenditure can be depreciated evenly over 5 years
6. TREATMENT OF LOSSES
The taxable losses can be carried forward to set off against the taxable income of the next 5
consecutive tax years. It is irrelevant if profits are earned or losses are suffered in any one or more
of those 5 consecutive years.
A domestic enterprise is subject to the worldwide tax and if an enterprise suffers overseas losses,
the loss can be combined with other profits from source abroad but not the profit earned within
China.
7. FOREIGN TAX CREDIT
A domestic enterprise is subject to the worldwide tax and may deduct the income taxes paid on
such income in a foreign country with the limitation by the following formula:
The limitation = total tax payable for both domestic and foreign income * foreign income / world
income
The limitation of foreign tax credit is calculated separately for each country. Any unused credit can
be carried forwarded for maximum 5 years for deduction of the remaining tax payable after set off
against the current credit from that country.
An enterprise earns profit RMB 200,000 in the China and subject to 33% tax rate. It
has oversea income from country A RMB 50,000 at 30% tax rate with tax payment
RMB 15,000 and country B RMB 30,000 at 35% tax rate with tax payment RMB
10,500.
Assuming the tax laws in China is similar to those tax laws in countries A and B, the tax payable
before tax credit:
Tax payable = (200,000 + 50,000 + 30,000) x 33% = RMB 92,400
The limitation of tax credit from countryA= 50,000 x 33% = RMB 16,500
The limitation of tax credit from country B = 30,000 x 33% = RMB 9,900
For country A, tax payment 15,000 <the limit 16,500, full amount can be deducted.


                                                                                                          12
For country B, tax payment 10,500 > the limit 9,900, only 9,900 can be deducted.
Therefore the tax payable after the tax credit = 92,400 15,000 9,900 = RMB 67,500 and the unused
                                                       -       -



tax credit 10,500 9,900 = 600 can be used to set off future tax liability from country B.
                   -



8. CALCULATION OF TAX PAYABLE
ACCA-2004-China Taxation 13

8.1 Actual basis
Tax payable = Taxable income x tax rate
The tax rate shall be 33%.
8.2 Deemed Basis
The tax bureau may adopt the deemed basis in any one of situations:
The income can be accurately determined but not the expense;
The expenses can be accurately determined but not the income;
Both income and expense can not be accurately determined;
The accounting record or the supporting is not properly maintained;
The taxpayer does not fulfill the reporting duty.
The tax bureau may use one of the following formulas:
Tax payable taxable income x tax rate
For income can be accurately determined,
Taxable income = Income x deemed profit rate
For expense can be acutely determined,
Taxable income expenses 1(1- deemed profit rate) x deemed profit rate

@Tax bureau impose income tax on an enterprise based on the deemed profit ratio and the rate of
which is 15%. There is no detailed information about the income of the enterprise for the current
year, but its total expense is RMB 190,000. Calculate the income tax payable for the year.
Taxable income = 190,000 ¡Â (1 15%) x 15% = RMB33,529
                                  -



Income tax payable 33,529 x 33% = RMB 11,064.71
9. TAX EXEMPTION AND REDUCTION
The approved high technology enterprises established in HNTIDZs (High and New Technology
Industrial Development Zones) can be exempted for first two year since the start of production. It
can be taxed at 15% after that.
ACCA-2004---China Taxation 14



                               Deemed profit rate
Business                       7-20
                               10 20  -




                                                                                                     13
                                10   -   25

1. Industry, transportation, commercial______________
2. Construction, property development______________
3. Food and beverage
4. Entertainment

10 25
   -




10-30

5.Others




For the newly set up of consultancy in legal, accounting, tax, technology, etc. can be exempted for
first 2 years since the start of operation.
A business with annual taxable income less than RMB 30,000 is taxed at 18% and for income less
than RMB 100,000 but more than RMB 30,000, it is taxed at 27%.
For enterprise suffered natural disaster can be exempted or enjoy the tax reduction after the
approval form the tax bureau.
For the newly set up of post and communication enterprise can be exempted from the first year and
half reduction for second year since its operation.
For income of technology transfer, technology training, technology consultancy, technology
services earned by the research and high level institute are exempted.
There are some miscellaneous exemptions apply to other cases.
10. TAX REPORTING AND COLLECTION
A tax year for an enterprise is the calendar year. The enterprises income tax is prepaid in monthly
or quarterly installments within 15 days after the end of a month or a quarter. The prepayment
should be made based on the actual profits and if it is difficult to find out the figures, it can use last
year’s monthly or quarterly figures.
a The taxable income for a toys factory in last year was RMB4,000,000, the factory starts to prepay
the income tax in quarterly this year and if there is difficult in finding out the figures. Calculate the
prepayment for the factory.
Enterprises are allowed to prepay their income tax in quarterly installments. The prepayment for the
factory = 4,000,000 ¡Â 4 x 33% RMB33O,000.
The annual settlement should be made within 4 months after the end of the tax year. Any
overpayment or understatement is to be settled after the tax bureau’s approval. If there is any
foreign currency involved, it should be translated into RMB at the applicable exchange rate
prevailing on the last day of each month or quarter. At the end of the year, any paid tax for foreign

                                                                                                         14
currency transactions before cannot be readjusted. Only the tax on outstanding foreign currency
transactions translated at the year-end rate needs to be paid.
(a Mock exam question
A nationalized communication company set up in year 1996, it had RMB 150,000 of profit at that
year. In year 1997, it had income of RMB12,900,000, cost RMB4,800,000, sales tax and surcharge
RMB525,000, investment income RMB9O,000 (including interest of national debenture
RMB6O,000, interest income of corporate debenture RMB3O,000), non-operating income RMB3
00,000, non- operating expenses RMB 1,275,000 (including donation to an institute RMB1,200,000;
penalties RMB45,000 from tax authority because it paid RMB3O,000 consulting fee to individual
but no withholding), management fee RMB4,200,000, finance expense RMB2,250,000.
The company reported its income for the year 1997 is:
Taxable income = 12,900,000 4,800,000 525,000 + 90,000 + 300,000 1,275,000 -4,200,000
                               -          -                            -



-2,250,000 = RMB24O,000
ACCA-2004-China Taxation 15

Tax payable = 240,000 x 33% RMB79,200
Required:
Point out the mistakes in the calculation if there is any and make your own correct calculation of the
income tax. Also point out the penalties from tax authority is reasonable, if not, state what the
mistakes are and suggest applicable methods for the company to protect its interest.
The calculation of the income tax is incorrect, the mistakes are:
Among RMB9O,000 of investment income, national debenture interest income RMB6O,000 is non
taxable.
RMB 1,200,000 of donation cannot be deducted from the taxable income.
RMB45,000 of penalties from the tax authority cannot be deducted from the taxable income.
For the newly set up post and communication enterprise, there is half reduction of tax payable for
the second year.
The tax payable for the enterprise:
Taxable income: 12,900,000 4,800,000 525,000 + (90,000 60,000) + 300,000 (1,275,000
                              -           -                      -               -            -



1,200,000 45,000) 4,200,000 2,250,000 = RMB 1,425,000
            --      -              -



Tax payable = 1,425,000 x 33% ¡Â2= RMB235,125
The penalties from the tax authority is not reasonable. Based on the rules of tax collection, the
payer did not withhold, the penalties fee should be over 50% but under 3 times of amount.
The withholding individual income tax 30,000 x (1 20%) x 30%-2000
                                                      -



RMB5, 200
The maximum of the penalties = 5,200x 3 = RMB 15,600
The company can have an option to have a review first within 15 days after the receipt of the
assessment or straightly go for a court litigation.


                                                                                                     15
(L(Question 3, June 1999)
Fortune Company Limited (FCL) is a state-owned enterprise establishes in China and has been
doing business since 1984. The following is the profit and loss statement of the Company for the
year ended 31 December 1999:
RMB
Sales 8,639,000
Less: discount and allowances 185,650
Net Sales 8,453,350
Less: sales tax and additional fees 40,100
cost of sales 5,976,240
Gross profit 2,437,010
Less: sales expenses 48,300
general and administrative expense 162,000
Financial expenses 319,750
ACCA-2004--China Taxation 16

(including: interest expense (less interest income
Income from sales of product
Add: income from other operations Operation income
Add: investment income
non-operation income
Less: non-operation expenses Net income

@ (Question 2, June 2000)
The following are the income and expense of company s in 1999:
total sales
after-tax profit from the Company's investment interest from State Treasury Bond
interest from enterprise bond
refunded VAT
Cost
including: salary for employees
three funds
marketing expense
tax and other fees

1,906,960
700,000
2,606,960



                                                                                                   16
0
500,000
298,000
2,808,960

358,000)
38,250)
Notes:
1. The sales include RMB3 19,650 sale of new products using waste, which falls in the List
of Comprehensive Utilization of Resources and is directly generated from the production
process. The new product is the achievement of a research project completed in 1994.
2. The company has 82 employees, and the salary paid to employees total led to
RMB 1,494,500.
3. The company borrowed RMB 1,800,000 from another enterprise for which it paid RMB
500,000 interest. Interest rate for same period loan from the commercial bank was 10%.
4. Income from other operation refers to earnings from issuing stocks.
5. Non-operation expenses include: fees paid to community for trees, flowers and lawn
maintenance, which was RMB 12,000 per month; RMB 150,000 donation paid to China
Hope Project and RMB 4,000 donation to an employee for his sick child.
6. The company included RMB 135,800 for the funds (trade union fund, employee welfare
fund, employee training fund) for this year in the production costs.
7. RMB 135,800 expenses for entertaining guests were also included in the production cost.
Required:
Calculate the enterprise income tax for FCL for the year of 1999, and explain the
adjustments you have made.
80,000,000
300,000
2,000,000
100,000
2,000,000
32,000,000
5,000,000
875,000
3,000,000
500,000

ACCA-2004-China Taxation

17

                                                                                        17
including fine for delayed tax payment 50,000
administration expense 4,000,000
including: expense for treating guests 450,000
expense for sponsoring a concert 40,000
The following is the calculation by Company S of the income tax payable for 1999:
Taxable income
80,000,000 32,000,000 500,000 4,000,000 + 100,000 50,000 40,000
               -           -        -                    -       -



3,000,000 = 40,510,000
The income tax payable is
40,510,000 33% 13,368,300
Note: 1. The income tax rate of the company in which Company S invested is 15%.
2. Company S has 200 employees with a standard salary of 660 per capita per month.
You are required to point out the mistakes in the calculation, giving brief reasons, and
make your own correct calculation of the income tax.

Income tax on foreign investment enterprises (FElT)
1. TAXPAYER
1.1 Foreign investment enterprise (FIE)
It has three forms, namely, equity joint ventures (EJV), contractual joint ventures
(CJE) and wholly foreign owned enterprises (WFOE). An FIE is subject to the
Foreign Enterprise Income Tax Law (FElT) on its worldwide income.
1.2 Foreign enterprise (FE)
It refers to non PRC-registered enterprises and has two forms, with or without establishments or
places of operation in PRC.
For any FE with establishments or places of operation in PRC, it is subject to the FElT on its
income attributable to its establishment or place of operation in PRC.
Any FE without establishments or places of operation in PRC is subject to the FElT only on its
PRC-source income.
Establishments or places refer to locations of management, administration and business operation,
factories and the exploitation of natural resources, contractual construction, installation, assembly
and exploration, places for labor service, and the activities, in general, last for more than 6 months
in a year. Effectively, both forms of FE are subject to the FElT only on its PRC-sourced income.
(¡®i A   consultancy company established outside the PRC provides consulting services to a domestic
company in the PRC, the consultancy fee is RMB 1,500,000. Contract stated: consultancy fee
RMB 450,000 is for consulting services provided inside the PRC; consultancy fee RMB 1,050,000

                                                                                                        18
is for consulting services provided outside the PRC, calculate the income tax for the enterprise if
the deemed income rate is 10% and the tax rate is 33% (assuming that the foreign consulting
company has constituted a permanent establishment in PRC by virtue of its consultancy services
rendered in the
PRC).
According to the related laws and regulations, foreign enterprise provides consultancy service
inside the PRC should be subject to its PRC-sourced income and the portion of income from China
should not be lower than 60% of the total income.
Therefore the deemed income: 1,500,000 x 60% = RMB 900,000 and the tax payable =900,000 *
10% * 33%=29,700
1.3 Withholding agent
Any FE which has no establishment in China or has establishment but whose China- source income
is not connected with the establishment and derives profit, interest, rental, royalties or other income
(e.g. income from the transfer of real property) the so-called ¡°passive income¡± from sources in
                                                 -



China, shall pay an income tax of 10% on such income.
ACCA-2004-China Taxation 19

Withholding income tax shall be exempted or reduced on the following income:
Dividend derived by a foreign investor from a FIE;
Income from interest on loans from international financial institute to the Chinese government and
other approved organisations;
Income from interest on loans made by foreign banks to the Chinese State banks and other
approved organizations.
Withholding tax reduction is available for FE from countries that have entered into the double
taxation avoidance treaties with China.
2. BASIS OF ASSESSMENT
Taxable income = Total income deductible items
                                -



The total income includes income from production and operation, income from transference of
property, income from interest, leasing, royalties, dividends and other income that derived from
inside and outside China. Avoiding double taxation, tax paid overseas can be used as a tax credit.
The total income includes the similar items as stated in the chapter of the Corporate Income Tax
and the following are some differences:
Donation receipts in the form of non-monetary assets can be booked as assets with reasonable
amount and is subject to income tax at the time of receipt. If the amount is comparatively large,
upon approval by the tax authorities of an application filed by the taxpayer, the amount can be
divided evenly and recorded as taxable income in no more than 5 years.
Donation receipts in the form of monetary assets should be recorded as taxable income in a lump
sum at the time of receipt.


                                                                                                      19
Exchange gains as a result of the reform of foreign exchange system effective from January 1, 1994
can be deferred to be taxable when the enterprises liquidate.
According to the civil laws, in the case that any creditor does not exercise his right within 2 years,
the liability can be waived. Therefore, any liability that is not demanded for payment by creditors in
2 years shall be taxable.
For the non-operating net income obtained in the pre-operating period, the amount should be
taxable in that period and the year can be not counted as tax profitable year for the purpose of the
tax holiday.
The gain on disposal of the investment in shares is taxable.
3. TAX RATES
3.1 Any FIE or FE with establishments or places of operation in PRC is subject to the national FElT
at 30% plus a local rate of 3% on its taxable income. (a lower rate is available in the Special
Economic Zones and other special open areas for investment).
3.2 Any FE without establishment, or has an establishment but the China-source income is not
connected with the establishment, is subject to FElT at 10% withholding tax. The most common
forms of China-source (passive) income are interest, rent, royalty, etc.
ACCA-2004---China Taxation 20




4. TAX DEDUCTIBLES
In general, costs incurred during an accounting period are tax deductible unless excluded under
FElT. The following expenses cannot be treated as deducible expenses:
Capital expenditure on purchase of fixed assets.
Interest on capital is not deducible. Other interest can be deductible if the interest rate is not higher
than the rate offered by the commercial banks with similar type of loan and the same loan period.
Expenses on acquisition and exploration of intangible assets such as patents, technical know-how,
trademarks, copyrights, and land use rights that can be amortized over the specified period of use. If
there is no specified period of use, it should be amortized over a period of not less than 10 years.
Bad debt provision is generally not allowable, but 3 % of the year-end debtor¡¯s balance for the
enterprise in the credit and leasing industries is deducible after the tax bureau’s approval. An actual
bad debt can be deductible after the tax bureau’s approval if the debtor is in bankruptcy or it is
irrecoverable from the estate of the deceased debtor or it is over 2 years from due date and still
outstanding.
The share of management fee paid to the head office can be deductible if (1) the share is reasonable
overhead incurred by the head office of the enterprise, (2) there is supporting documents showing
the allocation basis together with a certified public accountant report, and (3) there is approval from

                                                                                                         20
the local tax bureau. The share of management fee paid to related companies is non-deductible.
Please note that royalty paid to the head office is non-deductible.
There is a limit for the deduction of entertainment expenses:
(a) For a service-providing company, 1% of turnover for annual turnover under RMB 5 million and
0.5% of the portion of annual turnover over RMB 5
million.
(b) For a manufacturing and trading company, 0.5 % of turnover for annual turnover under RMB 15
million and 0.3% of the portion of annual turnover
over RMB 15 million.
@A foreign invested enterprise engaged in the entertainment industry has a total income of RMB
35 million in year 1998, with RMB 220,000 of entertainment expenses for the year. When the
enterprise calculates the taxable income for that year, what is the tax deduction of the entertainment
expenses?
For a service-providing company, the limit for the deduction of entertainment
expenses is calculate based on the net business income, x lO%o +
(35,000,000 5,000,000) x S%o = RMB 200,000
              -



if the enterprise is engaged in both service and manufacturing industry, the limit should be applied
to the each activity, if each activity cannot be separated, the major business is the basis for
determining the entertainment expenses limit.
Welfare and salary paid to the local staff is deducible but the overseas social insurance premium
paid for the expatriates is not deducible if the amount is not included as part of the reporting
remuneration to tax bureau.
Donation through the designated non-profit making organisations to the benefit
ACCA-2004-China Taxation 21




of the public or directly to the non-related scientific and high educational institutions can be
deductible.
For any FE with an establishment in China and the establishment receives overseas income that is
related to the establishment (e.g. dividends, interest, royalty, etc.), the payment to overseas tax
authorities related to the overseas income can be treated as expenses.
For any FE without an establishment in China and receives royalty income derived from sources in
China, the business tax paid can be treated as expense. Therefore the withholding tax of the royalty
paid by a Chinese company to an overseas company which is a tax resident of a country that has
entered into the double tax avoidance treaty = 10% x net amount of royalty/(1 business tax rate)
                                                                                 -



Expenses paid for land use right can be amortized over the beneficiary period.

                                                                                                      21
If the current year’s research and development expenses incurred in PRC is 10 % more than or
equal to that of last year, 150% of the current year expenses incurred can be deductible. If the
additional 50% of the expenses is more than the current year’s taxable profit, the exceeding amount
cannot be carried forward.
Provision for medical insurance fund, housing fund and pension fund made in accordance with the
government rules can be deductible. Provision of labor education fund and work union fund made
in accordance with the accounting regulation can be deductible. All other actual staff welfare
expenses can be deductible, provided that the amount is no more than 14% of annual total wages
and salaries.
5. TAX TREATMENT OF ASSETS
5.1 The cost of construction of machinery, equipment, buildings and other fixed assets may
generally not be deducted when incurred. Depreciation may be claimed on fixed assets having a
useful life of more than one year. Items with a unit value of less than RMB 2, 000 may be fully
written off in the year of operation. For items over RMB 2,000, they can be depreciated over the
following shortest possible years with 10% scrap value:
Building and construction (20 years); train, ship, machinery, and other production equipment (10
years), electronic equipment and transportation tool other than train and ship, other production tool
and furniture (5 years). The taxpayer can apply to the tax authority for a shorter period.
Depreciation is generally calculated using the straight-line method over the useful life of the assets.
Other methods can be applied upon approval of the local tax authority.
5.2 Intangible assets such as patents, trademark rights, copyrights, and land use rights are amortized
by the straight-line method over the period as set in the contract. If there is no stipulated period, it
can be amortized over at least 10 years.
5.3 Expenses incurred by an enterprise starting from the approval date of establishment and prior to
the date of operation must be amortized from the second month of operation The amortization
                                                                                 .



period must not be less than 5
ACCA-2004-China Taxation 22




years.
5.4 Other treatments are by and large similar to those of domestic enterprises
6. TAX INCENTIVES
6.1 Tax rate reduction and exemption
Since the normal tax rate (33%) consists of 30% state income tax rate plus 3% local income
tax rate, the following tax incentives applies to the rate of 30% only. The exemption from
or reduction of local income tax from any FIE which operates in an industry or undertakes

                                                                                                           22
a project encouraged by the State shall be decided under the discretion of local government
or provincial government. In Special Economic Zones, FIEs qualifying for the 15% tax rate
are normally given exemption from the 3% local government income tax.
A taxpayer may enjoy several kinds of incentives simultaneously if it meets the conditions.
E.g. A taxpayer of FIE manufacturer can enjoy the following incentives (a) and (c) together.
So a FIE manufacturer in Shenzhen is subject to 15% x 50% 7.5% income tax rate in the
third to fifth profitable year.
a) Incentive applied to manufacturing units invested by foreigners:
Any FIE with a production nature scheduled to operate for a period of not less than 10
years shall, from the year in which it begins to make profits after offsetting the loss brought
forward, be exempted from income tax in the first and second years and allowed a 50%
reduction in the third to fifth years (so called ¡°2 years exempt and 3 years half¡¯).
However, if the actual period of operation is less than 10 years, the amount of income tax
already exempted or reduced shall be recollected.
A Joint Venture engages in food production. It started business in year 1988 and
was profitable in that year. The following years¡¯ taxable income, tax exemptions and
half reduction of the enterprise tax payable are set out in the table below (tax rate is
30% of the taxable income):

(*): the RMB 350,000 of taxable income in year 1992 will, in the first place, setoff
against 1991¡¯s RMB 250,000 loss and then the tax 30% * 100,000 * 50% 15,000.
Please note that the half reduction period will not be deferred even there is a loss in
1991.
If the production income is more than 50% of the total income derived from both
ACCA-2004---China Taxation 23



                                                                                  Enterprise tax
                                                          Exemption,              payable for
Year            Taxable income
                                                          deductible              the year
                                                                                  0

                                                          Exempted
1988            RMB 300,000                               Exempted
                                                          Half reduction

0

1989            RMB 700,000


                                                                                                   23
1990           RMB 900,000                                                -   RMB 135,000

1991
               -   RMB (250.000) RMB 350,000 (*)_
                                -

1992                                                 Half reduction       0
               RMB 1,000,000
1993

Half
               RMB 15,000
reduction

Fully
               RMB 300,000
taxable




production and non-production activities, the total income is qualified for the incentive. If
the production income is not more than 50%, the total income is subject to the income tax
without any incentive.
b) Special industries
Any FIE engaged in energy, transportation, harbor and wharf infrastructure construction
can enjoy a 15% income tax rate upon approval of the State Administration of Taxation.
Any FIE engaged in harbor and wharf infrastructure construction with an operating period
of over 15 years can enjoy first 5 profit years full exemption and the following 5 years half
deduction in FIET.
Any FIE established in Shanghai Pudong New Development zone and engaged in the
construction of airport, harbor, railway, high way, power station, etc. with an operating
period of over 15 years can enjoy first 5 profit years full exemption and the following 5
years half deduction in FIET. Any FIE with other kinds of business enjoys a 15% income
tax rate.
Any FIE established in Hainan Special Economic Zone and engaged in the construction of
airport, harbor, wharf, railway, high way, power station, coal mine, water conservancy
facility, agriculture and the like, with an operating period of over 15 years, can enjoy first
5-profit year’s full exemption and the following 5 years half deduction in FIET. Any FIE
with other kind of business enjoys a 15% income tax rate.
Any export-oriented FIE with an export output value of more than 70% of the total output
value of the year, may enjoy a 50% reduction in income tax. However, the minimum
income tax is 10% after enjoying all the tax incentives.
An approved advanced technology FIE, after the enjoyment of ¡°2 years exempt and 3

                                                                                                24
years half¡¯, can further enjoy 3 years of half reduction. However, the minimum income
tax rate is 10% after enjoying all the tax incentives.
An enterprise dealing not only in the above industries but also in other industries must
separately book and file income and expense for each line of industry to calculate the tax
payable according to the different incentives policies and tax rates.
c) Specified location
A reduced income tax rate of 15% is applied to:
Any FIE located in SEZ (Special Economic Zones) i.e. the designated areas of Shantou,
Shenzhen, Zhuhai, Xiamen and of the entire Hainan.
Any FIE engaged in production business in ETDZ (Economic and Technological
Development Zones) in open coastal cities and Shanghai Pudong New Area.
Any FIE engaged in production business and located in the old urban districts of
SEZ, ETDZ and CEOZ (Coastal Economic Open Zone) and with:
(i) Technology intensive or knowledge intensive projects, or
(ii) Projects with foreign investment of US$30 million or above, and with long pay back
period, or
(iii) Major construction projects in energy, communications and harbors.
                                                                              [
Any FIE verified as enterprise with new high technology located in the HNTIDZs (High


i.
and New Technology Industrial Development Zones).
    Any EJV verified as enterprise with new high technology located in the
ACCA-2004--China Taxation 24

HNTIDZs and an operating period of over 10 years enjoy the exemption for first 2 profitable years.
Manufacturing FIE with export processing located in approved bonded zones.
Any Approved FIE located in central or western of China can further enjoy years of tax reduction at
a rate of 15% after other incentives have expired.
A reduced income tax rate of 24% is applied to:
Any FIE engaged in production business and located in the old urban districts SEZ, ETDZ and
CEOZ (Coastal Economic Open Zone).
Any FIE engaged in production business and located in the approved capitals province.
Any FIE located in the National Sight-seeing Holiday Zone.
Any FIE engaged in service industries in the SEZ with investment of over USD5 million and an
operating period of over 10 years enjoys first profitable year exemption and the following 2 years
half reduction of income tax rate (effectively 10%).
(¨¤NA FIE engages in production business in SEZ (Special Economic Zone). The exp output value
exceeds 80% of the total output value every year. Based on following information, calculate the
total income tax for the enterprise.
Business Year 1 2 3 4 5 6 7 8 9 10 1


                                                                                                     25
Taxable income -0.45 -0.75 0.6 1.2 1.5 2.25 1.8 -0.45 0.75 1.65 1.
(in RMB million)
Loss in year 1: no need to pay the income tax;
Loss in year 2: no need to pay the income tax;
The profit in year 3 can offset the loss in year 1 and the RMB 150, 000 loss in year no profit left
after the offset, no need to paid the income tax;
The profit in year 4 can offset the remaining loss of RMB 600, 000 in year 2, after the offset, there
is a RMB 600, 000 profit, this is the first profitable year, and full exemption is applied henceforth;
Year 5 is the second year having full tax exemption;
Year 6 is the first year having half deduction of tax: 2,250,000 x 15% x 50% RMB168,750;
Year 7 is the second year having half deduction of tax: 1,800,000 x 15% x 50% RMB 135,000;
Loss in year 8: no need to pay the income tax, it is the last year having half deduction of tax, even
though it is a loss-making year.
Profit in year 9 can offset the loss in year 8, after the offset, there is RMB 300,000 profit, which can
enjoy export-oriented FIE deduction: 300,000 x 10% = RN 30,000
Year 10 can enjoy export-oriented FIE deduction: 1,650,000 x 10% = RMB 165,00( Year 11 can
enjoy export-oriented FIE deduction: 1,200,000 x 10% = RMB 1 20,00( Total income tax for the
enterprise: 168,750 + 135,000 + 30,000 + 165,000 + 120,0 = RMB 618,750
6.2 Tax refund
(i) If the foreign investor receives the profits distribution from an FIE and directly
ACCA-2004--China Taxation 25




reinvests into the FIE in the form of capital increment or reinvest in another FIE with an operating
period of over 5 years, the foreign investor can be refunded 40% of the tax paid on the reinvested
amount. Such profits must be reinvested for at least 5 years, otherwise, the refund must be paid
back to the tax bureau.
Tax refund = Reinvestment amount / (1- original tax rate with local tax rate) x original tax rate
without local tax rate x refund rate.
Note: The refund is for national income tax. The exemption or reduction of local income tax from
any FIE which operates in an industry or undertakes a project encouraged by the State shall be
decided under the discretion of local government or provincial government
(ii) If the foreign investor receives the profits distribution and directly reinvest into the FIE which is
an approved as export-oriented or advanced technology enterprise in the form of capital increment
with an operating period over 5 years, the investor can be refunded 100% of the tax paid on the
reinvested amount.

                                                                                                        26
If the investee enterprise is not an approved export-oriented or advanced technology enterprise at
the time of refund application, it is refunded 40% first and the remaining 60% can be refunded if
the enterprise is verified as an export-oriented or advanced technology enterprise within 3 years.
The local income tax paid is not refundable in the above cases.
@A foreign enterprise earned RMB 1.8 million from the original investment, and reinvested it in
an advanced technology foreign enterprise. It consisted of RMBO.92 million from the profit in year
1996, RMBO.88 million from the profit in year 1997. Profit of original investment in year 1996
was taxed on 50% reduction at a 24% tax rate with local tax exempted. The profit in 1997 was
taxed at 24% of tax rate and 3% local tax rate. Calculate the refund from the reinvestment.
Refund from reinvestment by using the profit in year 1996:
920,000 ¡Â (1 12%) x 12% x 100% = RMB 125,455
               -



Refund from reinvestment by using the profit in year 1997:
880,000 ¡Â [1 (24% + 3%)] x 24% x 100% = RMB 289,315
               -



Total refund from reinvestment:
RMB 125,455 + RMB 289,315 = RMB 414,770
@A Equity Joint Venture started its business in July, 1994 with an operating period of 12 years.
There was a RMB 750,000 loss in that year. In the second year the profit was RMB 1.2 million. At
the end of year 1997, the foreign investor received the profits distribution of RMB 2.7 million and
directly reinvested it into the business in the form of capital increment. At the end of the year 1999,
the foreign investor received the profits distribution of RMB 3 million and reinvested it to form
another advanced technology enterprise (the enterprise started its business at the beginning of year
2000, at the end of year 2001, the enterprise was no longer verified as an enterprise with advanced
technology after investigated by the authority). Calculate
CCA-2004-China Taxation 26




the tax refund and the effect of the investigation.
Since the Equity Joint Ventureis a non-production foreign investment enterprise, it is
subject to a full rate of 33%. The tax refund of the reinvestment in year 1997 =
2,700,000 ¡Â [1 (30% + 3%)] x 30% x 40% = RMB 483,582
                   -



The tax refund of the reinvestment in year 1999 on the advanced technology
3,000,000 ¡Â [1 (30% + 3%)] x 30% x 100% = RMB 1,343,284
                       -



Since it was no longer deemed as an advanced technology enterprise, it had to repay the part of
refunded tax in 1999 = 1,343,284 x 60% = RMB 805,970
6.3 Tax incentives for withholding tax
(a) Interest income is exempted from withholding tax for the loan to the government or the People's

                                                                                                     27
Bank of China by the International Monetary Fund, the World Bank, etc.
(b) Royalties obtained from the provision of high technology, environment protection technology,
scientific research, energy conservation, development of transportation and communication, etc are
taxed at 10%.
(c) Interest income, rent, royalties received by the FE without establishment from sources in SEZ
are taxed at 10% income tax rate.
6.4 Treatment of loss
Same as domestic enterprises
6.5 Additional tax benefit for purchase of domestic made machinery
After satisfying certain conditions, a FIE can claim a refund of 40% of the purchase price of a
domestic made machinery, subject to an annual limit which is equivalent to the incremental amount
of income tax between the year of purchase and the immediate precedent year (PY). Any unused
purchase credit can be carried forward for further refund in next 5 years (7 years in the tax
exemption period) if there is an incremental amount of income tax compared with the PY. The
purchase cannot be made in the form of capital contribution and paid in cash.
For example, the income tax of a FIE:

In Year 2 , the enterprise purchased domestic made machinery at a cost of 8000
Step 1, to determine the amount and time limit for the purchase

Year 2 8000 x 40% = 3200 Valid in year 2 to year 6

Step 2, determine which years they can be offset,
Year 2 and 3 they cannot be offset because its income tax is less than
that of
ACCA-2004--China Taxation 27



Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

100         90           80          200          500          800




Current tax Year 1 Additional Offset Final tax payable______
Year 4 200 100 100 100 200-100100
Year 5 500 100 400 400 500-400100

                                                                                                    28
Year 6 800 100 700 700 800-700100
their immediate previous year.
Please note that the remaining tax credit 3200-100-400-700=2000 cannot be carried forward
anymore.
6.6 Foreign Tax credit
Same as domestic enterprise
7. SPECIAL FORM OF BUSINESS ENTITIES
7.1 Representative office
An overseas foreign company may set up a representative office to
carry out liaison work for the parent office. Its activities may
include:
Collecting market information to parent office
Setting up meetings and transferring price and technical
information to the PRC
Assisting in making arrangement for visits by the foreigners
Coordinating among other related companies.
Any representative office that limit its activities to conduct market research, liaison work and other
related services on behalf of the head office that sells self- manufactures products is exempted from
income and business tax.
With regard to tax exemption, we should note that the representative office must be set up by the
overseas manufacturing head office of the same legal entity, not any other subsidiaries There are
three methods of determining the taxable income of a representative office:
Actual income. It applies to any representative office that is able to provide complete and accurate
vouchers and documents of expenses and correctly compute taxable income, the income tax is at
30% + 3% (15% for SEZ) of the profits.
Deemed income. If it cannot provide the complete information, the tax authority may
otherwise determine the income.
Expenses plus. It is a method used by the tax authority to determine the taxable profits by
the expenses plus reasonable profits. The currently used
reasonable profit rate is 10%. e.g.
The deemed income (A) == expenses / (1 10% profits rate 5% business tax
                                                  -                             -



rate)
Business Tax == (A) x 5%
Income tax = (A) x 10% x 33% (15% for SEZ)
@A representative office of a foreign enterprise was approved to be taxed under the expenses plus
method. The total expenses in the year is RMB 0.73 million.
I

                                                                                                     29
I
ACCA-2004--China Taxation 28

Calculate the deemed income of the foreign enterprise and calculate the taxable income:
The deemed income = RMB 730,000 ¡Â (1 10% 5%) = RMB 858,824
                                             -     -



Business tax = RMB 858,824 x 5% = RMB 42,941
Taxable income = RMB 858,824 x 10% = RMB 85,882
State income tax payable = RMB 85,882 x 30% 25,765
Local income tax payable RMB 85,882 x 3% = 2,576
8. TAX DECLARATION AND COLLECTION
8.1 Tax filing
Any FIE or FE with establishments should file an income tax return and make payment in advance
within 15 days of the end of each quarter. The annual income tax should be declared within 4
months after the year-end together with an audit report. If, due to special reasons, the declaration
cannot be made in time, the tax bureau can grant an extension for the annual declaration for a
period of no more than 1 month.
For tax payment by any FE without establishment, the withholding agent who makes the payment
of interest, rent and royalty should file an income tax return within 5 days of payment.
If an FIE has several places of operation (e.g. a manufacturing head quarter in Guangzhou and
several sales offices all over China), it can file a tax consolidation combining all the results and
report and pay tax to the tax bureau located in the head quarter. Within 5 months after the year end,
the FIE should present its tax payment certificate paid by FIE, the financial statements of sales
offices and the tax declaration report of sales offices to the local tax bureau.
8.2 Tax consolidation for manufacturing or service branches
The manufacturing and service branches refers to those branches that they have manufacturing or
providing service activities locally and keep a good accounting records. The tax rate applicable to
each branch should be the rate prevailing at each location. It is different from an FIE that has
several sales offices which should be subjected to the rate prevailing at the head office.
However it can also file a tax consolidation combining all the results and report and pay the tax to
the tax bureau located in the head quarter. In the case that the tax rates prevailing at each location
are different, then there are 3 possible cases as follows:
(i) CASE 1: Each unit has the profits position.
Each unit should be taxed at the tax rate prevailing at location of each unit.
(ii) CASE 2: Each unit has the loss position.
Each unit should carry forward its loss for no more than 5 years to be offset by its future profit.
ACCA-2004-China Taxation 29




                                                                                                         30
(iii) CASE 3: Some units have profits and others have loss.
(An enterprise have 3 offices A, B and C in the areas with tax rate 33%, 27% and 15%
respectively, the profit (loss) of the offices are as follows:

After the offset, the net result is a loss. Then all units are not subject to income tax.

After the offset, each unit has profit and should be taxed at the rate prevailing at the each
unit's location.

ACCA-2004-China Taxation 30



                          Office A                    Office B            Office C            Combined

Year
1999 Profit!                                          (RMB 3                                  (RMBO.75
                          RMB1.5 million                                  RMB0.75million
(loss)                                                million)                                million)
for the year

                                                      -   offset RMB
-   offset RMB1.5         +RMB1.5                     0.75 million
million of loss for       million of profits          of                  --



office B                  from office A               loss for office
                                                      B

                          + RMB      0.75
                          million of profits          --



                          from office C

                                                      (RMBO.75                                (RMB 0.75
Taxable income            0                                               0
                                                      million)                                million)




               Office A                     Office B                    Office C              Combined

                                                                                              RMB
Year           RMB 3 million                RMB 3.75 million            RMB1.5million
                                                                                              8.25million
2000           + RMB1.5                     -   offset RMB 3            + RMB   0.75
                                                                                              --
               million that offset          million last year           million that offset


                                                                                                            31
               loss for office B        loss                    loss for
                                                                office B

                                                                                         RMB7.5
Taxable        RMB 4.5 million          RMB 0.75 million RMB
                                                                                         million

income                                                          2.25million

×tax rate
               33%                      27%                     15%                      --

Tax
               RMB 1.485 m              RMB 0.2025 m            RMB 0.3375 m             RMB 2.025m
payable




                     Office A                  Office B             Office C              Combined

                     (RMB1.5
                     million)                  RMB2.25              RMB2.25               RMB3
Year 2001
                     +RMB1.5 million           million              million               million
                     from office B

-   offset RMB 1.5
million for the
                     --                        --

loss
of office A

                                               RMB 0.75             RMB                   RMB 3
Taxable income 0
                                               million              2.25million           million

*taxrate             --                        27%                  15%                   --




Tax payable
                     --                        RMBO.2025m           RMBO.3375m            RMBO.54m
Year 2002

RMB2.25                                        RMB2.25
                     RMB1.5 million                                 RMB6 million
million                                        million




When the loss-making unit earns profit in the subsequent years, the profit should be offset by its
previous loss first, while the original profitable unit should be added back the loss it offset before.
From the summary, it shows that the total cumulative tax payable for each individual office is same

                                                                                                          32
whether there is a loss transfer between the offices or not. For example:
the total cumulative tax payable for office A = 5.25 * 33% = 1.7325m that is the sum of all the tax
payable over the years after the inter-office set off. However the consolidation reporting method is
still recommended as a smaller tax amount is paid in the earlier period. The reason can be better
explained by the following example:
@A foreign enterprise set up three organizations in Shanghai, Nan king and Guangzhou for
production business activities. The result of production business activities for year 2000 and 2001 is
as follows:

Calculate the tax payable for the enterprise by both (a) Consolidation reporting and (b)
non-consolidation reporting.
(a) Consolidation reporting:
In 2000, the profit from Nan king should cover the loss in Guangzhou:
Tax payable in year 2000 = 3,000,000 x 24% = RMB 720,000
Tax payable in year 2001 = 3,000,000 x 24% + (3,000,000 + 1,500,000) x 30% +
(4,500,000- 1,500,000) x 15% = RMB 2,520,000
(b) Non-consolidation reporting
In 2000, total tax payable under separate reporting = 3,000,000 x 24% + 1,500,000 x
30% = RMB 1,170,000
In 2001, total tax payable under separate reporting = 3,000,000 x 24% + 3,000,000 x
30% + (4,500,000 1,500,000) x 15% = RMB 2,070,000
                  -



It can be seen that the total tax payable under both methods are same but the consolidation reporting
method is recommended as a smaller tax amount is paid in the
ACCA-2004-China Taxation 31



                      -   offset the         + offset   RMB1.5
                      RMB1.5 million         million of loss for      -                 --



                      loss in last year      office A

                                                                      RMB 2.25          RMB 6
Taxable income        RMB0.75 million        RMB3 million
                                                                      million           million

×tax rate             33%                    27%                      15%               --




                                                                      RMB0.3375
Tax payable           RMB0.2475m             RMB0.81 m                                  RMBI.395m
                                                                      m

1999-2002             RMB5.25 million        RMB4.5 million           RMB6.75           RMB 16.5
cumulative

                                                                                                      33
taxable income                                                    million         million

Cumulative Tax                                                    RMB1.0125
                   RMB1.7325m             RMB1.215 m                              RMB3.96 m
payable                                                           m




Year        Shanghai (24%)             Nan king (30%)              Guangzhou (15%)
2000        RMB3     million           RMB1.5 million              RMB-1.5 million

Year
            RMB3        million        RMB3 million                RMB4.5 million
2001.




earlier period.
(iv) The tax bureau may allocate the consolidated profits into each unit according to the
ratio of the turnover or assets value, or number of staff, if the tax bureau considers that the
reported figures of each individual unit does not reflect the true position of the taxable
income of the all units.
8.3 Foreign currency
(i) If an FIE or FE uses RMB as its reporting currency, in practice, the transaction in
foreign currency can be converted into equivalent RMB at the prevailing exchange rate on
either the date of transaction or the first day of the transaction month.
(ii) If an FIE or FE uses a foreign currency as its reporting currency, quarterly taxable
income should be converted to equivalent RMB at the rate prevailing at the quarter end.
For the annual settlement, the balance of tax payables in foreign currency should be
converted into equivalent RMB at the rate prevailing at the year-end.
If there is tax refund, the amount should be converted back into foreign currency at the rate
that was used when the tax payment was made. Then the foreign currency should be
converted into RMB again at the rate prevailing at the issuance date of tax refund notice.
(a (Question 2, December 2000)
Company H is a joint venture located in a Special Economic Zone and engages in the
business of hotel service. The total investment of Company H is RMB 90,000,000, of
which 40% is foreign investment. It started operation in 1993 and began to make profit
from 1997.
The company has 120 employees.

                                                                                              34
The following is the profit and loss account of Company H for 1999: (in RMB)
Turnover 90,000,000
business costs 27,000,000
management expenses 13,500,000
Includes
salary and bonus paid to employees 4,980,000
social security paid abroad for Company H's foreign 1,500,000
employees
business tax 4,500,000
expenses for treating guests 900,000
financial expenses 3,300,000
Includes
Interest expenses for the loan of the foreign party borrowed
from foreign banks as investment 1,500,000 Interest expenses for RMB 3,000,000 loan
from another
company 300,000
management fee paid to associated enterprise 1,800,000
ACCA-2004-China Taxation 32

compensation from an insurance company for the canteen destroyed 3,000,000 by fire
Cost for rebuilding the canteen 4,500,000
donation to the building for a park 1,500,000
Company H calculates its income tax for 1999 as follows:
Taxable income = 90,000,000 27,000,000 13,500,000 1,800,000 4,500,000 900,000 -3,300,000 +
                              -            -            -          -           -



3,000,000 -4,500,000 1,500,000 = 36,000,000
                      -



Income tax to be paid = 36,000,000 x 15% x 50% = 27,000,000
Note: Company H is exempted from local income tax.
You are required:
(a) to identify the mistakes made by the company in its calculation of income tax,
giving brief reasons in each case; and
(b) to calculate the correct amount of income tax payable by Company H for
1999.
(a (Question 2, June 1999)
Palace of Paris (PP), a joint venture bowling club, was opened in December 1996. The foreign party
used USD 2,000,000, which was a loan from a foreign bank, to buy bowling equipment and put into
the joint venture as its investment. The Chinese party put its right to use the land and a newly built
building as its investment, totaling USD
2,100,000.


                                                                                                     35
According to the accounts, the business income of PP in 1995 was 12,000,000 yuan; 2,400,000
yuan business tax was paid; the cost of business was 7,000,000 yuan, which included 5,000,000
yuan depreciation for the equipment; cost for management was 3,000,000, including one-time
opening fee of 800,000 yuan and guest treating expense of 600,000 yuan; cost for account was
900,000 yuan, including 820,000 yuan paid as the interest for the foreign party's loan. The profit for
1997 was 1,300,000 (negative) yuan, which was reported to the tax authority.
           -



The business income of PP in 1998 was 18,000,000 yuan; 3,600,000 yuan business tax was paid;
the cost of business was 7,500,000 yuan, which included 5,000,000 depreciation for the equipment;
cost for management was 3,200,0000, including guest treating expense of 600,000 yuan and a fine
of 200,000 yuan; cost for account was 1,080,000 yuan, including 820,000 yuan paid as the interest
for the foreign party's loan and 200,000 yuan paid to another enterprise as annual interest for a loan
of 1,000,000 yuan. The profit of 1998 was 2,620,000 yuan. Offsetting the loss of
1,300,000 yuan of the previous year, a profit of 1,320,000 yuan was reported to the tax authority
and PP claimed 435,600 yuan income tax.
Note:
(1) When calculating the depreciation of equipment, 10% is allowed to be deduced as residue value.
(2) The annual interest rate of the bank is 10%.
Required:
ACCA-2004--China Taxation 33

(a) Identify and explain the mistakes in the calculation of tax for the years of 1997 and
1998.
(b) Calculate the income tax and local tax for each of the years of 1997 and
1998.
(i Mock   exam question
A Joint Venture export production enterprise located at the Special Economic Zone has 20 years of
operation period, it started its operation in year 1994, there is profit at that year and started to enjoy
the 5 years¡¯ tax exemption. Total value of production in year 1999 is RMB 67.5 million, value of
exportation RMB 29.7 million; total value of production in year 2000 is RMB 82.5 million, value of
exportation RMB 66 million; the taxable income in year 1999 is RMB 5.25 million, prepaid
income tax RMB 675,000; the taxable income in year 2000 is RMB 7.5 million, prepaid income tax
RMB 900,000.
After inspection, the enterprise has the following expenses from the income in year
1999:
(1) Concealed income from sale of products RMB 750,000, the tax authority impose a fine of 2
times of the amount of the value added tax evasion;
(2) Paid RMB 600,00 management fee to the related enterprise;
(3) Paid RMB 525,000 of overseas investment loan interest;


                                                                                                        36
(4) Expenses on the expansion of the production area RMB 1.35 million;
(5) Donation to the related scientific institution for the research and development
RMB 120,000.
The enterprise has the following expenses from the income in year 2000:
(1) Purchased domestic made machinery RMB 900,000 in June and started to use in the same
month, all prices of purchased machinery are deducted before tax (the machinery have 10 useful
years, 10% of disposal value, depreciation is calculated using the straight-line method);
(2) Donation to a sport competition RMB 525,000
(3) Paid interest of RMB 600,000 for the short term loan of RMB 7.5 million and the interest rate
of commercial bank is 7%;
(4) Overseas social insurance of five overseas management staffs RMB 450,000.
(5) RMB 750,000 of profit from a branch in oversea, (paid RMB 270,000 of tax overseas), which is
not including in the taxable income.
Required:
Calculate the taxable income and underpay income tax for the year 1999 and year
2000 (assume local income tax is exempted)
(1) Tax payable for the year 1999:
Penalties of concealed income from sale of products are punishment, which cannot be deducted
before tax.
Amount of penalties = 750,000 ¡À (1 + 17%) x 17% x 2 = RMB 217,949
Event (2) to event (5) in the question cannot be deducted before tax, adjustment
should be made.
Taxable income = 5,250,000 + 217,949 + 600,000 + 525,000 + 1,350,000 +
120,000 = RMB 8,062,949
ACCA-2004-China Taxation 34

(Exportation value in year 1999 is RMB 29.7 million, it is 44% of the total
production value of RMB 67.5 million, the tax rate for the year is 15%)
Taxable income = 8,062,949 x 15% RMB 1,209,442
Underpayment income tax 1,209,442-675,000 RMB 534,442
(2) Tax payable for the year 2000:
Purchase domestic made machinery is capital investment, RMB 900,000 cannot be totally deducted
before tax, but the current year’s depreciation of the machinery can be deducted before tax, amount
of depreciation = 900,000 x (1 10%)¡Â 10+ l2x6RMB 40,500
                              -



Taxable income = 7,500,000 + 900,000 40,500 + 525,000 + (600,000 7,500,000 x 7%) + 450,000 =
                                       -                              -



RMB 9,409,500
(Exportation value in year 2000 is RMB 66 million, it is 80% of the total
production value of RMB 82.5 million, and therefore the tax rate for the year is


                                                                                                    37
10%)
Tax payable = 9,409,000 x 10% = RMB 940,900
PRC income tax for overseas income = (750,000 + 270,000) x 33% RMB
336,600
Deduction for tax paid overseas 336,600 270,000 RMB 66,600
                                          -



Tax payable 940,900 + 66,600 RMB 1,007,500
Since the tax payable in year 2000 is lesser than the one in year 1999, so there is no preferential
policy for purchase of domestic made machinery..
Underpayment income tax 1,007,500- 900,000 RMB 107,500
ACCA-2004-China Taxation 35

Value Added Tax (VAT)
I. GENERAL INTRODUCTION OF VAT
Value added Tax is tax on each stage of value added process in the whole series of
production or service. The final consumer bears the burden of the tax on the value added for the
whole production series. Although it is the final consumer who bears the tax, the actual tax payment
is made by the producer I service provider of each stage to the tax bureau. For general VAT
taxpayers, the tax payment is the difference between the VAT paid on the purchase (input VAT)
and VAT collected on sales (output VAT). The offset between output VAT and input VAT will be
the VAT payable to the tax bureau by the producer of each stage.
For example, there is a product called product X, and it is made of chemical Y, which is extracted
from raw material Z and the purchases/selling price (excluding VAT) and the tax rate is 17%:
Value
Stage Purchase Sales Added Net tax paid
Material Z -+ Chemical Y 10 3O 2O 20 x 17% = 3.4
ChemicaLY→ProductX 30 ll0 80 80 x 17%= 13.6
The producer of the chemical Y needs to pay l 1.7 (10 x 1.17) including VAT to its supplier and it
can collect 35. 1 (30 x 1,17) including VAT from its customer. Among it, 5.1(30 x 17%) is
collected on behalf of the tax bureau. Since it pays l .7 VAT during its purchase, it only needs to
pay the net VAT 3.4 = 5.1 1.7 to tax bureau.
                           -



Similarly, the producer of the product X needs to pay 35.l (30 x 1.17) including VAT to its supplier
and it can collect l28.7 (110 x 1.17) including VAT from its customer. Among it, 18.7 (110 x 17%)
is collected on behalf of the tax bureau. Since it pays 5.l VAT during its purchase, it only needs to
pay the net VAT 13.6 = 18.7 - 5.1 to tax bureau.
The above is based on the assumption that the producer of each stage does not incur any input VAT
except for the purchase of materials. In summary the total tax collection (17) by the tax bureau is
the tax on total value added = (110 10) x 17% = tl7 for the two stages.
                                   -



2. SCOPE OF VAT


                                                                                                        38
The sales of taxable goods and services at each stage of production and sales process within China
are subject to VAT.
Taxable goods refer to tangible goods, waters, newspapers, etc., but exclude immovable assets and
intangible assets except sales of software (without transfer of the ownership or copyright) are also
subject to VAT. The import of taxable goods is also taxable. However export of goods are generally
exempt from VAT.
Taxable services refer to the provision of labor services related to the processing of
ACCA-2004-China Taxation 36

goods and of repair and replacement. It excludes the provision of processing, repairs and
replacement services by the employees of an enterprise for their employers. For service, which is
subject to VAT, is not subject to Business Tax. In other word, both VAT and business tax is
mutually exclusive.
3. DEEMED SALES
The following are deemed as sales of goods:
Consignment of goods to others
Sales of goods under consignment
Transfer of goods between establishments an across cities by a taxpayer who reports its result on a
consolidation to tax bureau
Application of self-produced or processed goods for non-taxable usage (Note:
application of purchased goods is not deemed as sales of goods as VAT is normally included in the
purchase price already)
Application of self-produced or processed goods for the staff benefits
Contribution of self-produced or processed goods or purchased goods to other enterprises or
individual as a form of investment
Distribution of self-produced or processed goods or purchased goods to shareholders or investors
Donation of self-produced or processed goods or purchased goods to others
For the above deemed sales activities, there is normally no sales figure in the transaction or the
sales value is obviously low. Then the following methods in order are used to determine the
turnover:
(1) The average selling price of the same kind of goods sold by the seller for the month;
(2) The average selling price of the same kind of goods sold by the seller recently; (3) Deemed
profit rate (10%) by the following formula:
The composite tax value= Cost of manufacturing or purchase x (1 + 10%)
If the goods are subject to consumption tax as well, the formula is:
The composite tax value Cost of manufacturing or purchase x (1 + Deemed profit rate) ¡Â (1-
Consumption tax rate)
Please note that the deemed profit rate for products, which are subject to consumption tax, vary


                                                                                                       39
with different kind of goods.
a An enterprise produces two kinds of product A and product B, which is use for
investment, Product A is not required to pay consumption tax, production cost
150,000 dollars (deemed profit rate 10%); product B is required to pay consumption
tax (consumption tax rate 30%), production cost 210,000 dollars (deemed profit rate
8%). Calculate the taxable turnover for the enterprise.
The composite tax value of product A = 150,000 x (1 + 10%) 165,000 dollars
ACCA-2004-China Taxation 37

The composite tax value of product B = 210,000 x (1 + 8%) ¡Â (1- Consumption tax rate)
The composite tax value of product B = 210,000 x (1 + 8%) / (1 30%) = 324,000 dollars
                                                                -



Therefore, taxable turnover for the enterprise = 165,000 + 324,000 489,000 dollars
4. TAX RATE
4.1 Normal rate
The normal rate is 17%. A taxpayer is a general VAT taxpayer who can maintain good accounting
system to provide accurate tax information for the output tax, input tax and tax payable with its
annual taxable turnover reaching:
(i) RMB 1,000,000 if it engages principally in the production of goods or provision of taxable
services or
(ii) RMB 1,800,000 if it engages principally in the whole selling or retailing.
The tax bureau only allows the general rate taxpayer to obtain and issue the VAT invoice. A
small-scale taxpayer can only issue ordinary invoices. A VAT invoices is a very important
document to entitle the purchaser of a transaction to claim their input VAT. The tax bureau on the
VAT invoices implements a very tight control system.
4.2 Small-scale taxpayer rate
Any taxpayer who cannot maintain good accounting system to provide accurate tax information for
the output tax, input tax and tax payable might be treated as a VAT small-scale taxpayer.
Individuals, non-corporate business and enterprise with infrequent taxable activities are deemed to
be small-scale taxpayer.
The tax rate for small-scale taxpayer who engages trading goods is 4% (for others are 6%) and no
input tax can be deducted to determine the VAT payable. They are not allowed to issue VAT
invoices and so they can only issue general invoices, which include the sales consideration and
VAT. Therefore in general unless otherwise stated, the sales amount involved in transaction with
small-scale taxpayer should be treated as sales consideration plus VAT.
The following goods are subject to 13%
Food grains and edible vegetable oil
Tap water, heating, air conditioning, hot water, coal gas, liquefied petroleum gas, natural gas,




                                                                                                     40
methane gas, coal! charcoal products for household use;
Books, newspapers, magazines;

4.3 Lower rate

ACCA-2004-China Taxation

38

Feeds, chemical fertilizers, agricultural chemicals, agricultural machinery and covering plastic film
for farming;
Other goods as regulated by the State Council.
4.4 Zero rate
Normally for export goods, the tax rate is 0%. Output VAT is exempted on the exported goods
(except for some special goods such as crude oil).
@A shop (which is a small-scale taxpayer of value added tax) purchased 225 of kids wear; it sold
all the clothes by 147 dollars (including tax) for each clothe. Calculate the value added tax for the
sales of all the kids wear.
Value added tax for the sales of all the kids wear = 225 x 147 ¡Â (1 + 4%) x 4% =
1272.11 dollars
5 EXEMPTION
The following items are exempted from VAT:
The self-produced agricultural and aquatic products sold by the farmers;
Contraceptive medicines and devices;
Antique books;
Importation of materials and equipment directly used in scientific research, experiment and
education;
Importation of materials and equipment from foreign governments and international organizations
as free aid;
Equipment and machinery required to be imported under contract processing, contract assembly
and compensation trade;
Articles imported directly by organizations for special use by the disabled persons;
Sales of goods (i.e. goods other than yachts, motorcycles, and motor vehicles) that have been used
by the individuals and enterprises.
6 OUTPUT VAT
Output VAT payable Sales consideration x tax rate
The sales consideration includes the sales value plus any additional charges such as commissions,
incentive bonus, interest on overdue payment, packaging charges, etc. but excludes:
The output VAT itself;


                                                                                                        41
Consumption tax withheld on processing of consumer goods;
Disbursement of freight charges if (i) the freight invoices was issued in name of the purchaser and
(ii) the invoices was handed over by the taxpayer to the purchaser.
Those sales discounts that specified on the same VAT invoice of a sales transaction.
ACCA-2004--China Taxation 39

7 USED ASSETS

For used yachts, motorcycles, and motor vehicles, it is exempted if the selling price is lower than
the original cost. However if the selling price is more than the original cost or the taxpayer engages
in the business of used yachts, motorcycles and motor vehicles, the tax rate is 4% with a half
reduction (i.e. effectively 2%).
For other type of assets, it is exempted if the following 3 conditions are satisfied. Otherwise, 4% tax
rate with a half reduction (i.e. effectively 2%) is applied for both normal rate and small-rate
taxpayers.
The assets is listed on the fixed assets register of the enterprises;
The assets is treated as fixed assets and used in the past;
The sales consideration is lower than the original cost.
An normal rate taxpayer enterprise sold its self-used two vehicles and obtain sales income 300,000
dollars (original value 285,000 dollars) and 225,000 dollars (original value 270,000 dollars)
respectively; at the same time sold self-used equipment and obtain sales income 120,000 dollars
(original value 105,000 dollars). Calculate the value added tax for the enterprise.
For the two vehicles:
1st car: Higher than the original   cost:
2¡¯ car: Lower than the original cost: exempted
For the equipment:
Since the selling price of the equipment exceeds its original value, it is required to pay: 4% x50%x
120,000/(1 +4%)2,307.69
8 INPUT VAT
Input VAT is the tax paid by the seller to the government on behalf of the buyer that included in
purchase consideration. The input VAT can be used to setoff the output VAT and in order to setoff,
a special VAT invoices must be obtained from the seller or a payment certificate from the custom
duty after the importation. Only normal rate taxpayer can obtain the blank VAT invoices from the
tax bureau and issue them to their buyer. Small-scale taxpayers can only use ordinary invoices. In
other word, only the buyer who is a general VAT taxpayer purchases their need from the normal
rate taxpayer can claim the buyer¡¯s input VAT. However, the following are special cases that it
can be offset without VAT invoices:
(1) The normal rate taxpayer purchase the agricultural products from the farmer or the small-scale
taxpayer, 13% (effective form 2002.1.1.) of the purchase cost can be treated as input VAT;

                                                                                                      42
(2) The normal rate taxpayer pays for the freight cost for purchase and sales, 7 % of the freight cost
(excluding handling cost, insurance, commission, etc. that paid by the taxpayer) can be treated as
input VAT;
(3) The normal rate taxpayer engages in a business of used articles can claim 10% of the purchase
cost of the used articles as input VAT.

ACCA-2004-China Taxation

40

@An enterprise engage in production of goods and purchase the agricultural products from the
small-scale taxpayer 150,000 and pay for the transportation fee 15,000 dollars, insurance fee 6,000
dollars. Also it purchases used articles for 30,000.
Since the enterprise is not the normal rate taxpayer engages in a business of used article, therefore,
used articles cannot have input VAT. Therefore:
Input VAT for the month = 150,000 x 13% + 150,000 x 7% = 20,550 dollars
8.1 Timing for input VAT to be deductible
For manufacturing enterprise, the goods must be examined and stored into the buyer¡¯s warehouse.
For trading enterprise, the goods must be fully paid.
8.2 Non-deductible input VAT
The general rule is that the VAT invoices (a special kind of invoices) must be obtained from the
seller for the input VAT to be deductible. However for the following cases, it is non-deductible
even the invoices is obtained:
(1) The purchase item is for the use of fixed asset;
(2) The purchase of goods or services that used for non-VAT taxable item (i.e. those activities that
subject to business tax);
(3) The purchase of goods or services that used for exempt item;
(4) The purchase of goods or services for the purchase of staff welfare or personal consumption;
(5) The loss of purchased goods from the extraordinary event (i.e. input VAT on goods losses due
to natural disasters or stolen, etc.);
(6) The loss of finished goods and work in progress from the purchased goods or services in the
extraordinary events.
An enterprise engages both in taxable activities and non-table activities shall account separately for
the input VAT of the related purchases of goods and services. Without accurate accounting and
supporting for the separation, the following formula should be used to determine the non-deductible
VAT:
Non-recoverable input VAT = Input VAT x Turnover of non-taxable activities I Total turnover
The non-deductible VAT should be transferred out from the input VAT and treated as expenses in
the income statement.

                                                                                                     43
9 VAT PAYABLE
For normal rate taxpayer:
The VAT payable = output VAT input VAT
                                  -



For small-scale taxpayer:
ACCA-2004--China Taxation 41

As explained before, for the sales transaction involved with small-scale taxpayer, the
sales amount should include sales consideration and VAT.
The VAT payable = Turnover x Tax rate/ (1- Tax rate)
10. BUSINESS WITH SEVERAL BUSINESS LINES
10.1 Multiple taxable sales activities
For a business which runs different business lines with different VAT tax rate, the tax should be
calculated with the applicable tax rate for each business line if there is a clear bookkeeping for the
separate business lines. If not, the whole business turnover of the entity is subject to the highest
applicable VAT tax rate among the business lines.
10.2 Mixed sales activities
If a manufacturer, wholesaler or retailer conducts a sales transaction that involves taxable services
that subject to BT and goods that subject to VAT, it is treated as sales of goods and is not taxable
under business tax, instead it should be taxed under Value Added Tax.
For example, if the selling price for a conditioner (480O) that including installation (20O) in a
electric appliance shop is 5OO0, the whole amount is subject to VAT as the electric appliance shop
is principally engages in the retailing business.
For other kind of taxpayer, it is treated as provision of service and taxable tinder business tax. The
state tax bureau has the authority to determine whether it is taxed under business tax or not.
10.3 Multiple taxable and non-taxable activities
For a business which runs different business lines with taxable and non-taxable services and goods,
the tax should be calculated with the applicable tax rate for the taxable activities if there is a clear
bookkeeping for the separate business activities. For non-taxable activity, it may be taxed under the
Business tax.
If there is no clear bookkeeping for the separation of taxable and non-taxable activities, the whole
business turnover of the entity is subject to VAT. The state tax bureau has the authority to
determine whether it is taxed under the value added tax or not.
11 EXPOET ¡®vat REFUND
For export sales, they are generally exempted from output VAT and the related input VAT may be
refunded. However the refund rate is generally lowered than the output rate and effective from Jan
1,2004 there are 5 main refund rates, i.e. 17%, 13%, 11%, 8% and 5%:
(I) Ships, automobiles and spare parts, aviation vessels, multifunctional machine-tools, printed




                                                                                                           44
circuits, program controlled telephones, telegraphic switching
ACCA-2004-China Taxation 42

equipment, light-transmitting equipment, medical instruments, metallurgy equipment, train, etc.-
17%;
(2) Industrial product proceed with agricultural products as raw materials, cotton, wheat, maize
flour, meat, edible offal of ducks, rabbits, hares, clothes, textiles. certain electronic machinery,
certain iron or steel articles, small hardware, organic or inorganic chemical materials, plastic-ware,
toys, shoes, clocks, watches, ceramics, porcelain, fiber, rubber-ware, sports products, leather craft,
travel luggage, etc. 13%;
(3) Petroleum, unwrought zinc, coal, chemical fertilizers 11%
(4) Products derived from natural resources: unwrought aluminum, yellow phosphorus and other
phosphorus, unwrought nickel, ferric-alloys, molybdenum ores, etc.; 8%
(5) Certain agricultural products- e.g. soybeans, products derived from natural resources: coke, coal,
feldspar, talc, steatite, etc. 5%.
-The VAT refunds were cancelled for the export of crude oil, timber, wood pulp, goat hairs, eels,
ores of rare earth metals, phosphorus ores, natural graphite, etc.
@A bicycle manufacturer sold 1,500 bicycles in the first quarter of the year with
selling price of each bicycle was 300 dollars and exported 2,250 units of bicycle.
FOB for each bicycle is 30 US dollars; input VAT of parts for the bicycles 85,500
dollars; the exchange rate is 100 US dollars to RMB 840, value added tax rate 17%,
refund rate 13%.
Above purchase did not include tax and have VAT special invoices. Require calculating the taxable
or refundable value added tax for the enterprise.
Non-refundable VAT = 2,250 x 30 x 8.4 x (17% 13%) = 22,680 dollars Deductible /refundable VAT
                                                    -



=   85,500 22,680 = 62,820 dollars
           -



Output VAT of domestic sales = 1,500 x 300 x 17% = 76,500 dollars
Net VAT payable = 76,500 62,820=13,680 dollars payable.
                              -



However if the selling price of each unit in the domestic market is 200 dollars each, then the output
VAT of domestic sales =100 x 200 x 1 7%=5 1,000 dollars payable
Net VAT payable = 51,000-62,820 = 11,820 dollars refundable.
There are 2 tax refund computation methods:
(1) ¡°Exempt, setoff, refund¡± method
It is mainly applied to all manufacturing enterprises. It consists of 3 steps:
a. Exempt refers to the export sale is exempted from output VAT;
b. Setoff refers to the related input VAT of the exported goods can be used to setoff
the output VAT of the domestic sales made by the taxpayer, if any;
c. Refund refers to the case that after the setoff, if there are still unused input VAT, they can be


                                                                                                       45
refunded.
ACCA-2004--China Taxation 43

The above 3 steps should be made in order and computed monthly by the taxpayer.
However for the case that the VAT tax rate (normally 17%) is not same as the refund rate, it needs
to calculate the irrecoverable input VAT:
Irrecoverable input VAT = Free on board (FOB) x (tax rate refund rate) Bonded materials x (tax
                                                                 -        -



rate refund rate)
      -



Bonded materials are materials imported into the PRC for the purpose of export to overseas. No
payment of import duty and VAT is needed at the import stage.
The irrecoverable VAT cannot be used to offset against the output VAT of the domestic sales, and
should be transferred out from input VAT and be charged to cost of sales. Then the VAT payable
(A) = Output VAT of domestic sales (Total input VAT irrecoverable VAT) input VAT brought
                                     -                   -                     -



forward
If(A) is positive, the taxpayer needs to pay the amount for the month.
If(A) is negative, the amount of refund depends
(i) FOB x refund rate > or equal to input VAT carried forward at the end of the month:
The refund amount = input VAT carried forward at the end of the month (ii) FOB x refund rate <
input VAT carried forward at the end of the month:
The refund amount = FOB x refund rate
The reason for the above process is to make sure the refund is the amount of the refund itself or the
amount left, not including any input VAT that is brought forward from last month that is not
belonging to input VAT of the consumed materials of export goods.
(2) ¡°Levy first, refund afterwards¡± method
It is mainly applied to all trading enterprises that have right of import and export. Under this
method, an enterprise needs to pay output VAT on export and claim a VAT afterwards as explained
in the following formula:
VAT payable Output VAT on domestic and export sales input VAT-



VAT refund Export sales x refund rate
,   12 EXPORT EXEMPT BUT NO REFUND
For exporting the following goods, there in no output VAT but also no input VAT refund:
Contract processing for export;

...i.A-2004-China Taxation

44




                                                                                                    46
Contraceptive medicines and devices;
Antique books;
Others stipulated by the laws.
13 PURCHASE OF SOMESTIC MADE MACHINERY
For FIE purchases domestic made machinery within the approved refund investment limit, it can be
refunded of the VAT paid for the machinery. The following conditions must be satisfied:
(I) The enterprises must be in the approved industry;
(2) The machinery is newly one and purchased in China;
(3) The settlement is made by money and not in form of capital contribution;
(4) The machinery must be in the approved refund investment limit i.e. the total investment amount
in form of monetary contribution minus the duty and VAT free importation of machinery.
14 TAX ON IMPORTATION
It is generally that the import of goods, no matter it is for self-used or trading; purchase or donation;
domestic-made or foreign-made, should be subject to custom duty and VAT unless the materials are
imported for some special purpose (e.g. for the contract or import processing for ultimate
exportation). There are generally two rates 17% or 13% and the formula is:
VAT payable = (dutiable value + custom duty + consumption tax) x tax rate
(a An import and export company imported some goods which required to pay consumption tax, the
purchase cost 1.5 million dollars, related fee 300,000 dollars, transportation and insurance fee for
the journey from overseas to China 450,000 dollars. The company also paid 450,000 dollars of
custom duty, consumption tax 270,000 dollars. In the same month, the company sold the goods to
an enterprise within china for 4,387,500 dollars including VAT. Calculate the value-added tax of
importation and domestic sales for the company.
Input VAT tax of importation = (dutiable value + custom duty + consumption tax) x
17%
=   [(1,500,000 + 300,000 + 450,000) + 450,000 + 270,000] x 17% = 504,900 dollars
Value added tax of domestic sales = 4,387,500 ¡Â (1 + 17%) x 17% =637,500 dollars
Net VAT payable =637,500 504,900 = 132,600 dollars
                              -



15 TAX ADMINISTRATION
15.1 Timing for tax liability arises
Per articles 33 of the detailed rules for the implementation on VAT, the timing for
VAT tax liability arises depends on the different settlement methods:
ACCA-2004-China Taxation 45

(1) For sales of goods under the direct payment method, no matter the goods is issued or
not, it shall be the date that the consideration is received or the right to collect the
consideration is obtained and the bills of lading are delivered to purchasers;

                                                                                                       47
(2) For sales of goods under the appointment of agency for collection, it shall be the date
that the goods are delivered and the procedures for the collection are completed;
(3) For credit sales or installment sales, it shall be the collection date per the contract;
(4) For sales of goods with payment received in advance, it shall be the date on which the
goods are delivered;
(5) For sales of goods on consignment, it shall be the date on which the consignment report
is received from the consignee;
(6) For sales of taxable services, it shall be the dates on which the services are provided and
the sales sum is received or the right to collect is obtained;
(7) For those deemed sales activities, it shall be the date on which the goods are transferred.
For import of goods, it is the time for custom declaration for VAT liability arises.
15.2 Filing location
Filing location refers to the place that the taxpayer makes the tax filing and payment. It can
be divided into several cases as follows:
(1) The taxpayer with fixed establishment
It must report and pay tax with the local tax bureau where the establishment is located. If
the taxpayer has branches and the head office and the branches are not situated in the same
county or city, they should report and pay VAT separately to their respective local tax
bureau. The head office may, subject to the approval of the State tax bureau or its
authorized tax bureau, report and pay the VAT on consolidated basis to the local tax bureau
where the establishment of head office is located.
A taxpayer with fixed establishment selling goods in different county or city must apply for
the issuance of ,a ¡®Tax Administration Certificate of Outbound Business activities¡± from
the local tax bureau where the establishment is located. The related VAT must be reported
and paid to the tax bureau where the establishment is located.
Without the certificate, the tax bureau in the place where sales activities take place may
levy a 6% of the transaction value. As a penalty, such sales amount is still subject to output
VAT at the location of the fixed establishment and the VAT paid in other locations cannot
be claimed as a tax credit.
(2) The taxpayer without fixed establishment
It must report and pay tax with the local tax bureau where the sales activities take place.
(3) For importation of goods, the importer or its agent must report and pay tax to the
custom authority where the custom declaration is made.
15.3 Filing period
ACCA-2004-China Taxation 46

For VAT purpose, the assessment period is equal to the filing period. Generally, a VAT is filed on
monthly basis. According to the rules, it can be 1-day, 3-day, 5-day, 10-day, 15-day or one month.


                                                                                                 48
The actual filing period is determined by the tax bureau according to the size of the VAT payable
by the taxpayer, where no fixed period can be made, it can be assessed on a
transaction-by-transaction basis.
For those are assessed by monthly basis, the taxpayer should report and pay VAT within 10 days
after the end of the period. If one of 1-day, 3-day, 5-day, 10-day, 15- day basis is adopted, the
taxpayer should prepay VAT within 5 days after the end of the period and a monthly filing and
settlement should be made within 10 days from the first day of the following month.
For importer, VAT should be paid within 7 days after the issuance of tax payment certificate.
For exporter, since most of the goods are taxed at zero rates, the VAT can be claimed on refund
from the tax bureau after the export procedures are finished with the custom.
(i (Question 1, Dec, 2000 ACCA)
Company F is an ordinary taxpayer for VAT. The following are the transactions of
Company F for January 1999.
(1) Sales to a wholesaler of 9,000 boxes of product. The price per box is RMB 2,250 yuan plus
RMB 150 yuan for packaging and after-sale service. The wholesaler has only paid for 6,000 boxes
and the other 3,000 boxes are accepted as consignment, but the letter for consignment has not been
provided. Company F issued a VAT receipt for 9,000 boxes of product after receiving the payment
for the 6,000 boxes.
(2) Sales to an end user of 3,000 boxes of product at the price of RMB 2,475 yuan per box, the
VAT receipt of which has been issued. Company F, who paid the transportation fee in advance on
behalf of the end user, asked the transportation company to issue a transportation fee receipt for
RMB 30,000 yuan. Both of the receipts have been given to the end user.
(3) Sales of 150 boxes of product at RMB 2,250 yuan per box to its own After-Sale Service
Department.
(4) RMB 750,000 yuan sales in the form of a price-returning sale of which RMB 300,000 yuan has
been paid as the returned price.
(5) Purchase of raw materials, the VAT indicated on the VAT receipt is RMB 2,250,000 yuan. The
money has been paid in full but the materials have not been received yet.
(6) Purchase of spare parts, the VAT on the VAT receipt is RMB 90,000 yuan. The parts have been
accepted.
(7) Purchase of office products for the total price of RMB 75,000 yuan, for which there is no VAT
receipt.
(8) Company F calculates its VAT for January 1999 as follows:
VAT for sales = (2,250 x 6,000 + 2,475 x 3,000 + 750,000 300,000) x 17% 3,633,750
                                                           -



VAT for purchase 2,250,000 + 90,000 + 75,000 x 6% + 30,000 x 7% = 2,346,600 VAT of Company
F for January 1999 = 3,633,750-2,346,600 = 1,287,150
ACCA-2004-China Taxation 47



                                                                                                     49
Note: Price-returning sale is a method whereby the seller will return the purchase price to the buyer
in several installments beginning with several years after the sale of the goods.
You are required:
(a) to identify the mistakes made by the company in (i) its calculation of VAT
and (ii) its issuance of receipt. Give brief reasons in each case, and
(b) to calculate the correct amount of VAT payable for January 1999 by
Company F.
@ (Question 1, June 1999 ACCA)
Flying Dragon Co (FDC) produces bicycles. It is classified as a general taxpayer for the
purpose of calculating VAT. The ex work price (not including tax) of the bicycles produced by
FDC is 290 yuan for each bicycle. FDC has the following sales and purchase in November 1998:
(1) 1,000 bicycles were sold to the local department store, which were paid in full in the same
month. FDC provided an 8% discount, which was recorded in the accounts with red-letter receipt,
but was not reflected in the VAT invoice.
(2) 600 bicycles were sold to stores outside the city. FDC paid 8,000 yuan for the transportation of
these bicycles, the receipt of which listed 7,000 yuan for transportation and 1,000 yuan for loading
and unloading.
(3) A car o FDC that had been used for two years was sold for 100.0000 yuan.
(4) 50,000 yuan of package deposits, which were overdue, were recorded as sales income.
(5) Spare parts and raw materials for producing bicycles were purchased, the special receipt of
which listed sales price 140,000 yuan and stated 23,800 as tax.
(6) Spare parts of 90,000 were purchased from small-scale tax payers without a special receipt.
(7) Used bicycles were directly purchased by FDC, who paid 70,000 yuan. The accountant of FDC
calculated the VAT for that month as follows:
The tax for the sales of the month
=   [1,000 x 290 x (1 8%) + 600 x 290 + 100,000 + 70,000) x 17%
                    -



=   [266,800 + 174,000 + 100,000 + 70,000] x 17%
610,800x 17%
=   34,760 yuan
VAT payable for the month = 103,836-34,760 = 69,076 yuan
Note:
ACCA-2004--Cbina Taxation 48

The deemed input VAT credit rate for transportation invoices is reduced from 10% to 7%
effective 1 July 1998.
The applicable tax rate for selling a second-hand car is 6%.
Required:
(a) Identify and explain the mistakes in the calculation of the VAT by the accountant


                                                                                                   50
of FDC; (14 marks)
(b) Calculate the VAT of FDC for November 1998. (9 marks)
@ Exam-typed question
A production enterprise (normal rate taxpayer for VAT) conducted the following
business in a month:
(1) The sales for the month RMB300,000, the goods are delivered but the money is not
received from the customers;
(2) Raw material with cost RMB10,000 is used for staff benefit;
(3) Finished goods with selling price RMB2O,000 is used for investment purpose
(4) A machine from trade-in was sold out and only ordinary invoices RMB 100,000 was
issued by the enterprise;
(5) Raw material is paid for RMB 1,000,000 but it is not deliver to the enterprise;
(6) VAT shown on water and electricity's bill is RMB 1,000;
(7) VAT shown on the special invoices for purchase of part for the production machine is
RMB7,000;
(8) VAT shown on the special invoices for service rendered to repair the staff quarter is
RMB8,000;
(9) VAT shown on the special invoices for television for the staff quarter is
RMB9,000.
Please calculate the VAT payable for the month.
(1) It is payable even the money is not received from the customers;
(2) The input VAT should be transfer out as it is for staff benefit;
(3) It is a deemed dales activity;
(4) Although an ordinary invoice is issued, the amount is treated as VAT inclusive;
(5) Even the purchase money was paid but for production enterprise, the goods must be
received and stored in warehouse for VAT deduction purpose;
(6) It is input VAT deductible;
(7) Since it is for production purpose, it is input VAT deductible;
(8) And (9) Both are for staff benefit's purpose and it is non VAT deductible.
The input VAT for the month= 1,000+7,00010,000* 1 7%6,300
The output VAT for the month =300,000*1 7%+20,000* 17%
+100,000/1.17*1 7%=68,930
The net VAT payable=62,630
ACCA-2004-China Taxation 49

Business Tax (BT)

1. THE SCOPE OF BUSINESS TAX
All units and individuals engaged in the provision of services as stated below, or the

                                                                                            51
transfer of intangible assets or the sale of immovable properties within China shall be the
taxpayer of business tax.
2. THERE ARE 9 CATEGORIES OF TAXABLE INCOME ITEMS:
The scope of business tax is mutually exclusive from Value Added Tax and so if a
transaction is subject to business tax then it is not subject to Value Added Tax.

Business tax taxable items and tax rates table

ACCA-2004---China Taxation

50



Taxable items             Scope of charge                                      Tax rate

                          Transportation by land, water, air and pipeline,
1. Transportation                                                              3%
                          loading, unloading

                          Construction, installation, repair, decoration and
2. Construction                                                                3%
                          other engineering work

                                                                               8% and from
                                                                               the year of
                                                                               2001, 1%
3. Finance and                                                                 reduction
insurance                                                                      each
                                                                               year to 5%
                                                                               from 2001 to
                                                                               2003

4. Posts and
                                                                               3%
telecommunications

5. Cultural activities
                                                                               3%
and sports

                          Singing bars, dance halls, karaoke lounges,
                          commercial music halls, musical tea houses,          20%
6. Entertainment o
                          billiards, golf, bowling and amusement facilities

7. Service                                                                     5%
                          Agency, hotel, catering restaurant, tourism,

                                                                                              52
                             warehousing, leasing, advertising and other
                             services

                             Transfer of land-use rights, patent rights,
8. Transfer of
                             non-patented technologies, trade marks,                    5%
intangible assets
                             copyrights and goodwill

9. Sale of immovable
                             Sale of buildings and other attachments to land            5%
properties




2.1 Transportation
It includes the domestic and cross-boai1er transportation by sea, air, land, pipeline of gas, liquid or
solid, loading and unloading of goods, guiding of ships or airplanes, parking and port charge.
2.2 Construction
It includes the construction of building, installation of equipment or machinery, repairing of
building, decoration and other engineering work. For construction, repair and decoration work, the
turnover includes the cost of raw materials and power. For installation work, the turnover includes
the cost of machinery if it is included as part of the contract amount.
Subject to certain conditions, self-construction and self-used building is not subject to business tax
@A construction company contracted to build a house and it was responsible to supply the
materials. When the construction completed, total amount of used construction materials and
decoration materials cost RMB2 million. The construction company received the construction fee
BMB650,000. The business tax for the construction company:
Business tax payable (2,000,000 + 650,000) x 3% RMB79,500.
2.3 Finance and insurance
Finance includes lending, financial leasing, foreign exchange and other financial services. The
interest earned is subject to business tax. Insurance includes the service provided by overseas
insurance company in PRC. A financial institute can deduct the interest expenses from the interest
income for the foreign currency re-lending business to calculate the business tax.
@ A Bank, in 2000, receives deposits and pay interest RMB600,000 and earned interest
RMB75O,000. At the same time, it raise RIvIB55 million from overseas on 5% interest rate and
re-lending RMB3O million to some enterprise and earned income for RMB 2.5 million.
Business tax = 750,000 x 8% + (2,500,000-30,000,000 x 5%) x 8% = RMB 140,000.
2.4 Post and telecommunication
Post includes the delivery of physical message e.g. letter, express and package, and postal savings
deposits and other postal services. Telecommunication includes the electronic transmission of
information e.g. telegrams, faxes, telephone calls and the sales of goods related to such business.


                                                                                                      53
@ A construction company installs cable from Guangzhou to Shenzhen and receives RMB8O
million as income from the installation.
ACCA-2004--China Taxation 51

Business tax 80,000,000 x 3% RMB2,400,000.
2.5 Cultural activities and sports
Cultural activities include performance, broadcasting, exhibitions, training activities, seminar,
lectures and meetings on culture, art, science and technology, lending service provided by libraries.
Sports includes organization and operation of all kinds of sports competition and activities
2.6 Entertainment
It includes the provision of place and services for entertainment. Its turnover includes entrance fee
of nightclubs, dancing place, karaoke, music lounges, snooker clubs, golf courses, bowling place
and its related food and beverage charge.
@A restaurant with dinning place and ballroom provides drinks and entertainment for customers.
The restaurant have the following income in a month: income from dinning placeRMBl .5 million,
income from ballroom tickets RMB25O,000, income from drinks R.MB9O,000, from singings in
ballroom RMBI 50.000. Calculate the business tax for the month (the business tax rate for
entertainment in that area is 20%)
(1) business tax for dinning = 1,500,000 x 5% = RMB75,000
(2) business tax for entertainment (250,000 + 90,000 + 150,000) x 20% RMB98,000
Business tax for the month = 75,000 + 98,000 RMB 173,000
2.7 Services
It includes agency, hotel, catering, tourism, warehousing, leasing, advertising and other services
such as laundry, designing, surveying, photography, haircutting, chemical analysis, measuring and
accounting, legal consultancy, etc.
2.8 Assignment of intangible assets
It is defined as the assignment of the ownership or use right of intangible assets such as land use
rights, patent, trademark, technology, copyright and brand name. However if the transfer is used as
a capital contribution to an enterprise and the investor enjoys the profit sharing and bears the risk of
investment, the transfer is not subject to business tax. Also according to Caishuizi [2002] 191, the
investor is exempt from business tax when it disposes the investment in which it has previously
contributed the intangible assets.
2.9 Sales of immovable property
It is defined as the sales for consideration of the ownership of immovable property. Immovable
property includes buildings, construction and other attachment to the land. However if the transfer
is used as a capital contribution to an enterprise and the investor enjoys the profit sharing and bears
the risk of investment, the transfer is not subject to business tax. Also according to Caishuizi
[2002]191. the investor is exempt from business tax when it disposes the investment in which it has


                                                                                                        54
previously
ACCA-2004----China Taxation 52

contributed the immovable property.
Non-individual donation of immovable property without consideration is deemed to be the sales of
immovable property and subject to business tax. However the donation without consideration by
individual is not subject to business tax.
(A property developer sold properties for RMB 10 million, income from transfer of land use rights
RMB 1 million and rental RMB25O,000, calculate the business tax for the month.
(1) Sales of immovable property 10,000,000.
(2) The business tax 10,000,000 x 5% = RMB500,000
(3) Business tax for rental = 250,000 x 5% RMB 12,500
(4) Business tax for the income from transfer land use rights 1,000,000 x 5%
RMB5O,000
Total amount of business tax for the month 500,000 + 12,500 + 50,000 =
RMB562,500
3. CALCULATION OF TAX LIABILITIES
Tax liabilities = Turnover * applicable tax rate
Turnover normally includes all the consideration from a transaction, including commission,
handling charge and insurance, etc, no deduction is allowed except in some special cases as follows:
The fee income received by a domestic transportation company from cross- boarder delivery can
deduct the fees paid to overseas freighter for carrying of those passengers or goods outside the PRC.
@A domestic transportation company exports some goods, received whole journey transportation
fee RMB 60,000, including 5% insurance fee, overseas freight RMB 25,000 paid to an overseas
transportation company.
Calculate the business tax for the domestic company: (60,000 25,000) x 3% RMB1,050
                                                              -



The fee income received by a domestic travel agency from cross-boarder tours can deduct the fees
paid to overseas travel agency for organizing those tours outside the PRC.
@A travel company organized an overseas traveling, total income is RMB8 million; it paid RMB3
million to the oversea tourist company and paid the domestic transportation fee RMB 1.5 million.
Business tax = (8,000,000- 3,000,000- 1,500,000) x 5% = RMB 175,000.
The principal contractor of building construction can deduct the subcontracting fee to the
subcontractors.
The re-finance lender in foreign currency can deduct the interest expenses paid
ACCA-2004--China Taxation 53

on the borrowing amount. The interest paid to saving accounts and self-financed fund are not
qualified.
The re-insurance can deduct the premium paid to the sub-insurancer.

                                                                                                   55
@ ABC insurance company earned from insurance RMB 1 .5 million, paid the sub- insurance
insurance fee RMB700,000 million.
Business tax (1,500,000 700,000) x 8% = RMB64,000.
                         -



The business of foreign exchange, transaction of securities and non- commodity future conducted
by the finance institute can be taxed on the margin gained. Personal transaction for the above is not
taxable.
The tourist company can deduct the amount of the hotel bill, food and beverage, entrance fee and
others paid on behalf of the tourist to arrive the taxable turnover.
For individual performance, the amount of the rental, agency commission can he deducted from the
box-office income.
The leasing company can deduct the Cost of the property, insurance, installation, transportation,
custom duty, value-added tax, consumption tax, interest expenses of overseas foreign currency
borrowing in relation to the purchase of the leased goods.
For self-construction-and-sales or the donation of immovable property by non- individual, the tax
bureau may deem the turnover amount.
@ A company built an office and donated it to its related enterprise: the office has an assessed cost
of RMB75O,000. Calculate the business tax for the company.
The donation of immovable property to other (non-individual)is regarded as sales of immovable
property. Tax is based on both construction and sales of immovable property.
750,000 x (3% + 5%) = RMB6O,000
4. DEEMED TURNOVER
ln case of the transaction prices of the provision of services, assignment of intangible assets and
sales of immovable property is unreasonably low without a good reason, the tax authority can deem
the turnover amount in the following order:
The average price of the similar services provided or the similar sales transaction conducted by the
taxpayer during the current month.
The average price of the similar services provided or the similar sales transaction conducted by the
taxpayer recently.
By the following formula:
Deemed turnover= Cost * (1 + deemed profit rate)/(I- applicable business tax rate)
The local tax bureau case by case determines the deemed profit rate.
@A company sold an office at RMB2 million to another company. The cost of
building the office is RMB5.5 million, deemed profit rate 15%, calculate the business
ACCA-2004----China Taxation 54

tax for the company
Since the sales of immovable property is below cost, if it is a sale at unreasonably low prices
without a good reason, the tax bureau can deem the turnover by the above equation.


                                                                                                      56
Deemed turnover = 5,500,000 x (1 + 15%) / (1 5%) = RMB6,657,894.73 Business tax = 6,657,894.73
                                                -



x 5%=RMB332,894.73
5. Business with several business lines
5.1 Multiple sales activities
For a business having business lines that subject to different business tax rates, the tax should be
calculated with the applicable tax rate for related business if there is a clear bookkeeping for
separate business lines. If not, the whole business turnover of the entity is subject to the highest
business tax rate among the business lines.
S2 Mixed sales activity
If a manufacturer, wholesaler or retailer conducts a sales transaction that involves taxable services
and goods, it is treated as sales of goods and is not subject to business tax, but value added tax. For
other kind of taxpayer, it is treated as provision of service and subject to business tax. The
collecting offices under the State Administration of Taxation have the authority to determine
whether it should be taxed under business tax or not.
5.3 Mixed taxable and non-taxable activities
For a business which runs different business lines with income subject to BT or VAT, the tax
should be calculated with the applicable tax rate for the taxable activities if there is a clear
bookkeeping for the separate business activities. If not, the whole business turnover of the entity is
subject to value added tax. The collecting offices under the State Administration of Taxation have
the authority to determine whether the taxable services are under the value added tax or not.
6. AGENCY ACT! VITIES
6.1 Agency in purchase activities:
If the following 3 conditions are satisfied simultaneously, business tax is levied on the
commission received by the agent. Otherwise, VAT should be levied on the purchase amount
including commission fee:
The agent does not pay in advance on behalf of the principal;
The selling party issues the VAT invoices in the name of the principal for the agent's onward
submission to the principal;
The agent settles the purchase with the principal and separately receives commission.
ACCA-2004-China Taxation 55

6.2 Agency in sales activities:
(a) The sales are conducted at no margin
If there is no additional mark up in the transaction, the sales is taxed under the
Value-Added Tax and while the commission is taxed under business tax.
(b) The sales are conducted at margin
if there is an additional mark up in the transaction, the additional amount is included both
into the calculation of the tax liabilities of business tax and VAT.


                                                                                                        57
¡®a Calculate the business tax and VAT for an agent that having the following:
A manufacturer appoints the agent to sell 20,000 items for RMB8O each, commisson
RMB5 each; the agent sold all the items at RMB9O each.
Business tax [(90 80) x 20,000 + 5 x 20,000] x 5% RMB 1 5,000. VAT= 90x20,000x 1
7%-80x20,000x I 7%RM B34,000.
7. EXEMPTION
Individuals whose turnover has not reached the business tax threshold is exempted from
business tax. For those assessable on a periodical basis, the threshold is monthly turnover
of RMB200 to RMB800 with the actual amount decided by the local government. For those
assessable on a transaction basis, the threshold is turnover RMB5O per day or per
transaction.
Nursing services provided by nurseries, kindergartens, home for aged. welfare institute for
the handicapped, matchmaking agencies and funeral services.
Personal services provided to the public by the disabled.
Medical services provided by hospitals. clinics and other medical institute.
Educational services provided by qualifying schools and educational Institutes or services
provided by students participating in work-study programs.
Agricultural mechanical ploughing, irrigation and drainage, prevention and control of plant
diseases and insect pests, protection of plant, insurance for farming and related technical
training services, breeding and diseases control for poultry, livestock aquatic animals.
Admission fee for cultural activities held by memorial hall. museum, cultural center, art
gallery, exhibition hail, library and cultural preservation organization and admission fee for
cultural and religious activities conducted in temples and churches.
Local governments have no right to grant reduction or exemption. Other than the above, the
State Council grants the exemption as follows:
Insurance premiums of life insurance policy for more than 1 year with the interest and
principal recoverable on maturity;
Income from assignment of technology, the technology development and related
technology consultancy, technology service provided by individual:
ACCA-2004--China Taxation 56

assignment of copyrights by individual;
assignment of agricultural land use right to agriculturists:
Union nurseries;
Membership fee of non-profits making organization approved by civil or financial
administrations.
8. LOCATION OF TAX PAYMENT
The taxpayer shall generally pay tax to the authority in the place where those taxable


                                                                                             58
services are performed;
For transportation entity or transfer of intangible assets (not including land use right), the
place is where the entity registered;
For assignment of land use right and immovable property, the place is the location of the
land and immovable property.
For withholding agent, the place is the location of the agent.
9. ARISE OF TAX LIABILITIES
It is normally the date on which the consideration is received or the right to collect the
payment is evidenced. There are also certain rules as follows:
For transferring land use rights or selling immovable properties with payment in advance, it
is the date the advance is received.
For donation of immovable assets without consideration, it is the date of the transfer of
assets.
For withholding agent, it is the time that the agent receive the consideration or the right to
receive is evidenced.
10. TIMING OF TAX PAYMENT
It can be 5 days, 10 days, 15 days or I month. It depends on the size of the taxable amount
and is decided by the tax authority. If it cannot be determined on regular basis. it can be
paid on transaction basis.
A taxpayer with a tax period of I month may report and pay the tax within 10 days
after the end of the period. With other period, it shall pay a provisional amount within
5 days after the end of the period and shall settle the payment within the first 10 days
of the next following month.
The above rules are applied to the withholding agent as well.
11. WiTHHOLDING AGENT
Withholding agents are required to withhold the tax amount and pay directly to the tax
authority in the following cases:
for sub-contracting, the main contractor is the withholding agent;
for overseas entity carries out taxable services in China and does not have an establishment
in China, its agent or the assignee or the purchaser of the service shall be the withholding
agent:
ACCA-2004-Cbina Taxation

for individual public performance, the agent selling the tickets shall be the withholding
agent:
u Anagent sold tickets on behalf of a singer for RMB 18,000 and commission RMB8.000.
Business tax for the commission 8.000 x 5% = RMB 400:
Withholding business Lax I 8.00() x 3% = RMB54O


                                                                                                 59
for reinsurance, the principal insurer will be the withholding agent;
for personal transfer of patent. trademark. copyright, etc. the assignee shall be the agent
¡®   Question 8, December 2000)
Company U runs a hotel and a nursing home for aged people. In Jana 2000. the
income from the hotel was as follows. restaurant RMB 150.000, rent RMB l35.tJ0()
from karaoke: RMB 7.500 for song orders. RMB 18.000 for sales of drinks and RMH
45.000 for entrance tickets. The income from the nursing home is RMB 22.500
you arc required it¡¯ calculate:
11w business tax of (company U for January 2000
mock exam question
A construction company agreed to build an office building for RMI3 24 millions for a property
development company It sub-contracted decoration to Company A for RMB 10.5 million
After the construction. the property development company¡¯ faced financial difficulty and
gave the construction company total Rib( million market value) 2 buildings as the payment
of the construction fee: the construction cornpany save one of the building for self use purpose.
another building RMB 3.3 million (market value) to Company A For the decoration fee.
Required:
Calculate the tax payable and withholding business tax for an companies respectively.
The construction company:
(I) Business tax for construction company = (24.000.000 10.500.000) 3%
                                                          -



RM B405.000
(2) Withholding business tax on behalf of¡¯ Company A 10.500.000 x 3%
RMB3 15.000
43) Business tax for sale of immovable properties = 3.300X)00 x 5% ¡°RMB165.000
The property development company:
(4) Business tax for sale of immovable properties 6.000,000 x 5% = RMB300.00()
ACCA-2(M4--China Taxation

Customs Duty (CD)
THE DUTYPAYER
Consignee of imported goods, consignor of exported goods, agent of consignee and
consignor and owner of imported or exported items.
2. THE TARIFF RATE
2.1 Imported duty: From 1 Jan 2004, there is five tariff rates on imports: the general tariff
rates, special preferential rates, agreed rates, most-favored- nation rates and quota rates.
a. Most-favored-nation rates shall apply to imports originating in member countries or
regions of World Trade Organization with which China shares the general most favored
nation treatment. It is also applicable to imports originating in countries or regions with


                                                                                              60
which China has concluded reciprocal preferential agreements.
b. Agreed rates shall apply to imports originating in the countries or regions with which
China has taken part in the regional trade agreements containing tariff preferential clauses.
In 2002, 739 types of imported goods originating from the Korea, Sri Lanka and
Bangladesh can be subjected to agreed rates as specified in the Bangkok Agreement.
c. Special preferential rates shall apply to imports originating in the countries or regions
with which China has concluded special preferential tariff agreements. In 2002, certain
goods from Bangladesh can be subjected to the special rates specified in the Bangkok
Agreement.
d: General rates apply to imported goods originating in the countries or
regions not mentioned above or unidentified originating country.
e. Quota rates apply to imported goods within the approved quota. For the imported goods
outside the approved quota, it follows the above a
toe.
2.2 Exported duty: There are 36 items ranging from 20%-40%.
2.3 Application of rate: It is normally the rate prevailing at the date of declaration, and for
advanced declaration, the rate prevailing at the date of declaration of arrival of the
transportation means.
3. DUTIABLE VALUE:
Customs duty is based on dutiable value.
ACCA-2004-China Taxation 59

3.1 The dutiable value for imports is normally based on the price of the goods, insurance premiums
and freight (CIF) together with packing and other service costs incurred BEFORE unloading at the
port of discharge plus, if any, fees for patents, trademarks, copyright, software and commission to
seller's agent. It does not include the commission paid by the purchasers to its agent and normal
discount given by the overseas sellers.
3.2 The dutiable value for export shall be assessed according to freight over board (FOB) price
including packaging fee, insurance premiums and domestic freight from the production place to
domestic port, but excluding export duty, commission to foreign agent (if specified), insurance and
transportation cost from domestic port to overseas.
@An Import and Export company imported 300 cars in this month, consideration was RMB 37.5
million, paid packaging fee RMB 60,000, paid commission RMB 30,000 to its agent, the
transportation fee after the importation RMB 27,000.
Required: calculate the Customs Duty for the company (assume the custom duty rate is 20%)
Custom dutiable value = (37,500,000 + 60,000) = RMB 37,560,000.
(note: commission fee paid to agent, transportation fee after the importation are
not included in calculation of dutiable value)


                                                                                                      61
Custom duty for importation 37,560,000 x 20% RMB 7,512,000
@A Guangzhou company imported some goods from USA, transaction price is in FOB RMB
13,200,000 (including commission to foreign agent RMB7O,000 but not including payment of
software 600,000 and commission to seller RMB 120,000), plus paying RMB37O,000 for the
transportation and insurance fees for the goods to Shanghai seaport. Assuming the duty rate for
those goods is 20%, value added tax rate 17%.
Required: calculate the duty payable and value added tax respectively.
The dutiable value = FOB of the imported goods + software fee +seller commission purchase
                                                                 -                   -



commission +transportation + insurance = 13,200,000 + 600,000 + 120,000- 70,000 -1- 370,000 =
RMB 14,220,000;
Duty payable = 14,220,000 x 20% = RMB 2,844,000;
Composite tax value= 14,220,000 + 2,844,000 = RMB 17,064,000.
VAT payable on importation = 17,064,000 x 17% = RMB 2,900,880.
3.3 The customs normally assesses the import duty based on the transaction price as the dutiable
value. However if it is unable to determine the dutiable value of an imported item, the Customs may
assess duty on the following bases in the order of:
The transaction price of same/similar goods
The transaction price of same goods should be used first.
ACCA-2004---China Taxation 60

¡°Same¡± means the imported items are from the same country/region and have the same physical
property. quality and goodwill hut can have minor variance. ¡°Similar¡± means the imported items
are from the same country/region, have some value in use and similar physical property, quality and
function and can be exchanged in the commercial transaction.
The Customs uses the above method for the imported goods with reference to the same/similar
transaction price with the same/similar quantity incurred in the period of 45 days before and after
the Customs accepts the application of the importation.
Without such same/similar transaction price, it can use different transaction price with different
quantity of same similar goods and adjustment to the price may be made in consideration of
different quantity or means/distance of transportation. Also the reference should he first made to the
same manufacture, first and if it cannot. the reference to the same/similar transaction in the same
country/region. if there are many same similar transactions, the LOWEST transaction price should
be used.
Work backward method
The Customs uses the price in the domestic market of same similar goods
on the conditions that:
(i) The importation and the sales take place in the same recent time.
(ii) The condition of items at the importation are as same as sales.


                                                                                                      62
(jji)The sales are the immediate and direct wholesales in the domestic market.
(iv) The sales quantity for the period is the biggest
(v) The sales are not made to the related party.
To arrive at the dutiable value, the price can he deducted the following:
(i) Profit in the sales, commission, related expenses
(ii) Transportation cost, storage, insurance fee and some other related expenses after the importation.
(iii) Customs duty, any domestic tax, e.g. consumption tax.
Cost summation method
The dutiable value is the summation of all the following:
(i) Raw material cost for the manufacturing plus related cost;
(ii) Profits earned in the same/similar transaction; and
(iii) Foreign transportation and insurance cost prior to the domestic port of discharge.
Other appropriate method
When using other appropriate methods, we should base on aforesaid principles and domestic selling
data, but the following prices CAN NOT be
ACCA-2004--China Taxation 61

used:
(I) the domestic selling price of the domestic manufactured items
(ii) higher price among the several prices
(iii) the price in foreign market
(iv) other cost that not included in the above 4.3
(v) export price to the third country/region
(vi) any fictitious price
The above methods can be used similarly when the custom cannot determine the dutiable value
of the export goods.
4 GOODS EXPORTED TO OVERSEAS FOR REPAIRING
For the goods that exported to overseas for repairing and had been reported to Customs being
shipped back to China within the time limit set by the Customs. the dutiable value includes overseas
repairing fee, spare parts cost, and the transportation fee for way back to China and the related
expenses and insurance.
1a A company exported an equipment to overseas for repairing, value of the equipment was USE)
90,000 for export declaration, the exchange rate at that time was 8.27. Ii cost transportation fee
USD 3.000 and the insurance fee USD 600; the overseas repairing fee was USE) 4,000, spare parts
cost USD1,500; the transportation incurred for way back to China was USD 3,000 and the related
insurance USI) 600. The exchange rate was 8.28. The applicable duty rate of the equipment is 8¡ã/a.
calculate the import duty for the company.
For equipment exported to overseas for repairing and later shipped back to China, the dutiable


                                                                                                     63
value includes overseas repairing fee, spare parts cost and the transportation fee for way back to
China and the related expenses e.g. insurance.
Dutiable value (4.000 + 1,500 + 3,000 600) X 8.28 RMB 75,348 Duty payable 75,348 x 8% RMB
6,027.84
5 GOODS TEMPORARILY IMPORTED AND USED in CHINA
With the deposit to the customs, the following goods can be temporarily imported and used in
China. The goods should be exported within 6 months from the importation and the deposits can be
refunded accordingly.
(1) the goods used in the exhibition, trade fair, conference or similar activities; (2) goods used in
cultural, sports, performance and competition:
(3) equipment used in news reporting, movie, television. etc.;
(4) equipment used in science research, teaching, medical activities;
(5) vehicle used in above (l)to (4);
(6) samples;
(7) equipment used in repairing, testing. etc.;
(8) packing materials:
(9) other non-commercial purpose goods.
ACCA-2004----China Taxation 62

Machinery, engineering vehicle, equipment and tools, can be temporarily duty free imported and
used in China for 6 months. After that, it should be taxed from the 7th month since the. importation
as follows:
Monthly duty payable = Original dutiable value * tariff rate * 1/48
6 GOODS EXPORTED TO OVERSEAS FOR SUBCONTRACTING
For the goods which were exported to overseas for processing with the declaration made to the
Customs in advanced and then shipped back to China within the time limit set by the Customs, their
dutiable value includes overseas subcontracting fee, spare parts cost, and the transportation fee for
way back to China and the related expenses and insurance.
7 DUTY FOR THE GOODS WITHIN CUSTODY PERIOD
If the goods that are tariff duty exempted when importation and under control of the Customs are
sold out within custody period, e.g. the imported machinery as contribution of capital that subject to
5 years custom custody period custom duty must be repaid and the dutiable value = The original
dutiable value * (1- used months since importation! years of custody period * 12)
8. CALCULATION OF CUSTOM DUTY
Import duty payable = Dutiable value (CIF) * Duty rate for ad valorem; or
=   Quantity of goods * unit custom duty
@A company was permitted to import one machine for temporary use, Customs assessed the
dutiable value of the equipment to be USD 2,000,000, the tariff rate at that time was 14%, exchange


                                                                                                        64
rate 8.278, the machine was allowed temporarily being imported duty free. Six months later, the
company applied to change to formally import the machine and custom duty rate is 7% at that
moment, exchange rate 8.276, What is the duty payable when it changed to be imported?
Since the tax rate and exchange rate are based on the date of formally importation, not based on the
original tax rate and exchange rate.
Import Duty Payable=2,000,000 x 8.276 x 7% = RMB 1,158,640.
For compound duty, it should be calculated ad quantity, then ad valorem:
Import duty payable = quantity of goods * unit custom duty + Dutiable value (CIF) * duty rate.
For sliding scale duty:
Import duty = quantity * unit dutiable value * sliding rate
Export duty payable = export duty rate * FOB value / (1 +export duty rate)
ACCA-2004--China Taxation 63

9. THERE ARE CERTAIN EXEMPTIONS FROM CUSTOMS DUTY IN THE
FOLLOWING CASES:
(i) where the amount of duty payable is less than RMB5O;
(ii) advertising materials and trade samples with no commercial value
(iii) goods sent from abroad AND free of charge by foreign governments and international
organizations
(iv) fuel, supplies, and provision for conveyance entering or leaving China for consumption
en route
(v) trade samples, exhibits, engineering equipment, vehicle for construction, instructions
and tools for installation, cinematograph and television apparatus, containers and theatrical
costumes and paraphernalia, all of which are permitted by Customs to be temporarily
imported for exemption from custom duty if deposit is paid or guaranteed to be re-exported
within 6 months. See 6 above.
(vi) Imported raw materials, spare parts, packing materials for the purpose of
manufacturing of export goods is exempted from customs duty, or customs duty is paid
first and then refunded after the export
(vii) In case of any export goods shall be shipped back into China for some reason, the
original consignor can claim the levy of import duties be exempted. However the paid
export duty shall not be refunded
(viii) In case of any import goods shall be shipped back out of China for some reason, the
original consignee can claim the levy of export duties be exempted. However the paid
import duty shall not be refunded
(ix) Reduction or exemption of import duty may be granted at the discretion of Customs in
the following cases:
(a) where the goods damaged, destroyed, or lost en route to China or at the time of


                                                                                                  65
discharge
(b) where the goods damaged, destroyed, or lost by force majeure after unloading but prior
to release
(c) where the goods have been found leaky, damaged, or rotten the time of examination by
the Customs, provided that the cause is not improper storage
(x) Free replacement goods are free of import duty. But if the original imports had not been
returned, the Customs shall levy on the free replacement goods from foreign sellers.
(xi) Goods stipulated by relevant provisions of the international treaties, to which China is
a contracting party.
(xii) Goods that are stipulated by law.
10. PAYMENT OF CUSTOMS DUTY
For the importation, the taxpayer should make the import duty declaration at the place of
importation within 14 days of the arrival declaration made by the transporter. The penalty
of delay in declaration on daily basis is 0.05% of the dutiable value. The Customs should
assess the duty according to the tariff nomenclature and the dutiable value, then issue the
duty payment notice. The taxpayer should make the payment to the designated bank within
15 days of the assessment made by the Customs. The late charge on daily basis is 0.05% of
the duty payable.
ACCA-2004-China Taxation 64




For the exportation, the taxpayer makes the export duty declaration at the place of exportation 24
hours prior to loading by the transporter. It can be 3 days or one week or so depending on the
arrangement of the transporter. The Customs should assess the duty accordingly and issue the duty
payment notice, the taxpayer should make the payment to the designated bank within 15 days of the
assessment by the custom. The late charge of delay in payment of custom duty is same as the above
but there is no penalty of delay in declaration of export.
iA   company imported some goods, transaction price in CIF was RMB 7 million, including RMB
450,000 installation of parts after the importation which is ascertained by Customs, the import tax
rate is 10%, Customs issued the demand note on 10 Jan 2004 but the company pay the tax on 25 Jan.
Calculate the duty payable and the late interest surcharge.
Firstly, the dutiable value of the imported good = CIF transaction price installation of parts after the
                                                                         -



importation 7,000,000 450,000 = RMB
                        -



6,550,000.
The duty payable 6,550,000 x 10% RMB 655,000
Custom duty should be paid within 15 days after the issue of demand note, the company should

                                                                                                      66
make the payment on or before 24 Jan, it overdue one day, the late charge is RMB 655,000 x 0.5%
=   RMB327.5
If due to force majeure or change in government taxes policy, the taxpayer cannot pay the duty on
time, the taxpayer may apply for the extension. The approved extension cannot be longer than 6
months.
11. INTEREST ON UNDERPAYMENT/OVERPAYMENT OF DUTY
If there is underpayment of duty because of the fault of the taxpayer, the customs can pursue the
underpayment with the interest on overdue (daily 0.05%) within 3 years
from the payment of duty or the clearance of goods. For other reasons of
underpayment, the time is within 1 year from the payment of duty or the clearance of goods.
If the taxpayer overpays the amount of duty that he should pay, the taxpayer can
claim the duty overpayment with the repayment supplement calculated at the bank interest rate
prevailing at the period within 1 year from the payment of the duty.
12. APPEAL PROCEDURE
Taxpayer who disagree with the decision of the Customs on the collection, reduction, recovery or
refund of the duty shall pay such duty as ascertained by the Custom first and then, within 30 days
from the date of issuance of the duty payment notice, submit an application in writing to Customs
for a reconsideration of the case. Application submitted beyond the time limit shall not be
considered.
The Customs shall make its decision within 15 days from the receipt of the appeal. If the taxpayer
refuse to accept the decision, he may appeal to the Customs General
ACCA-2004----China Taxation 65

Administration for reassessment within 15 days from the date of the receipt of the notice of decision.
The Custom General Administration shall make its decision within 30 days after the receipt of the
appeal and if the taxpayers still refuse to accept the decision, he may appeal to the People's Court
within 15 days from the receipt of the notice of decision.
An overseas trading company imported some goods in 2002, the CIF is USD
140,000 dollars, Customs prescribed exchange rate 8.21, custom tax rate 28%. If the
company sold them at RMB 1.5 million (not included the value added tax), calculate
all tax payment and payment method.
Importation:
1. Customs duty payable 140,000 x 8.21 x 28% = RMB32 1,832
Import duty is collected by the custom, taxpayer should pay the tax within 15 days after issue of
demand notice.
2. Value Added Tax= (140,000*8.21+321,832) x 17%
=1,471,232 x 17%
=   250,109.44


                                                                                                       67
Value Added Tax are collected by the Customs, tax should be paid within 7 days after the issue of
the demand notice.
Domestic sales: VAT payable = 1,500,000 x 17% = 255,000
Value added tax payable= 255,000 250, 109.44 = RMB4,890.56      -.



The VAT is collected by the State Tax Bureau and normally the filing date is before
10th next       month.
@(Question 7, June 2000)
With the approval of the Customs, Company J temporarily imported 5 machines, without paying the
tariff, for the purpose of producing some specially ordered goods. The machines arrived in
Shanghai on 3 May 1998. The CIF price for the machines is RMB9,000,000. Company J imported
500 tons of materials with an FOB price of RMB4O,000/ton, among which I ,000/ton is the
commission paid to the agent. The shipping, unloading and insurance cost is 2,000/ton. Company J
reported the importation on 12 May, 1998, the tariff rate was 110%. Because Company J had
difficulty paying the tariff, it was permitted to pay the tariff on 1 June, 1998. The company paid the
tariff on 15 June, 1998. After finishing the production, the machines were re-exported on 14 July,
1999. The tariff rate for the machines is 10%.
You are required to
(1) explain the treatment of the temporary importation and calculate the tariff, if any,
to be paid on the machines;
(2) calculate the tariff for the importation of the materials;
(3) calculate the fine incurred for the late tariff payment.
ACCA-2004--China Taxation 66

Stamp tax (ST)
All units and individuals who execute or receive documents in the specified categories (see below)
within China shall be the taxpayer subject to Stamp tax. ¡®Execute and receive¡¯ refers to the
enforcement in China or receive the protection of Chinese Law. ¡®Units and individuals¡¯ refers to
the various forms of domestic enterprises, public institute, foreign invested enterprise and other
economic organization and their representative offices in China and individuals.
1. CALCULATION OF TAX LIABILITIES


5. property Leasing of buildings, ocean 0.1% of Parties to
leasing vessels, motor vehicles rental the
contracts aircraft, machinery, amount contract
appliances and other such
_________   equipment   ___________ ________ ________________



6. commodity Civil aviation; railways; 0.05% of Parties to Where the
shipping sea-transport; inland water- transport the documents are used
contract ways; overland and through fees, not contract as contracts, tax

                                                                                                     68
transport including stamps shall be
downloading affixed to the
fee documents.
ACCA-2004-China Taxation 67



Tax
                                                                                            Additional
category -                        Scope                       Taxable amount   Taxpayer
                                                                                            comment
1. purchase and sale contracts


Supplier contracts; advanced
sales;
institutional purchase and
                                  0.03% of the value of the   Parties to the
cooperative manufacturing;
                                  purchase or sale            contract
assembly; compensation
trade; barter and similar
contracts

                                  Processing; special
                                  orders; repair and
                                                              0.05% of         Parties to
                                  renovation; overhaul;
2. processing contracts                                       processing fee   the
                                  printing; advertising;
                                                              and materials    contract
                                  surveying and similar
                                  contracts

3. survey and design
contracts for engineering and
                                                              0.05% of         Parties to
construction projects   -         Survey and design
                                                              contract         the
4.                                contracts
                                                              amount           contract
construction installation and
engineering contracts


Construction, installation                                    Parties to the
                                  0.03% of contract amount
and engineering contracts                                     contract




8. loan
contracts
9. property insurance contracts


                                                                                                      69
10.
technology contracts
11. property transfer documents

Banks, including other financial organizations and lending agents (except interbrain loan
agreements) Property insurance; guarantor, surety and credit insurance contracts
Technology development and transfer; consulting service and similar contracts (not
including legal and accounting consulting contracts Property ownership transfers;
copyrights; trademarks; patents; licensing and similar transfer documents

0.1% of warehousing and storage fee 0.005% of loan amount
0.1% of amount of insurance premium 0.03% of contract amount

Parties executing the documents

The Company A signed a processing contract with the contractor, company B. The Company A
provided value RMB 700,000 of raw materials, Company B supplied RMB 100,000 of supplement
materials and made an charge ofRMB 150,000,
The stamp duty of processing contract: based on 0.05% of processing fee and supplement materials:
(RMBIOO,000 + RMB15O,000) x 5% RMB 125.

7.
warehousing contracts

Warehousing and storage

Parties to the contract

Parties to the contract

Parties to the contract

Parties to the contract

0.05% of contract amount

F.
ACCA-2004---China Taxation

68


                                                                                               70
                                                          0.05% of paid
12. business                                              in/additional capital and     Business
                  Account books for production
accounting                                                capital reserve; 5 yuan for   accounting
                  and business operations
documents                                                 other accounting or           entities
                                                          bookkeeping documents

                  Building property
13. certificate   certificate; industrial, commercial
                                                                                        Party
and licenses      and business licenses; trademarks
                                                                                        receiving
14. document      and patent certificates; land use       5 yuan per piece
                                                                                        permit or
of equity         permits Stock equity transfer in
                           -

                                                                                        license
transfer          respect of purchase, sales;
                  inheritance, gift, split

0.2% of the
transaction       Parties to the transaction
price




(a Company A signed a 1 year loan contract with a bank, RMB 2 million with annual interest rate
7%. The duty payable =RMB2,000,000 x O.5%oo RMB 100.
2. THERE ARE CERTAIN RULES FOR THE CALCULATION AS
FOLLOWS:
2.1 If there are two or more economic events with different rates in a single document and the
amount of each event are recorded separately, each event should bear stamp duty at the respective
rate applicable to that event. If the amount is not separately recorded, Stamp duty is made on the
entire amount of both events at the highest applicable rate.
a Company A signed a transportation contract with the railway that stated clearly the transportation
fee and insurance fee totally RMB22O,000
The transportation and insurance fee are not recorded separately in the railway transportation
contract, so use the higher rate, i.e. 0.1% of the total amount of the contract for the stamp duty:
220,000 x l% = RMB22O.
2.2 If there are several parties to a single document, each part is responsible to the full amount of
stamp duty with respect to such document.


                                                                                                        71
a Party A (a developer), Party B (construction company) and Party C (construction design company)
signed a contract, Party B is responsible for the construction, Party C is responsible for construction
design. Total amount of the construction is RMB4O,000,000, design fee RMB5 million, calculate
the stamp tax for Party A, Party B and Party C respectively.
All parties in the contract should pay the stamp duty.
(1) Stamp duty for Party A: both the 40,000,000 construction and 5 millions reconnoiter design. =
40,000,000 x 0.3% + 5,000,000 x 0.5% = RMB 14,500.
(2) Stamp duty for Party B : only 40,000,000 construction contract 40,000,000 x 0.3% RMB 12,000
(3) Stamp duty for Party C : only RMB5 million design contract 5,000,000 x RMB2,500
2.3 If the transaction amount in the transfer document cannot be ascertained initially, e.g. the
amount can be dependent on the sales volume, RMB5 should be attached to the document and the
additional stamp duty should be settled at the end of the contact.
@ A company signed a technology transfer contract with company C, the price is the 30% of profit
of company C from year 2001 2005.
                                -



The amount is dependent on the sales volume, RMB 5 should be attached to the document
temporary.
2.4 If the transaction contract does not assign the value, the tax is assessed according to the market
value.
ACCA-2004-China Taxation 69

A

2.5 The Stamp duty arises when concluding the contract and the tax liability should be based on the
contract amount. Even the contract may not be carried out or the actual amount is different from the
contract amount, there is no amendment to Stamp duty if there is no amendment to the contract
amount is made.
2.6 For barter transaction, it involves both sales and purchase in the single document, therefore the
Stamp tax should be based on the total of the sales
and purchase amount.
(u Company A signed a barter contract with company B, value of goods from company A is RMB3
million, value of goods from company B is RMB4 million.
Barter transaction should be treated as both sales and purchase, stamp duty is
based on 0.03% of total amount: (3,000,000 + 4,000,000) x 0.03% =
RMB2, 100
2.7 For subcontracting, no deduction for the subcontracting in the main contract can be allowed.
3. THERE ARE CERTAIN IMPORTANT EXEMPTIONS AS FOLLOWS:
If a copy of the original document is made only for the reference purpose, no Stamp duty arises on
the copy. However if the copy is used as an original, it
is subject to the Stamp duty.

                                                                                                     72
Where the property owner donates as a gift to the government, school, social welfare unit, etc.,
Loans contracts with preferential treatment by the Ministry of Finance
Other document approved by the government.
Contract to foreign government or international financial organization which provide favorable
loans to the PRC government
Agricultural insurance contracts.
Special transportation contract, such as military, disaster recovery, new railway construction's
materials, etc.
(i A   company signed a contract with a transportation agent, stating
transportation fee RMB6O,000(including loading fee RMB3,000)
Transportation contract, based on the transportation fee minus amount of
loading fee for stamp duty: (60,000 3,000) x 5%oo = RMB28.5.
                                       -



@ Company A has 400 copies of transportation settlement documents from a transportation
company. Total amount of the transportation fee is RMB 15,000,000 and it signed a transportation
insurance contract with an insurance company with insured amount RMB4O,000,000 and pay the
insurance fee RMB300,000. It signed tax agent agreement with a CPA firm and the fee RMB3,000;
calculate the stamp duty for Company A.
ACCA-2004-China Taxation 70




(1) Transportation settlement documents are treated as same as a contract and stamp duty
15,000,000 x 0.3% RMB4,500.
(2) Stamp duty based on the amount of the insurance contract = 300,000 0.1% RMB300.
(3) There is no stamp tax required for tax agent agreement
Total stamp duty fee = 4,500 300 RMR4,800.
                               -



4. PAYMENT METHODS
According to the implementation rules of the Stamp duty law, there are three methods:
4,1 For amount equal or less than RMB500
The tax is paid by buying the required amount of stamp and attaching it to the document and
canceling them either by drawing several lines through the stamps or stamping the seals on it. The
stamp can be bought from the tax bureau or any authorized agent.
4.2 For amount over RMB500
The taxpayer should directly apply to the tax bureau for a payment slip or settlement certificate and
attach it to the document or the tax authority may affix to the document a symbol indicating
payment of stamp tax.
4.3 For frequent payment of a single type of document

                                                                                                     73
The taxpayer should directly apply to the tax bureau to make the payment periodically. The tax
authority shall determine the time period for such payment. The period shall not be more than one
month. A collective payment stamp and serial numbers stipulated by the tax authority shall be
affixed to documents on which the stamp duty is paid collectively and shall be stored for reference.
5. PENALTIES
The tax authority shall impose penalties in the following cases:
for failure of attachment or insufficient duty stamps, other than to make up the shortfall, the
taxpayer can be fined with between 3 to 5 times of the shortfall.
for failure to cancel the stamps affixed to a taxable document, the taxpayer can be fined with
between 1 to 3 times of the stamps not cancelled.
for reused the affixed stamps, the taxpayer can be fined with 5 times of the reused amount or a fine
between RMB2000 and RMB 10,000.
for forgery of stamp, a criminal investigation may be undertaken.
for failure to compliance of handling and retention requirement for collective payment, below
RMB5,000 may be fined and for serious case, a collective payment license should be cancelled.
for failure to store the supporting document for a period of at least 1 year after the completion of the




@
contract performance a fine up to RMB5,000 may be imposed.



H
                      ,



ACCA-2004-China Taxation 71



                  exam question
Information for an enterprise in year 2002 as follows:
(1) Actual investment increased RMB 1.5 million when compared to the year
2001;
(2) Signed a loan contract with a bank for one year, loan amount RMB4.5
million, annual interest rate 5%;
(3) Signed a barter transaction contract with Company A, value of the goods
from enterprise is RMB5.25 million, value of the goods from Company A is
RMB6.75 million;
(4) Signed a processing contract with Company B, Company B provides
RMB 1.2 million of raw materials, the enterprise provides RMB225,000 of
supplement materials and RMB300,000 of processing fee;
(5) Signed a technology transfer contract with Company C, income of the
transfer is based on 30% of profits of Company C from year 2000 to 2004;
(6) Signed a transportation contract with a transportation company, stated clearly
RMB 1 20,000of transportation fee (including RMB7,500 of loading fee);
(7) Signed a transportation contract with railway department, stated clearly
RMB300,000 of transportation fee and insurance fee.


                                                                                                      74
Required:
Calculate the stamp duty for the year of 2002.
(1) Stamp duty for increment in actual investment = 1,500,000 x
RMB75O
(2) Stamp duty for loan contract 4,500,000 x 0.05% RMB225
(3) Stamp duty for barter transaction = (5,250,000 + 6,750,000) x 3%oo RMB3,600
(4) Stamp duty for processing contract = (225,000 + 300,000) xO. 5%o RMB262.5
(5) Stamp duty for technology transfer contract, RMB5 is paid temporary
(6) Stamp duty for transportation contract = (120,000 7,500) x 5%oo RMB56.25
                                                              -



(7) Stamp duty for railway transportation contract = 300,000 x 1% = RMB300 The stamp
duty for the year of 2002 is RMB5 193.75



ACCA-2004----China Taxation




Land Appreciation Tax (LAT)
SCOPE OF CHARGE
All organizations and individuals receiving income from the transfer of stated owned land use rights;
buildings and their attached facilities shall be taxpayers of Land Appreciation Tax
2. ALLOWABLE DEDUCTION
1. The acquisitions of land use rights and its related cost, registration fee, etc.
2. Demolition, expropriate, relocation compensation, etc.
3. Pre-construction, i.e. designing, feasibility study, surveying, etc.
4. Self-construction cost, subcontracting construction cost, etc.
5. Infrastructure including water, electricity, gas, drainage, communication, lighting, sanitation and
road, etc.
6. Public facilities include public toilet, security post, school, etc.
7. Indirect cost including management salaries and wages, employees¡¯ welfare, depreciation,
repairing, water and electricity, etc.
8. Other real estate development expenses (ODE):
It refers to selling expenses, administration expenses and finance expense. Given the nature of real
estate development industry, it is very difficult for a developer to precisely allocate the selling and
administration expenses into each project. Therefore such kind of expenses is considered by the
following methods:
(a) If there is proper record and certificate from the lender, the allowable interest is subject to the


                                                                                                          75
amount not exceeding the interest charged by the commercial banks for the same type and same
loan period plus the other expenses that is deemed to be 5 % of the total amount of above 7 items.
ODE Interest + 5% * (item 1 to item 7)
However the local government may determine the exact number of percentage
in the above formula.
(b) if there is no proper record or certificate from the lender, the whole ODE is deemed to be 10%
of the total amount of above I to 7 items.
ODE 10% * (item i to item 7)
However the local government may determine the exact number of percentage
in the above formula.
9. If the taxpayer is a property developer, there is an additional allowable deduction of 20% of the
total amount of above 1 to7 items
10. Taxes including Business Tax, Urban Maintenance and Construction Taxes, Stamp Tax (only
for non-property developer) and Education Surcharge.
ACCA-2004-China Taxation 73




A beer factory transferred a land and earned transfer income RMB2O million, paid business tax
RMBI million, City maintenance tax and education surcharge RMB 100,000, stamp tax RMB
10,000. The beer factory paid 10 million Yuan for the acquired land use rights, land development
cost is 4 million Yuan, land development expense 2 million Yuan.
(1) calculate the value added according to the land appreciation tax:
Deductible items including fee for land use rights, land development cost, land development
expense, business tax, city maintenance tax and education surcharge, stamp tax. Therefore
Land value added 20,000,000 [10,000,000 + 4,000,000 + (10,000,000 + 4,000,000) x 10% +
                               -



1,000,000 + 100,000 + 10,000] = 3,490,000 Yuan
(2) assuming that it is not the beer factory to transfer but a property developer, re-calculate the land
value added according to the land appreciation tax:
Deductible items including fee for land use rights, land development cost, land development
expense, business tax, City maintenance tax and education surcharge, 20% of additional deduction
for property developer. Therefore
Land value added = 20,000,000 [10,000,000 + 4,000,000 * (10,000,000 + 4,000,000) x 10% +
                                   -



1,000,000 + 100,000 + (10,000,000 + 4,000,000) x 20%] = 700,000 Yuan
in the case of the transfer of the used building, the allowable deduction is the appraisal value
assessed by a real estate appraiser approved by the government after the discount with the
consideration of the age and the usage.

                                                                                                       76
@An old building, its construction cost was 3 million Yuan. Based on the appraisal value assessed
by a real estate appraiser, the cost of construction at the time of transfer is 18 million Yuan to build
a same new building. The old building has 40% residual new. Calculate the assessed value of the
building:
18,000,000 Yuan x 40% = 7,200,000 Yuan
3. CALCULATION OF LAND APPRECIATION TAX (EAT).
LAT Sum of (Appreciation in each grade * applicable rate)
There are 4 progressive rates as follows:
Where the appreciation is not more than or equal to 50% of the deductible items, the progressive
rate is 30%.
Where the appreciation is more than 50% but not exceeding or equal to 100% of the deductible
items, the progressive rate is 40%.
Where the appreciation is more than 100% but not exceeding or equal to 200% of the deductible
items, the progressive rate is 50%.
ACCA--2004---China Taxation 74

Where the appreciation is more than 200% of the deductible items, the progressive rate is 60%.
In practice, it can be calculated in an easier way as follows:
Where the appreciation is not more than or equal to 50% of the deductible items
LAT=LA* 30%
Where the appreciation is more than 50% but not exceeding or equal to 00% of the deductible
items
LAT = LA * 40% (Deductible item * 5 %)
                 -



Where the appreciation is more than 00% but not exceeding or equal to 200% of the deductible
items
LAT = LA * 50% (Deductible items * 15%)
                     -



Where the appreciation is more than 200% of the deductible items LAT = LA * 60% (Deductible
                                                                                       -



items * 35%)
(a Lucky property agency limited company earned transfer income 90 million Yuan, based on rules
for the calculation of deductible items is 30 millions Yuan. We can use normal and simple method
to calculate the land appreciation tax for the company.
() normal calculation method:
a. Value added: 90,000,000 Yuan 30,000,000 Yuan = 60,000,000 Yuan
                                   -



b. Calculate the ratio of value added and deductible items:
60,000,000 Yuan 30,000,000 Yuan x 100% = 200%
The ratio is 200%, so the progressive rates 30%, 40% and 50% of tax rate are applicable.
c. Calculate the land appreciation tax for each level respectively.
(i) for the portion of not exceeding 50% of deductible items, the tax rate is


                                                                                                       77
30%, the appreciation in this part is: 30,000,000 Yuan x 50% = 15,000,000
Yuan
Tax payable: 15,000,000 Yuan x 30% 4,500,000 Yuan
(ii) for the portion of appreciation exceeding 50% but not exceeding 100% of
deductible items, the tax rate is 40%, the appreciation in this part is: 30,000,000
Yuan x (100% 50%) = 15,000,000 Yuan
               -



Tax payable: 15,000,000 Yuan x 40% = 6,000,000 Yuan
(iii) for the portion of appreciation exceeding 00% but not exceeding 200% of
deductible items, the tax rate is 50%, the appreciation in this part is: 30,000,000
Yuan x (200% 00%) = 30,000,000 Yuan
               -



Tax payable: 30,000,000 Yuan x 50% 15,000,000 Yuan
ACCA-2004-China Taxation 75

(iv)Total land appreciation tax for Lucky company:
4,500,000 yuan + 6,000,000 yuan + 15,000,000 yuan 25,500,000 yuan.
Easier calculation method:
Since the appreciation ratio is 200%, 50% tax rate and 15% fast deduction factor are applicable.
Tax payable =60,000,000 yuan x 50% 30,000,000 yuan x 15% = 30,000,000 4,500,000 yuan
                                         -                                       -



25,500,000 yuan
Please note that the results of two calculation methods are the same.
4. TAX PREFERENTIAL TREATMENTS
If the taxpayers build ordinary grade residences for sale and the appreciation does not exceed 20%
of the deductible item, the appreciation is exempted. If the appreciation exceed 20%, the whole
amount is subject to LAT. Ordinary grade does not include villas or resort.
Expropriation by the government or due to the city planning, etc.
Due to the reason of job requirement or improvement of living condition, and after the approval
from the tax bureau, a person transferred his/her own units which having lived for at least 5 years,
LAT can be exempted and 50% of LAT exemption if living for at least 3 years.
Swap of residence flats between individuals is exempted.
For the property developer, the pre-sold agreement was signed before 1 January 1994, no matter
when to transfer the property, the transfer was exempted.
5. FILING PROCEDURE
The taxpayer should report the transfer to the tax bureau 7 days after signing the transfer contract
and pay the tax within the time requirement specified by the tax bureau. If the taxpayer makes
frequent transfer of property and hence it is difficult to report each time on each transfer, the
reporting can be made periodically after the tax bureau’s approval.
If the taxpayer pre-sell the property, an estimated amount of LAT should be prepaid and a final
settlement should be made after the completion of the project.


                                                                                                       78
It should be noted that any transfer of property cannot be registered in the Land and Building Office
if LAT is not paid.
(i (Question   3, December 2000)
A real estate developer built and sold an ordinary residence building. The sales income is RMB
18,000,000 yuan (the tax rate for city construction is 7% of business tax paid and the education fee
rate is 3% of business paid). The developer paid RMB 3,000,000 yuan for the right to use the land
and RMB 9,000,000 yuan for the cost of the building. Because the developer built other styles of
building such as villas, the interest paid for the loan from the bank could not be allocated separately.
According to relevant local regulations, the allowed extra development rate is 10%.
(a)You are required to explain whether or not the developer should pay land
appreciation tax, giving calculation to support your conclusion;
ACCA-2004----China Taxation 76

(b)If the developer built and sold commercial buildings and the sales income is RMB
22,500,000 yuan and all the other figures remain the same, how much land
appreciation tax should the developer pay?
@ (Question 5, December 1999)
5 On 30 November 1997, a real estate developer sold an office building and had an income
of 50,000,000 yuan. It paid relevant tax according to pertaining regulations (5% business
tax and 250,000 yuan of construction and other taxes). The developer paid 5,000,000 yuan
for the land use right and other fees to the State. The cost for the development of the office
building was 15,000,000 yuan. The interest paid for the development of the office building
was 1,2000,000 yuan, which was 100,000 yuan higher that the interest calculated according
to the loan interest rate of the Industrial and Commercial Bank for the same period of time.
The deduction rate in calculation permitted by the local government is 5%.
Required:
Calculated the land appreciation tax of the developer from the sale of the office
building.

Income tax on individuals as employees or individual enterpriser
(lIT)
1. BASIS OF ASSESSMENT
At! income that sourced inside or outside of PRC earned by a resident for PRC tax purpose
(i.e. a ¡°tax resident¡±) is subject to Individual Income Tax (¡°lIT¡±). In other words,
worldwide income earned by a PRC tax resident would be subject to lIT in PRC. For a
non-tax-resident, only income sourced inside PRC is subject to UT.
In determining if an individual is a PRC tax resident, two factors are considered:
domicile and period of residence. An individual is regarded as a PRC tax resident if he/she
either (A) is domiciled in the PRC or (B) has resided in the PRC for one year or more.

                                                                                                     79
1.1 Domicile
Individuals who are domiciled in the PRC are those habitually reside in PRC due to the
family tie, economic relationship, or registration of permanent residency. Foreign nationals
who stay in the PRC purely for the purpose of carrying out employment duties and do not
have an intention to settle in the PRC are generally regarded as nonPRC-domiciled for lIT
purposes.
A local Chinese national is normally considered to be China resident even though he/she
may not live in China in a year of assessment because of his/her overseas studying,
working, visiting relatives or traveling but is required to return to the China afterwards. In
general practice, the foreign nationals, the residents of Taiwan, the Special Administrative
Zone of Hong Kong and Macau has no domicile in China.
1.2 Period of residence
This is applicable to non-PRC-domiciled individuals. ¡°Residing for one year in the PRC¡±
means residing in the PRC for 365 days (i.e. a full year) in a calendar year. Absence out of
the PRC for a consecutive period of not more than 30 days or, absences over a number of
trips with an aggregate period of not more than 90 days within the same calendar year. are
treated as ¡°temporary absences¡± and are disregarded for this purpose.
A PRC tax-resident is subject to lIT on his/her worldwide income. As a concession, Article
6 of the Detailed Implementation Rules of lIT Law provides that an individual who is not
domiciled in the PRC but has lived in the PRC for a full year but not more than 5 years,
may be taxed only on income sourced in the PRC, plus any income sourced outside of the
PRC but only to the extent that such income is borne by a PRC entity/individual. Once a
non-PRC-domiciled individual has lived in the PRC continuously for more than 5 years
(calculating from 1994), he/she must pay lIT on his/her worldwide income (i.e. all income
derived from within and outside of the PRC) beginning in the 6th year.
For a non-PRC-domiciled individual (say, an expatriate employee) who only earns salary
income from his/her secondment to the PRC:
ACCA-2004-China Taxation 78

(i) If he/she stays in the PRC for a period or periods not more than, in the aggregate, 90 days in a
calendar year (or 183 days for those from treaty country), he/she is considered as a non-
tax-resident. His/her employment income will not be subject to ITT if all of the following
conditions are satisfied:
I. the income is paid by an employer who is not a PRC individual or entity.
2. the income is not borne by a permanent establishment of a foreign employer in China or a
Chinese individual/entity.
In other words, only the PRC sourced income borne by a PRC individual or establishment is subject
to lIT in this case. Please see exception in (v) for senior management.


                                                                                                       80
(ii) If he/she stays in the PRC for a period or periods more than, in the aggregate, 90 days in a
calendar year (or 183 days for those from treaty country) but less than a full calendar year, he/she is
considered as a non-tax-resident. Only employment income that sourced from PRC (regardless of
whether it's borne by a PRC or a non-PRC entity/individual) is subject to lIT. Please see exception
in (v) for senior management.
(iii) If he/she stays in the PRC for a full year but not more than 5 years, he/she is considered as a
PRC tax-resident. According to the article 6 of the Detailed implementation rules of lIT, upon the
approval by the tax bureau, ITT may only be levied on (a) PRC-sourced income and (b)
non-PRC-sourced income which is borne by a PRC individual or entity.
@For example, Mr. Chan lives in China for more than 1 year but less than 5 years, he received
income from PRC employer RMB 5,000 and Hong Kong employer HK$20,000 for Feb. 2004 (that
he worked 5 days in Hong Kong during the month). His lIT would be:
Since he is a resident of PRC for tax purpose. In respect of income received from both employers,
only the part paid by the foreign employer and attributable to his service outside the PRC can be
excluded by the following formula:
Income tax = The tax amount of total employment compensation received with respect to both in
and outside PRC x [1- (compensation borne by foreign entity outside PRC/ total compensation
received in a taxable month) x (number of days spent outside PRC/ number of days in the taxable
month)
Tax amount of before apportionment:
=   (5,000 + 20,000x 1.06-4,000) x 25% 1,375 4,175 Income tax = 4,175 x [1- (21,200/26,200) x 5/30J
                                        --



=   RMB3,612
(iv) If he/she stays in the PRC for more than 5 years, he/she is considered as a PRC tax-resident.
Commencing from the 6th year of residence in the PRC, all income regardless of whether such
income is sourced within or outside China will be subject to ITT, i.e. his/her worldwide income will
be subject to lIT starting from the 6th year of residence. 5 years refers to 5 consecutive full calendar
years.
ACCA-2004----China Taxation 79

According to the relevant rules, any absence from the PRC of more than thirty days in a single trip
or more than 90 days in a number of trips within a calendar year will not constitute a full year of
residence in the PRC. Therefore an expatriate can adopt one of the following tax planning methods
so as to break the 5-year rule in order to avoid the world-wide income tax exposure:
(a) To leave China for a consecutive 31 days or a total of 91 days in the 5th year; (b) To have an
employment outside of China and not to reside in China for a period
of more than 183 days (or 90 days for non-treaty country residents) during the 6th year; or
(c) To leave China for a consecutive 31 days or a total of 91 days during the year and each year
thereafter so that only the income sourced in China for those years will be taxable.


                                                                                                        81
(v) Exception to the above rules for foreign senior management personnel
If the above expatriate assumes a senior management position (including general manager, deputy
general manager, chief executive of departments such as chief financial officer, and other senior
level management positions) of a PRC entity, his/her non-PRC-sourced employment income, which
would otherwise be non- taxable under scenarios described in Sections (i) and (ii) above, will also
be taxable but only to the extent that such non-PRC-sourced employment income is borne by a PRC
entity/individual. (For more see 5.6)
PRC-sourced employment income relates to income earned by an individual while working in the
PRC, regardless of whether such income is borne by a PRC or a nonPRC entity/individual. On the
other hand, non-PRC-sourced employment income relates to income earned by an individual while
working outside of the PRC, regardless of whether such income is borne by a PRC or a non-PRC
entity/individual.
The above for foreign non-senior management can be summarized as follows:

(1) It refers to the formula (iii) above
ACCA-2004--China Taxation 80



PRC stay period in Residency PRC sourced income                  Non-PRC sourced income

Borne in                Borne           Borne in Borne

days/year(s)                            PRC       outside PRC PRC                outside PRC

Within 90               Non PRC         Taxable   Non-taxable Non-taxable Non-taxable

(or 183 )     -

                        resident
90 (or 183)

Non PRC                 Taxable         Taxable   Non-taxable Non-taxable

<+<l year_ 1 year < +   resident

PRC                     Taxable         Taxable   Taxable        (1)

<5 years More than
          -             resident

PRC                     Taxable         Taxable   Taxable        Taxable

5 years                 resident




                                                                                                      82
I
2. TAXABLE INCOME
The scope of the taxable income is as follows:
Income from wages and salaries;
Income from production or business operation derived by private industrial and commercial
enterprise;
income from sub-contracting or leasing operation of enterprises or institutions
income from remuneration for personal services;
Income from authorship;
income from royalties;
income from interest and dividends;
income from lease of property;
Income from transfer of property;
Contingent income from wining awards, prizes and lotteries and other income with an occasional
nature.
According to the article 5 of the regulations for the implementation of the Individual
Income Tax Law, the following income, whether the place of payment is inside the
PRC or not, shall be income derived from the PRC:
income from personal services provided inside the PRC because of the tenure of an office,
employment, the performance of a contract, etc;
Income from the lease of property to a lessee for use inside the PRC;
Income from the assignment of property such as buildings, land use rights, etc located in the PRC
or the assignment of any other property inside the PRC;
Income from the licensing of any kind of licensing right for use inside the PRC;
Income from interest, dividends and extra dividends derived from companies, enterprises and other
economic organizations or individuals inside the PRC,
3. EXEMPTIONS. RELIEF¡¯S AND ALLOWANCES
3.1 Exemptions
awards for achievements in science, education, technology, culture, public health, culture and
environmental protection granted by the provincial people's governments, departments under the
State Council, the People's Liberation Army units at army level and above and by foreign or
international organizations;
Interest income on national debt obligations and other financial debentures issued h\ state:
Subsidies and allowances received under the state provisions;
\\elfare benefits, survivors pensions and relief payments;
Insurance indemnities;
Military severance pay and demobilization pay received by members of the armed forces:


                                                                                                    83
Settlement pay, severance pay, retirement pay and retirement living allowances received by public
ser\ ants and workers under state provisions:
Income derived h\ the diplomatic agents and consular officers and other personnel who are exempt
form tax under the provision of the relevant Laws of
AC(¡¯-2OO4 china [taxation
               -(




r

China;
Income from tax exempt as stipulated in the international conventions to which the Chinese
Government is a party and in agreements it has entered into; and
Income exempt from tax with the approval of the finance department of the State Council.
The following are temporary exempted subject to the tax bureau’s approval:
The rewards was obtained because of reporting crime;
Fee or reimbursement for housing, meal allowance, local transportation, relocation allowance and
laundry obtained by foreign national;
Reimbursement for paid home leave, language training, child education fee obtained by foreign
national;
Gain from the transfer of the only house that be used for more than 5 years;
Dividends, shares of profits obtained by foreign national from FIEs;
Wages and salaries obtained by some foreign experts specified by the government
3.2 Relief
The following could be relieved subject to approval:
Income derived by disabled persons, unsupported aged persons or member of martyr's family;
Major losses caused by disasters
Other cases in which relief is approved by the Ministry of Finance
3.3 Allowance for employment income
A standard deduction of RMB800 per month is allowed according to the lIT Law but in some
locations, the allowance may be more than the statutory in the practice e.g. Guangzhou city RMB
1,600 from Jan 1st 2004;
For foreign national, the monthly deduction is RMB4, 000.
3.4 Donation
Donation to the approved educational and other social welfare institution; or area in China which
suffered from natural disaster. The maximum deduction for qualified donation is 30% of the taxable
income.
4. DIFFERENT SCHEDULES
4.1 For wage and salaries, a progressive tax rate in 9 grades is used:
All income from employment including many fringe benefits are taxable such as basic salary, cash
allowance, hardship allowance, housing allowance (other than the actual reimbursement from

                                                                                                    84
employer), option incentive scheme, payment to overseas social insurance and tax equalization
scheme.
ACCA-2004-China Taxation 82




_____ ___________
Grade Taxable income which employee Tax rate Fast deduction factor
    ___ ____       (RMB)
____    Under 500          _____ ____   0
501 2000 10 25 -



______    200 1 5000 15 125
                     -



-   5001 -20,000 20 375
    4    _____



20,001 40,000 25 1,375
____    40,001 -60,00() 30 3,375
7       ____   60,001 80,000 35 6,375
8 80,001 100,000 40 10,375
___   OerlOO.OOOJ4S 15,375
ITT == (Monthly income 800 or 4000) x applicable rate fast deduction factor
                                            -            -



The fast deduction factor is the difference between cumulative deduction and progressive deduction
within each tax grade.
e.g. for a monthly income RMB6, 000
it falls within grade 4 and the corresponding tax rate is 20%. If the whole amount is taxed at 20%, it
is excessive and so the fast deduction factor is calculated as follows:
The first 500 overpay (20%-5%) = 75
The second 1500 overpay (20%-10%) 150
The third 3000 overpay (20%-15%) 150
Fast deduction factor 375
However, if the tax is borne by the employer, a different table is used as follows to determine the
applicable tax rate. The below table is only different from the above one that the range of each
grade is different.:

Then the taxable income needs to be grossed up by the following formula:
Taxable = (Monthly income-800 or 4000-fast deduction factor)
income
(1-tax rate) 83



                                                                                                      85
      Taxable income which employer bears Tax rate Fast deduction factor
Grade
      the tax (RMB)           -           (%)      (RMB)    -

1
      Vnder47S                            5        0

2         476-1,825                                    10          25

          -

3                                                      15          125
          1,826-4,375

4         4,376-16,375    -

                                                       20          375
5         16,376-31,375

25        1,375

          -

6                                                      30          3,375
          31,376-45,375

7         45,376-58,375                                35          6,375

8         58,376-70,375                                40          10,375

9         Over 70,375                                  45          15,375




a Mr. Smith from USA is working in the PRC. He received RMB 18,000 as his total income for the
month of August.
(1) The tax is borne by the employee:
Fax payable=( I 8,000-4000)*20%_375=2,425 yuan
(2) The tax is borne by the employer:
First step: 1 8,000-4,000=14.000 and from the second table, the fast deduction
factor is 375 and the tax rate is 20¡ã o and so
Thxahte income( 14.000-35) (1-20¡ã 1 031.25
Tax payable I 7.03 1 .25*20¡ã -35=3.03 I .25 (using the first table)
From the calculation, e can see that the company paid tax 3,031.25 yuan for Mr. Smith and the
gross-up income is 1 O0--3M I .25 21.03 1.25.
We can check its correctness in the ay that as if Mr. Smith had such amount of income (2 1 .03
I .25) but bearing the tax by himself, the tax amount is:
Tax payable=(2 I ,03 1 .25-4,000)*20%-375=3,03 I .25 (using the first table) Monthly income Vs
Taxable income:

                                                                                                 86
The taxable income is the monthly income after the monthly allowance (4, 000 for foreigner and
800 for local). Sometimes, in the examination, a monthly income tax table is given as below and the
table is for the monthly income, not the taxable income. That means when using the table, there is
no need for the allowance deduction from the monthly income. Using the above example. we find
tax payable for Mr. Smith:
Fast-
Monthly income Monthly income calculating
(including tax gross- (tax borne by Rate deduction
up (if any) RMB company) RMB
0- 4,000 0 4,000 0    -



2 4,001 4,500 4,001 4,475 5 200
          -               -



3 4,501- 6.000 4,476 5,825 10 425
                              -



4 6,001- 9,000 5.826- 8,375 15 725
5 9,001- 24,000 8,376- 20,375 20 1,175
6 24.OOt- 44.000 20.376- 35,375 25 2,375
7 44,00t 64,000 35,376 49,375 30 4,575
              -                   -



8 64,001 84,000 49,376 62,375 35 7,775
                  -                   -



9 84,001- 104,000 62,376- 74,375 40 11,975
10 Over 104,000 Over 74.375 45 17,175
The following shows the lax position if (a) the tax is borne by the employee and (b) the tax is borne
by the employer.
ACCA-2004-China Taxation 84

(a) The tax is borne by the employee:
Using the first column, we do not need to consider the monthly allowance. Tax
payab1e=18,000*20%1,175=2,425 (Same as 1 above)
(b) The tax is borne by the employer:
Using the second column, we do not need to consider the monthly allowance. Gross up income:
(18,000-1,175)/1-20% = 21,031.25
Using the first column:
Tax payable= 21,031.25 * 20% -1,175 3,031.25 (Same as 2 above)
4.2 Entrepreneurs who receive production or operation income derived from private
industrial or commercial enterprises;
The enterprises can take two forms: Individual and Partnership. The general rule for determination
of income is the amount of turnover after the deduction of allowable expense. However in the case
that the taxpayer does not keep a proper book of accounts, the tax bureau may determine a deemed
income.
For partnership, the income of individual partner is determined according to the partnership


                                                                                                     87
agreement and the tax liability is determined accordingly. If there is no agreement, the income
should be shared equally among the partners.
For the tax rate, please refers to below:
Level Annual taxable income Tax rate (%) Fast deduction factor
Under 5,000 yuan 5 0

4.3 Income from contracted or leased operation of enterprises or institutes
The annual taxable income for the lessee is the remaining earning after the monthly deduction
RMB800 and the contracted rental. However if the lessee obtain a predetermined amount according
to the agreement no matter the result of the operation, it in fact is an employment contract and
hence it is taxed as wages and salaries.
(a Yu signed a contract with a unit to subcontract its motel, in the contract, Yu is responsible to pay
for the deposit 150,000 yuan, and pay 28,000 yuan contracted profit to the unit each year, the
remaining amount is for Yu. Yu earned turnover 45,000 yuan in the year.
45,000 -28,000 (12 x 800)
                  -          7,400 yuan
                                     =


Tax payable 7,400 x 10% 250 490 yuan
                             -




2        5,000-10,000yuan 10                  250

3        10,000-30,000yuan               20   1250

4        30,000z 50,000 yuan             30   4250

5        Over 50,000yuan                 35   6750




4.4 Income from independent personal services:

(i) for each time with amount not exceeding RMB4,000:
ITT = (each time 800) x 20%
                      -



@A professor from university A was invited to giving a speech at university B for the topic of
¡°green house effect¡±, he received 3,600 yuan for the speech. lIT = (3,600 800) x 20% 560 yuan
                                                                             -



(ii) for each time with amount over RMB4,000:
lIT each time x (1-20%) x 20%
i Yu   is a painter, she received 18,000 yuan for one of her painting.


                                                                                                     88
ITT = 18,000 x (1-20%) x 20% 2,880 yuan
(iii) for each time with amount over RMB2O,000:
lIT = each time x (1-20%) x tax rate fast deduction factor
                                     -



@ A singer received 45,000 yuan for a performance.
ITT = 45,000 x (1-20%) x 30% 2000 = 8,800 yuan
                                 -



The tax rates for the each time with amount over RMB 20,000 are shown below

4.5 Income from authorship
(i) for each time with amount not exceeding RMB4,000:
ITT = (each time 800) x 20% x (1-30%)
                      -



(U An   author's fiction is published in a magazine, he gets 3,800 yuan in return lIT (3,800- 800) x
20% x (1-30%) 420 yuan
(ii) for each time with amount over RMB4,000:
ITT = (each time) x (1-20%) x 20% x (1-30%)
a An author publish one of his opus and get 10,000 yuan
lIT 10,000 x (1-20%) x 20% x (1-30%) 1,120 yuan
4.6 Royalty
Normally no expenses deduction is allowed.
(i) for each time with amount not exceeding RMB4,000:
ITT (each time 800) x 20%
                  -



a Provide patent to a user and received 3,200 yuan in return.
lIT = (3,200 800) x 20% = 480 yuan
              -



ACCA-2004----China Taxation 86

I
Level Each time taxable income               Tax rate (%) Fast deduction factor

1         Not more than 20,000 yuan 20                        0

2         Over 20,000 50,000 yuan
                          -                  30               2000

3         Over 50,000 yuan                   40               7000




                                                                                                       89
(ii) for each time with amount over RM134,000:
lIT (each time) >< (1-20%) x 200/o
a An author sold his new opus in an auction and earned 39,000 yuan. lIT = 39,000 x (1-20%) x 20%
6,240 yuan
4.7 Interest/profits sharing
Normally no expenses deduction is allowed.
UT = (each time) x 20%
4.8 Income from leasing of property
(i) for each time with amount not exceeding RMB 4,000
lIT (each time 800) x 20%
               -



(ii) for each time x itch amount over RMB4.00()
lIT (each time) 1-20¡ãc) x 20¡ãc
[Or leasing of building, the taxpayer can also claim deduction. other th1! hnv, i.e. the taxes (e.g.
business tax and education surcharge): ih axial repair i; maintenance expenses.
Mr. lIro n rent out part of his property in Guangzhou and received income of rental fee 3,000 yuan
in April and paid business tax for the month I i yuan, real estate tax of the month is 360 yuan (based
on 12% of the annual income of rental fee), n addition, brought forward 600 yuan remaining
amount of repairing from last year, the calculation for the taxable income of rental fee for the month
is:
Calculation of income of rental fee (after tax) =3,000-. 1 50-360-600--1 ,9() yuan Taxable
income=1 ,890-$001 ,090 yuan
4.9 Income from transfer of property
lIT (Proceeds-original cost of property-reasonable expenses) 20¡ãc
4.10 Occasional gain and other gains
Normally no expenses deduction is allowed.
lIT = (each time) x 20%
5. OTHER SPECIAL Considerations
5.1 Tax Credits
ACCA-2004-China Taxation 87

A person that subject to the worldwide tax may deduct any income taxes paid on such income in a
foreign country. The foreign tax credit is calculated separately for each country and for each
category of income. The credit limitation for each country is the aggregate of the amounts of tax
payable under different categories of income within the country.
The deduction is limited to the amount of tax that would have been actually paid on such
foreign-sourced income in China. Any unused credit can be carried forwarded for maximum 5 years
for deduction of the remaining tax payable after setoff against the tax credit derived from that
country in the current year.


                                                                                                       90
@A person has income from 2 countries (country A and country B) within the same taxable year. In
country A, he working in a company and earned salary 60,000 yuan (5,000 yuan each month),
provided patent for other user, received royalty of 30,000 yuan, the two source of income were
taxed 5,200 yuan in country A; Published a fiction in country B, earned authorship fee 15,000 yuan,
and paid 1,720 yuan for the tax in country B already. The tax credit calculation is as follow:
1. offset of individual tax in country A
(1) the taxpayer’s salary from country A minus monthly deduction fee(4,000 yuan), use the
remaining amount with the tax rate in 9 grades progressive tax rate table are used to calculate the
taxable amount.
Tax payable for each month:
(5,000 -4,000) x 10% (tax rate) -25 (fast deduction factor) = 75 yuan Tax payable of the year:
75 x 1 2(total number of months in a year) 900 (yuan)
(2) Royalty earned. The royalty earned from country A should itself minus 20%, use the remaining
amount with 20% tax rate to calculate the tax payable.
Tax payable: 30,000 x (1-20%) x 20% (tax rate) = 4,800 (yuan)
the taxpayer got the offset limit of the individual tax on country A is 5,700 yuan (900 + 4,800). The
taxpayer has paid lIT of 5,200 yuan of tax in country A already. Such amount is lower than the
offset limit, so it can fully offset, and the taxpayer needs to pay additional 500 yuan for the
difference in China.
2. offset of individual tax in country B
Based on the China tax rules, the authorship fee should itself minus 20%, using the remaining
amount with 20% tax rate and 30% discount to calculate tax payable:
[15,000 x (1-20%) x 20% (tax rate)] x (1-30%) = 1,680 (yuan)
that’s mean 1,680 yuan is the offset limit. The taxpayer paid tax 1,720 yuan in country B, it exceeds
40 yuan over offset limit, which cannot be deducted in current year, but the amount can be carried
forwarded for maximum 5 years for deduction against the remaining tax payable after setoff from
that country.
5.2 Lump sum amount of bonus
For those bonus for a period of several months and not included into monthly salary, e.g. annually
performance bonus, the bonus are taxed as wages and salaries during the ACCA-2094---China
Taxation 88




month in which the bonus are received but not added to the normal monthly salary. Since the
monthly allowance has been deducted already in the calculation of monthly taxable income, no
more monthly deduction or expenses can be allowed.

                                                                                                      91
5.3 Frequently travel individuals
For an individual who frequently travels into and works in China, he can be exempted from lIT if
the following three criteria can be met:
The employment income is paid by, or on behalf of, an employer who is not a resident of the PRC;
The employment income is not borne by a permanent establishment or a fixed base which the
employer has in the PRC; and
The individual stays in the PRC for a period or periods not exceeding, in the aggregate, 90 days (or
1 83 days if the individual is a tax resident of a tax jurisdiction which has entered into a Double Tax
Treaty with PRC) within a calendar year or any twelve-month period.
If he stays more than 90 days (183 days for treaty country) but less than 1 year, the time
apportionment with the reference to the number of days of stays in PRC will be used to calculate
the taxable amount.
a Mr. Christopher working in the PRC on a traveling basis. He received USD
5,000 as his total income for the 15 days in the PRC in September. Given
USD$1 to RMB 8.17 as the exchange rate (lIT is borne by the employee).
Monthly tax liability = (Monthly salary in RMB-RMB4,000) x Applicable tax rate -Applicable fast
deduction factor
RMB (5,000 x 8.17 -4,000) x 25% RMB 1,375
RMB 7,837.5
Tax for September = Monthly tax liability x Number of days the foreign
employee spent in the PRC in September ¡Â Number of days in September
=   RMB 7,837.5x 15/30
RMB 3,918.75
5.4 Representatives
Any foreigner acts as a representative of foreign companies¡¯ representative offices in PRC is
deemed to be an employee of PRC establishment and therefore even he spends less than 90 days
(183 days for treaty country), he is taxable under the Individual Income Tax, as the representative
office is normally taxed under the deemed income method by the tax bureau.
a representative of a foreign company has monthly salary USD 4,500. It is totally paid by foreign
employer, in year 2001, lie stayed 80 days in PRC, and in the October of 2001, he worked 7 days in
PRC, the exchange rate is USDS1 to RMB 8.25 on the last day of October. how much should the
representative pay for the tax if the representative office is taxed under the deemed income method.
ACCA-2004---China Taxation




                                                                                                      92
I
Although days of the representative stayed in PRC is under 90 days within a
taxable year, but the salary he earned is paid by the foreign employer and the representative office
is taxed under the deemed income method, hence it is deemed the representative office pays the
salary, not the foreign employer. It then calculates the tax depends on the days the representative
are working in PRC. (lIT is borne by the employee)
Taxable income = USD 4,500 x 8.25 -4,000 yuan = 33,125 yuan
Tax payable = (33,125 x 25% 1,375) x 7/31 1,559.47 yuan
                                 -



Therefore, the representative should pay 1,559.47 yuan for his individual tax.
5.5 Dual employments
If a foreigner is employed by both a PRC entity and a foreign entity to work sometimes in PRC and
sometimes outsides PRC, and if he spends less than I full year in PRC, income sourced outside the
PRC would not be taxable. His tax liability:
Tax Liability [(total income 4,000)x tax rate fast deduction factor] x days working in PRC /
                             -                 -



Number of days in a month
If a foreigner is employed by both a PRC entity and a foreign entity to work sometimes in PRC and
sometimes outsides PRC, and if he spends more than I full year but less than 5 years in PRC, only
the part paid by the foreign entity and attributable to his employment services rendered outside the
PRC can be exempted from lIT. The following formula shows how to deduct that part:
Income tax = lIT liability for total compensation received with respect to both in and outside the
PRC x [1 (compensation borne by foreign employers outside the PRC / total compensation
          -



received in a taxable month) x (number of days spent outside the PRC / number of days in the
taxable month)]
5.6 Foreign senior management
It refers to the posts of general manager, deputy general manager, chief executive of departments
such as chief financial officer, and other senior level management positions of a PRC entity. His/her
income can be divided into 2 categories:
Income borne by PRC entity
Regardless the number of days in China or whether the service is performed in China, the whole
amount is taxable.
Income borne by foreign entity
(i) If the residence period is not exceeding 90 days (183 days for treaty country), the amount is
exempted.
(ii) If the residence period exceeds 90 days (183 days for treaty country) but less than 1 year, the
PRC sourced income is taxed together with the income of non ACCA-2004-Chin Taxation 90




                                                                                                       93
PRC-sourced income but borne by the PRC entity.
(iii) If the residence period exceeds 1 year but less than 5 years, the income from services
outside China are exempt on a time apportionment basis as same as the second formula in
5.5
The above for foreign senior management can be summarized as follows:

(a) It refers to the second formula in 5.5
PRC-sourced employment income relates to income earned by an individual while working
in the PRC, regardless of whether such income is borne by a PRC or a nonPRC
entity/individual. On the other hand, non-PRC-sourced employment income
relates to income earned by an individual while working outside of the PRC, regardless of
whether such income is borne by a PRC or a non-PRC entity/individual.
5.7 Presence in the PRC
For an individual employed by the PRC entity, his presence in the PRC for tax purpose
includes the workdays, weekends, public holidays, vocation and training in the PRC and
overseas during his employment within China. If he is also employed by a foreign entity,
his days spent outside the PRC include workdays, weekends and public holidays during his
overseas job performance.
For an individual not employed by PRC entity but temporarily works in the PRC entity. His
presence in the PRC for tax purpose includes the workdays, weekends and public holidays
during his assignment within China.
The day of entrance into China is treated as one day of presence in China while the
departure day is not treated as one day of presence.
A single temporary department from China not exceeding 30 days, or several department
totally not exceeding a total of 90 days within a tax year, are not deducted from the total
presence days in China for the purpose of determining if an individual lives in China for a
full year.
ACCA-2004-China Taxation 91



PRC stay period in    PRC so           urced income Non-PRC s ourced income

Borne in              Borne outside Borne in           Borne outside

days/year(s)          PRC              PRC             PRC           PRC

Within 90 (or
183)   -              Taxable          Non-taxable     Taxable       Non-taxable
90 (or 183) <



                                                                                               94
Taxable                  Taxable      Taxable         Non-taxable

and<lyear 1 year < and
           -



<5 years
More than 5


Taxable                  Taxable      Taxable         (a)

Taxable                  Taxable      Taxable         Taxable

years




5.8 Director¡¯s fee Vs Salaries and wages
Normally the director¡¯s fee should be treated as the income from the independent personal
services as shown in section 4.4. However if the director is actually involved with the daily
operation and actively manage the operation, he should not only report the director¡¯s fee
but also report the wages and salaries for lIT purpose. in other words, the director is both
subject to director fee under section 4.4 and wages and salaries under 4.1. If no such
amount is reported, the tax bureau may deem an amount as wages and salaries by reference
to the similar position in the same industry and location.
6. MINIMIZING TAX LIABILITY
Since reimbursement of actual costs and some in-kind fringe benefits are non-taxable, the
remuneration package should be structured to have the maximum biggest part of in-kind
fringe benefits.
The appropriate timing of spending in the China needs to be carefully considered in the
factor of residence.
The deferred payment of tax, subject to the approval of the tax authorities, may be possible
in case of stock option benefits and purchased cars or housing may be spread evenly over a
maximum period of 6 months.
(a (Question 5, December 2000)
Mr. Ma is a senior engineer working with a research institute in China. His monthly salary
is RMB 3,600. In 1999, besides the salary, he had the following income: RMB 30,000 as
reward for his excellent work; RMB 90,000 royalty for licensing a technology to a
company; RMB 19,500 income for publication of a book; US $3,200 for giving lectures in
two American Universities; RMB 74,000 yuan for publishing a book in Japan, from which

                                                                                           95
7,400 tax has been paid to the Japanese tax authority.
You are required to calculate the income tax to be paid by Mr. Ma in 1999.
@ (Question 5, June 2000)
Mr. Wang, a Chinese citizen, is a professional artist with no employer. The following is his
income in 1999 from January to December:
(1) RMB 23,000 yuan and RMB 18,500 respectively form selling two paintings in March
and September;
(2) RMB 180,000 yuan from publishing a collection of his paintings in a foreign country,
from which US $2,500 tax had been withheld;
(3) RMB 12,000 yuan of bank interest from a foreign country, from which US $250 tax had
been withheld;
(4) RMB 5,000 yuan as award from the city party committee for contribution to spiritual
civilization; and
ACCA-2004-China Taxation 92




(5) RMB 2,400 yuan for giving 3 lectures to a senior citizens¡¯ school.
You are required to calculate the income tax payable by Mr. Wang for the year
1999 giving brief answers for your answer.
@Mock exam question
Mr. Huang is a PRC resident, and he is an employee of a foreign investment
enterprise and bears his tax on his own and he has following income in the year:
(1) Every month get 22,500 yuan from the enterprise (January to December)
(2) Every month get 3,750 yuan from the Chinese party of the enterprise (January to
December)
(3) Earned 12,000 yuan of authorship fee in May
(4) Earned 45,000 yuan of translation fee in June
(5) Earned 3,250 yuan of editorial fee in July
(6) Earned 9,353 yuan of national debenture interest in August
(7) In October received 37,500 yuan of 5 years deposit interest from bank since October,
1993
(8) On 1 December received 10,733 yuan of 1 year deposit interest from bank since I
December, 1998
For all the above income, any event that needs to pay the individual income tax is paid by
the source and tax payment certificate was attained. To make sure everything is done, Mr.
Huang goes to a CPA firm and asks the following enquiries:

                                                                                             96
(1) For the income of the eight events in year which needed to pay for the individual
income tax and which needn¡¯t?
(2) For the income which is subject to the individual income tax, how does the paying unit
should withhold the amount of individual income tax?
Required: Give answers to Mr. Huang¡¯s enquiries.
Enclosed: table of tax rate to wages and salaries
Table of tax rate to wages and salaries

ANSWER:
(1) For income of Mr. Huang from the eight events in the year, there are six events need to pay for
the individual income tax, including event( 1) to event(S) and event(8), but event(6) and event(7)
are tax free because interest earned before October 31, 1999 and from national debenture are not
subject to lIT.
AA   Taxation 93



                                               Tax rate
          Taxable income for the month                      Fast-calculating
Grade                                          (%)   -

          (RMB)                                             deduction (RMB)
                                               5

1         Under500                                          0

2         501-2000                             10           25

3         2001-5000                            15           125

4         5001 -20,000                         20           375

-

          20,001 -40,000                       25           1,375
5

6         40,001-60,000                        30           3,375

7         60,001 -80,000                       35           6,375

8         80,001 100,000
                   -                           40           10,375

9         Over 100,000                         45           15,375




                                                                                                     97
(2) The payer should withhold the following amount of individual income tax:
(1) individual income tax withhold by the foreign invested enterprise
[(22,500 800) x 25% 1,375] x 12 = 48,600 yuan
                      -



(ii) individual income tax withhold by the Chinese party = (3,750 x 15% 125) x
                                                                          -



12 = 5,250 yuan
(iii) individual income tax withhold for authorship fee = 12,000 x (1 20%) x
                                                                     -



20% x (1 30%) 1,344 yuan
           -



(iv) individual income tax withhold for translation fee (i.e. service income)=
45,000 x (1 20%) x 30% -2000= 8,800 yuan
(v) individual income tax withhold for editorial income (3,250 800) x 20%
                                                                -



490 yuan
(vi) individual income tax withhold for interest earned since November 1, 1999 10,733 ¡Â 12 x
20% = 178.88 yuan
Taxable income = [(22,500 + 3,750 800) x 25% 1,375] x 12 = 59,850 yuan Tax payable = 59,850
                                   -             -                                              -



48,600 5,250 6,000 yuan
       -



ACCA-2004----China Taxation 94

Overview of Tax System and Administration
1. STRUCTURE AND PROCEDURES OF NATIONAL AND LOCAL
TAXATION
The State Administration of Taxation (SAT) is a government department under the State
Council. It has two arms for processing tax returns and tax collection, the State tax bureau
and Local tax bureau. The State tax bureau at local levels is administrated directly by SAT
for the staffing and funding. It has different levels from the provincial to the level under
city. The local tax bureau is administrated mainly by the local government for staffing and
funding with the supplementary administration from SAT.
2. DUTIES AND POWERS OF THE DIFFERENT LEVELS OF THE TAX
BUREAUS
The State Administration of taxation (SAT) is to draft tax legislation and gives the final
interpretation. Its duties include enforcing the tax rules and setting the revenue budget for
each province.
The State tax bureau is responsible for the administration and collection of the following
taxes, mainly: Consumption tax, tax on maintenance of city construction, Income tax of
domestic enterprises, Value added tax and Income tax of Foreign invested Enterprises, etc.
The Local tax bureau is responsible for the administration and collection of the following
taxes, mainly: Business tax, Individual income tax, Land appreciation tax, Stamp tax,


                                                                                                    98
Contract tax, Slaughter tax, etc.
The National People¡¯s Congress


The State Council


The State The Ministry of The Custom General
Administration of I Provincial Finance
I Administration

Taxation (SAT) vernment (MOF)
F   ___ ___ ___ ___



Provincial Provincial City Local Provincial Guangdong
State Tax Local Tax Government Finance Branch
Bureau Bureau Bureau
In major cities, such as Beijing, Shanghai, Guangzhou, separate administrations for the state tax bureau and
local tax bureau are in existence at the municipal level. However not all the cities at the county level have
such separate administration.
ArrA?flft4Chjna Taxation        95

3. TAX DISPUTE AND APPEAL SYSTEM
In case of tax dispute, the taxpayer should pay the tax required by the tax authority within
the prescribed time and then can apply for a tax administrative review or tax administrative
litigation.
4. TAX ADMINISTRATIVE REVIEW
For the tax dispute on tax assessment or interest on tax overdue, the review must be taken
place before the litigation. For other cases, the taxpayer can have an option to have a
review first or straightly go for litigation. The tax payer must file an application orally or in
written form within 60 days of becoming aware of the decision of the tax administration.
The application will be normally reviewed by the next higher level tax authority. The
authority must make a decision within 60 days after the receipt of the application. If the
taxpayer is unsatisfied with the decision, the taxpayer may appeal a legal proceeding in the
court within 15 days after the receipt of the decision.
5. TAX ADMINISTRATIVE LITIGATION
For tax dispute other than the tax assessment and interest on tax overdue, the taxpayer can
appeal to the court within 15 days after the receipt of a tax demand notice or becoming
aware of such notice. If the taxpayer is not informed of such right in the notice, the time
limit is extended to 2 years after the time of knowing the right or the limit of the original
litigation time limit.
6. RETURNS AND DUE DATES
6.1 Income tax

                                                                                                                99
(a) Individual income tax
For individual income tax, the income earner for wages and salaries shall be the taxpayer
and the paying unit or individual shall be the withholding agent. The tax shall be paid to the
State Treasury within the first 7 days of the following month with the tax returns. In some
cases, local tax bureaus may have different tax filing and payment dates.
For individual income tax for individual industrial and commercial owner, the tax payable
shall be computed on annual basis and paid in advance in monthly installments. The tax
shall be paid to the State Treasury within the first 7 days of each month and the final
settlement shall be made within 3 months after the end of each tax year.
For taxpayer who derives income from outside of China, the tax payable shall be paid to
the State Treasury within thirty days after the end of each tax year with the tax return.
ACCA-2004----China Taxation 96




(b) Enterprise income tax
For domestic enterprise, a taxpayer shall file accounting statements and provisional income tax
returns and payment within 15 days from the end of each month or quarter, as applicable, with the
local tax authorities where it is located. The final accounting statements and income tax return shall
be made within 45 days after the end of each year and the final settlement shall be made within 4
months from the end of the tax year.
For Foreign Investment Enterprise (¡°FIE¡±), a taxpayer shall file accounting statements and
provisional income tax returns within 15 days from the end of each quarter with the local tax
authorities where it is located. The annual income tax return together with financial statements and
an audit report issued by the members of Chinese Institute of Certified Public Accountants shall be
filed within 4 months after the year end and the final settlement shall be made within 5 months
after the end of each year.
For FIE, a taxpayer who have two or more business establishments set up in China may select one
establishment for consolidated tax filing and payment. However, that establishment shall meet the
following requirements:
it shall assume the supervisory and management responsibility over the business of other
establishment;
it shall keep complete accounting records and vouchers that correctly reflect the income, Costs ,
expenses, profits and losses of other business establishment.
An application must be made to the provincial tax bureau if both establishments are in the same
jurisdiction of a tax bureau. For the two establishments locate in the different provinces, an
application shall be made to the SAT.

                                                                                                    100
For FIE paying dividends, interest, royalties, management fee, etc., withholding tax returns must be
filed with the local tax authority within 5 days of the payment.
(c) Value Added Tax (¡°VAT¡±)
The VAT assessable period shall be 1 day, 3 days, 5 days, 10 days, 15 days or 1 month. The length
of periods is decided by the tax authorities with the reference to the amount of the tax. Taxpayer
with large amount of VAT normally pays more frequently than other payer with smaller amount. If
it cannot be assessed in regular period, it may be assessed on a transaction-by-transaction basis.
Taxpayers that adopt one month, as an assessable period shall report and pay tax within ten days
following the end of the period. If an assessable period of 1 day, 3 days, 5 days, 10 days or 15 days
is adopted, the tax shall be prepaid within five days following the end of the period and a monthly
return shall be filed within ten days from the first day of the following month for the settlement.
(d) Business and consumption tax
It is same as the VAT.
ACCA-2004-China Taxation 97

7. TAX ASSESSMENT
7.1 Assessment on Individual Income Tax
The tax year is the calendar year for individual. Normally the employer is the withholding
agent and tax is deducted from the monthly salaries and wages and paid to the tax bureau
on behalf of the employees. The employer must file monthly returns and tax payment; the
tax authority shall issue a tax payment certificate.
7.2 Assessment on Enterprise Income Tax
The tax year is the calendar year for domestic, foreign investment enterprise and foreign
enterprises. Before the mid of 2002, the taxpayer of foreign enterprise can apply for a tax
period other than the calendar year.
The return is normally computed on a self-assessment basis unless the tax authority assess
a deemed income on the following cases:
If, according to the law, the taxpayer is not required to prepare a set of account book;
If, according to the law, the taxpayer is required to prepare a set of account book but fail to
do so;
If the taxpayer destroy or refuse to provide the account book;
Even the taxpayer has prepared a set of account book, the tax authority has difficulty in
checking the account because the account books are mingled or cost information, income
or expenses vouchers are incomplete;
If a taxpayer fails to make a tax declaration within the time limit or after being required by
the tax authority to do so within a set time limit but still fails to do so;
If the reported basis is rather low without reasonable explanation.
Under the Detailed rules for the law of implementation of tax collection, the tax authority


                                                                                                      101
can assess a deemed income by using one or more of the following methods:
by reference to the turnover and profit rate of other taxpayer in the same or similar industry
with a similar size of operation;
by reference to the cost plus reasonable expenses and profit rate;
by reference to the deduction of the consumption of raw materials, fuel and power;
by reference to other reasonable method.
According to the article 13 of income tax laws of FIE, where the payment, receipt of fees is
made between the associated enterprise not in the same manner between independent
enterprises and resulted in a reduction of taxable income, the tax authority shall have the
right to make reasonable adjustments with the following methods:
based on the price charged for the same and similar business activities between
independent enterprises;
based on the profits from the resale to an unassociated third party;
based on cost plus reasonable expenses and a profit margin;
ACCA-2004-China Taxation 98

based on any other reasonable method.
7.3 Interest on tax overdue
If a taxpayer or an agent fails to pay tax at the time required under the relevant tax laws,
the tax authority shall impose a surcharge of 0.05% of the overdue tax payment calculated
daily from the date of the first tax liability arose. However, the tax authority can grant free
tax payment extension due to the taxpayer’s difficulty but the extension cannot be longer
than 3 months.
If, due to the fault of the tax authority, a taxpayer underpays the tax he should pay, the tax
authority can pursue the underpayment within 3 years from the settlement but no interest
on tax overdue should be added.
If, due to the fault of the taxpayer or an agent, a taxpayer underpay the tax he should pay,
the tax authority can pursue the underpayment with the interest on overdue and for the
special case, the period can be extended to 5 years and for cases of tax evasion, deception,
etc., there is no time limit for the perusal.
7.4 Repayment supplement
If the taxpayer overpays the amount of tax that he should pay, the taxpayer can claim the
tax overpayment with the repayment supplement calculated at the interest rate prevailing at
the period within 3 years from the settlement of the tax.
8. WITHHOLDING TAXES
8.1 Income tax
A foreign enterprise that do not have a permanent establishment or place of business in
China but obtain a China-source income in form of profits, rental, royalties and other


                                                                                             102
income(see below for the details) is liable to a 20% withholding income tax on such
income. The person paying the income must withhold the tax from each payment and
within 5 days of so doing pay the tax and file a return to the tax bureau.
Profits refer to income derived according to the investment ratio.
Rentals refer to rental income obtained from leasing property located in China.
Royalties includes income obtained from the provision of patent rights, copyrights,
trademark, technical know-how
Other income includes the gain in the transfer of buildings, constructions, facilities and
land use right located in China.
There are several exemptions:
The share of the after-tax profits derived by a foreign investor from an FIE is exempt from
withholding tax;
Income from interest on loans made by international financial institute to the Chinese
government, the government banks and other approved institute;
ACCA-2004-China Taxation 99

Income from interest on loans made by foreign banks to the government banks and other
approved institute at preferential interest rate;
Income earned by foreign banks on deposits in the government banks at a rate lower that
prevailing in the international financial market;
Royalties received by a foreign enterprises from the provision of advanced technical
know-how.
8.2 Business taxes (BT) and Value Added Taxes (VAT)
Foreign companies that do not have a permanent establishment or place of business in
China or those that have a permanent establishment or place of business but perform
taxable service in the PRC that is not effectively connected with that permanent
establishment or place of business is liable to BT and VAT on such service income.
9. PENALTIES
The punishment can take the forms of penalty, confiscating illegal income and stopping
export tax refund. Only the county tax authority or above where the illegal action takes
place can issue the punishment to the taxpayer. The taxpayer should pay the penalty within
15 days of the receipt of the tax administrative notice. The penalty can be given in the
following cases:
9.1 Against basic tax administration rules:
A tax authority shall impose a period for correction and, if no correction is taken within the
period, may impose a fine up to RMB2,000 to RMB 10,000 on the following cases:
failure to make a tax registration, amendment or cancellation of tax registration within the
period;


                                                                                             103
failure to keep or maintain accounting records or keep supporting vouches and other
relevant information in accordance with the relevant provision;
failure to furnish reports of financial and accounting systems or measures for handling
finance and accounts to tax authority for filing purpose;
failure to report all bank accounts to the tax authority;
failure to install tax machinery.
9.2 Against tax withholding agent
Where a withholding agent fails to keep and maintain accounting books and relevant
information in respect of the tax withheld on behalf of others in accordance with the
regulation, the tax authority shall set a period for correction and if no action is taken, tax
authority may impose a fine of up to RMB2,000 or in serious case, a fine between
RmB2,000 and RMB5,000.
9.3 Against failure of filing returns
Where a tax payer or tax withholding agent fails to make a tax filing within a prescribed
time limit, the tax authority shall order to rectifj within a prescribed time
ACCA-2004-China Taxation 100




limit and a fine below RMB2,000. If the taxpayer or withholding agent still fails to do so,
the tax authority may impose a fine of over RMB2,000 but below RMB 10,000.
9.4 Against tax evasion
¡°Evasion of tax¡± is defined as a tax payer fails to pay or pay less the amount of tax
payable by means of forging, revising, concealing or destroying without authorization
accounting book or supporting vouches or by overstating expenses or understating income
by filing fraudulent tax returns.
The tax authority shall pursue the tax with the interest on overdue tax arising from the
non-payment or underpayment and impose a fine of over 50% but below 5 times of the
amount of tax evasion, In case of constituting a crime, criminal liability shall be pursued.
Similar punishment is applied to the tax withholding agent.
Criminal penalties may be imposed if the tax evasion comprises an amount of 10% or more
but below 30% of the amount of tax payable and, moreover, involves an amount of RMB
10,000 or more but below RMB 100,000 or, if the taxpayer evades tax again after having
been subject to the administrative punishment imposed by the tax authority twice, a term of
less than 3 years imprisonment and a fine of over 1 time but below 5 times of the amount of
tax evasion may be imposed.
Where the tax evasion involves an amount of more than 30% of the amount of tax payable

                                                                                                 104
and, moreover, involves an amount of more than RMB 100,000, a term of more than 3
years but less than 7 years imprisonment and a fine of 1 time but below 5 times of the
mount of tax evasion may be imposed. Similar punishment is applied to the tax withholding
agent where the amount of tax evasion is more than 10% of the amount of tax payable and
is more than RMB 10,000.
9.5 Against fraudulent filing or failure of filing
Where a taxpayer or tax withholding agent make a fraudulent filing, the tax authority shall
order to rectify within a prescribed time limit and a fine below RMB5O,000.
Where a taxpayer fails to make filing and hence not paying or less paying tax payable, the
tax authority shall pursue the tax with the interest on overdue tax owing due to the
non-payment or underpayment and impose a fine of over 50% but below 5 times of the
amount of tax evasion.
9.6 Against avoidance of tax recovery
Where a taxpayer transfer or conceal his property and result in failure of tax recovery, the
tax authority shall pursue the tax with the interest on overdue tax owing due to the
non-payment or underpayment and impose a fine of over 50% but below 5 times of the
amount of tax evasion. In case of constituting a crime, criminal liability shall be pursued.
Criminal penalties may be imposed if the avoidance of tax recovery involves an amount of
RMB 10,000 or more but below RMB 100,000, a term of less than 3 years imprisonment
andlor a fine of over 1 time but below 5 times of the amount of tax
ACCA-2004-China Taxation 101




avoidance may be imposed. Where the amount involved is over RMB 100,000, a term of
more than 3 years but less than 7 years imprisonment and a fine of over 1 time but below 5
times of the amount of tax avoidance may be imposed.
9.7 Against fraudulent tax refund on export
Where a tax payer fraudulently gain export tax refund by deceptive means such as
fraudulently declaring the export, the tax authority shall pursue the repayment of the tax
refund and impose a fine of over 1 time but below 5 times of the tax refund. In case of
constituting a crime, criminal liability shall be pursued.
Criminal penalties may be imposed and the term of imprisonment ranges from below 5
years to the life sentence with a fine of over I time but below 5 times of the amount of tax
refund depending on the seriousness of the offence.
9.8 Against refusal of paying tax
Where a taxpayer refuse to pay tax by using violence or threatening, the tax authority shall

                                                                                               105
pursue the payment of the tax with the interest on tax overdue and impose a fine of over I
time but below 5 times of the tax. In case of constituting a crime, criminal liability shall be
pursued.
Criminal penalties may be imposed and the term of imprisonment ranges from below 3
years to below 7 years with a fine of over 1 time but below 5 times of the amount of tax
depending on the seriousness of the offence.
9.9 Against the non-payment or less payment in the prescribed time limit
Where the taxpayer or tax withholding agent have been ordered to pay the tax, within a
time limit, but fail to pay, the tax authority may, in addition to pursue the tax, impose a fine
of over 50% but below 5 times of the outstanding tax.
9.10 Against non performance of withholding by agent
If a withholding agent does not perform its statutory duty to withhold tax under the relevant
tax laws, the tax authority shall pursue the tax from the taxpayer and impose a fine of over
50% but below 3 times of the tax on the agent.
9.11 Against the non-cooperation of tax inspection
Where the taxpayer or tax withholding agent avoids or by other means of noncooperation
to the tax inspection, the tax authority shall order the payer and agent to rectify and/or
impose a fine of below RMB 10,000 to below RMB5O,000.
9.12 Against the illegal printing of invoices
Tax authority shall destroy the illegally printed invoices, confiscate any illegal property and
the printing tools and impose a fine of within RMB 10,000 and RMB5O,000. In case of
constituting a crime, criminal liability shall be pursued in the following cases:
ACCA-2004-China Taxation 102

(a) Value added taxes invoices
Fraudulent printing and selling of false VAT invoices may be imposed with the term of
imprisonment ranging from below 3 years to death sentence with a fine of over RMB
20,000 to below RMB 500,000 or confiscate property depending on the seriousness of the
offence.
(b) Invoices for tax refund of export
Fraudulent printing and selling of false invoices for the purpose of tax refund of export may
be imposed with the term of imprisonment ranging from below 3 years to over 7 years with
a fine of over RMB 20,000 to below RMB 500,000 or confiscate property depending on the
seriousness of the offence.
(c) Other kind of invoices
Illegal printing and selling of false invoices may be imposed with the term of imprisonment
ranging from below 2 years to below 7 years or with a fine of over RMB 10,000 to below
RMB 500,000 depending on the seriousness of the offence.


                                                                                             106
10. SOURCES OF INFORMATION -LAWS, REGULATIONS,
ADMINISTRATIVE REGULATIONS, JUDICIAL AND ADMINISTRATIVE
EXPLANATION
The highest authority is the tax laws issued by the Standing Committee and the National
People¡¯s Congress. A typical tax law consists of a set of general principles setting forth
the scope of the tax, the tax rate, the tax administration, the computation and the penalty
provisions. E.g. ¡°Individual income tax law¡±, ¡°Income tax law for enterprises with
foreign investment and foreign enterprises¡±, ¡°Law of PRC concerning tax administration
and tax collection¡±, etc.
The second tier is the tax regulations issued by the State Council. It generally contains
detailed provisions, which elaborate on the principles set forth in the tax laws. E.g. ¡°Rules
for the implementation of the income tax law for enterprises with foreign investment and
foreign enterprises¡±, ¡°Rules for the implementation of the law of PRC concerning tax
administration and tax collection¡±. Also local government, e.g. 1-lainan can have same
legal status and is applied in the local level under the scope of authority granted by the
National People¡¯s Congress.
The third tier is the administrative rules issued by the bureaus of the State Council, i.e., The
State Administration of Taxation (SAT), the Ministry of Finance (MOF) and the Customs
General Administration. For some taxes, such as value added taxes and business tax, it
takes the form of ¡°provisional regulations¡± promulgated by the State Council. These
¡°provisional regulations¡± are usually supplemented by ¡°detailed implementation rules¡±
promulgated by the Ministry of Finance after obtaining approval from the State Council.
The detailed rules are to clarify the application of the provisional regulations.
The fourth tier is the tax notice and ruling issued periodically by the SAT and MOF. These
notice are sent to the various finance and tax bureau all over China to
ACCA-2004-China Taxation 103

(i) explain how tax laws and regulations should be interpreted and applied in different situations;
(ii) show examples how the taxes should be computed and
(iii) grant exception in narrow and particular cases. The courts in China generally accept the
SAT¡¯s interpretation.
ijMock exam question
At the beginning of year 2002, the tax authority inspected the enterprise income tax of a state
owned manufacturing enterprise for the year 2001. Income statement for the year 2001 shows as
follows:
(1) income from sale of product RMB 10.5 million (already deducted RMB 150,000 commission
paid to the purchaser);
(2) cost of sales is RMB7.5 million, tax on sale of product and surcharge is


                                                                                                      107
RMB375,000;
(3) Management fee RMB 1.05 million; finance cost RMB975,000 (including: loan interest
RMB675000, principal RMB7.5 million, similar bank interest rate 8%; capitalized interest
RMB300,000);
(4) Non-operating income RMB525,000 (excluding transfer of one property, the book value of
property RMB2.25 million, depreciation RMB 1.05 million, income of transfer is RMB 1.5 million,
paid expenses RMB3O,000), other non-operating expenses RMB4O5,000;
(5) Profit from investment RMB75O,000 (including: income from national debenture interests
RMB45O,000, income from enterprise debenture interests RMB300,000)
The state owned manufacturing enterprise reported its income tax for the year 2001:
Taxable income = 10,500,000 7,500,000 375,000 1,050,000 975,000 +
                              -          -         -           -



525,000-405,000 + 750,000 = RMB 1,470,000
Tax payable 1,470,000 x 33% = RMB485,l00
Required:
(1) Based on the income tax and the related rules, you are asked to analyze if there is
any mistake in the calculation. If yes, point out the mistakes in the calculation, and
make your own correct calculation of the income tax (stamp tax can be ignored but
city maintenance tax 7% and education surcharge 3% are considered and based on
business tax), what action should the tax authority take?
(1) RMB 150,000 of commission paid to the purchaser cannot be deducted before tax. (2) Loan
interest should be calculate based on similar financial interest rate, the exceeding portion cannot be
deducted = 675,000 7,500,000 x 8% = RMB75,000, capitalized interest RMB300,000 dollars
                      -



cannot be deducted before tax.
(3) Taxable income of the transfer of property should be adjusted.
Business tax 1,500,000 x 5% RMB75,000.
City maintenance and education surcharge 75,000 x (7% + 3%) = 7,500
Taxable income for transfer of property = 1,500,000- (75,000 + 7,500) (2,250,000- 1,050,000)
                                                                          -                     -



30,000 RMB 187,500
(4) income from debenture interest 450,000 is exempted from tax.
The taxable income for the year:
ACCA-2004----China Taxation 104

(5) Taxable income for the year = (10,500,000 + 150,000) 7,500,000 375,000 1,050,000 (975,000
                                                           -          -         -           -



-   75,000 300,000) + (525,000 + 187,500) 405,000 +
          -                                  -



(750,000 -450,000) = RMB 1,732,500
(6) The income tax payable for the year = 1,732,500 x 33% = 571,725 dollars
(7) The amount of tax evaded RMB 86,625 (571,725 -485,100)
the whole tax payable for the year571,725+75,000+7,500654,225 86,625 / 654,225=13.24%


                                                                                                    108
The over-reporting of expense may be treated as tax evasion. The tax bureau shall pursue the tax
with the interest on tax overdue and impose a fine of 50% but below 5 times of the tax evasion.
For criminal liability, as the tax evasion comprises 10% more but below 30% of the amount of tax
payable and, moreover, it involves amount of RMB 10,000 or more but below RMB 100,000, the
court may impose a fine of over 1 time but below 5 times of the amount of tax evasion. Also a term
of less than 3 years imprisonment may be imposed.




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