Tax law income tax by dominic.cecilia


									         Chapter 18 Tax law

1   Overview
2   Income tax
3   Turnover tax
4   Land appreciation tax
5   Taxation administration
1 Overview
1.1 Concept
(1) Compulsory
(2) Gratuitous
(3) Fixity

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

                    Types of taxes
 Categories  Subcategories                                                   Tax rates
             Individual income tax                                        5-45%; 5-35%
 Income tax Enterprise income Domestic enterprises income tax                  33%
             tax                FIEs and foreign enterprises income tax        33%
             VAT                                                           17%; 13%;0
             Business tax                                                     3-20%
Turnover tax Consumption tax                                                  3-45%
               Customs duty
               Real property tax                                            1.2-12%
Property tax Land appreciation tax                                          30-60%
               Deed tax                                                        6%
Resources tax Resources tax
               Stamp tax
               Adjustment tax on fixed asset investment
               Vehicle and vessel use tax
               Vessel tonnage tax
Activities tax Slaughter tax
               Urban land use tax
               Urban maintenance and construction tax                        1-7%
               Farming land occupancy tax
               Securities trading tax
1.3 Sources of law
                           Sources of tax law
                Name of legislation   Issuance authorities    Issuance time
                       TAL                  SCNPC            1992, 1995, 2001
                    TAL Regs             State Council         1993, 2002
                       IITL              NPC, SCNPC          1980, 1993, 1999
 Income tax           IREIT              State Council            1993
                     FIEITL                  NPC                  1991
                      IRVAT              State Council            1993
                      IRBT               State Council            1993
Turnover tax
                      IRCT               State Council            1993
                 SCNPC Decision             SCNPC                 1993
 Property tax        IRLAT               State Council            1993
1.3.1 Unified taxation law
1.3.2 Income tax laws
1.3.3 Turnover tax laws
1.3.4 Land appreciation tax law
2 Income tax
2.1 Individual income tax
2.1.1 Taxpayers
 • Fiscal residence and the source of the income when
   determining tax jurisdiction

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

 • Those not residing in China in absence of domicile or
   residing in China for less than 1 year in absence of the
   domicile shall pay tax only for the incomes sourced in
2.1.2 Taxable incomes
(1) wages and salaries
(2) IICH’s incomes from production and business operation
(3) incomes from contracting management or leasing
   management of enterprises or institutions
(4) service remuneration
(5) copyright royalty
(6) royalty
(7) incomes from interest, dividends and bonuses
(8) incomes from property leasing
(9) incomes from property transfer
(10) accidental incomes
(11) other incomes to be taxed depending upon the decision
   by the MOF
2.1.3 Tax rate
                    Tax rate of individual income tax
                                         Annual taxable
    Monthly taxable salary   Tax rate                     Tax rate         Deduction
1        <RMB 500                5%       <RMB5000          5%
2       RMB500-2000             10%     RMB5000-10000      10%       (1) Wage & salary: RMB
3      RMB2000-5000             15%     RMB10000-30000     20%
                                                                     (2) Incomes of IICHs:
4      RMB5000-20000            20%     RMB30000-50000     30%       expenses, costs and
5     RMB20000-40000            25%      > RMB50000        35%       losses deductible.
6     RMB40000-60000            30%                                  (3) Incomes for
                                                                     contracting & leasing
7     RMB60000-80000            35%
                                                                     management: reasonable
8    RMB80000-100000            40%                                  fees deductible.
9       > RMB100000             45%
Copyright royalty                                          20%               30%
                                                                     <RMB 4000: RMB 800
Service remuneration, royalty                              20%
                                                                        >RMB 4000: 20%
                                                                       Original value and
Incomes from property transfer                             20%
                                                                        reasonable fees
Incomes from interest, dividends and bonuses               20%                 ╳
2.1.4 Tax exemption and deduction Tax exemption
(1) awards in science, education, technology, culture, health, physical
    sports and environmental protection granted by provincial
    government, ministries or commissions under State Council or
    above and foreign organisation and international organisation
(2) interest of bank savings, and interest of treasury bonds and
    financial bonds issued by the State
(3) subsidies and allowances granted according uniform standard of
    the State
(4) welfare money, survivor's pensions and relief payment
(5) insurance indemnities
(6) military severance pay and demobilization pay for soldiers of the
    armed forces
(7) severance pay, retirement salaries and life subsidies for retired
    cadres and staff granted in accordance with uniform standard of
    the State
(8)incomes of diplomatic officials, consular officials and other
   personnel of foreign embassies and consulate in China which
   should be free from tax under the law of China
(9) incomes which shall be free from tax in accordance with
   international conventions acceded to by China and bilateral
   agreement concluded by China
(10) other incomes which the financial department under the State
   Council approves to exempt from tax. Scope of deduction
2.1.5 Tax credit
 If the taxpayer obtains incomes outside of China, taxes paid
 outside of China for that part of incomes may offset taxes in
 China for that part of incomes.
2.2 Enterprise income tax
2.2.1 Taxpayers
 (1) SOEs
 (2) collective enterprises
 (3) private enterprises
 (4) jointly operated enterprises
 (5) CLS and LLC
 (6) other entities obtaining incomes from production
    and business operation and other incomes
2.2.2 Taxable incomes
(1) incomes from production and business operation
(2) incomes from property transfer
(3) incomes from interest
(4) incomes from leasing
(5) incomes from royalty and licensing fees
(6) incomes from dividends
(7) other incomes

2.2.3 Scope of deductions
Costs, expenses and losses related to the incomes of taxpayer
are deductible
Not deductible items:
(1) expenditure of a capital nature
(2) expenditure on acquisition and development of intangible
(3) fines in relation to illegal business operation and losses
   incurred on confiscation of property
(4) surcharge on over due tax payments, fines and penalties in
   relation to various types of taxes
(5) the portion of losses incurred due to natural disasters or
   accidents covered by compensations receivable
(6) donations for community benefits and charitable donations
   in excess of deductible amounts; and donations other than
   those for community benefits or charitable donations
(7) expenditure for any sponsorship, which refers to one for
   non-advertisement purpose
(8) other items of expenditure not incurred in the earning the
2.2.4 Tax rate

2.2.5 Tax credit
 If taxpayer obtains incomes outside of China, taxes
 paid outside of China for that part of incomes may
 offset taxes in China for that part of incomes
2.3 FIEs and foreign enterprises income tax
2.3.1 Taxpayers
 (1) SFEJVs
 (2) SFCJVs
 (3) WFOEs
 (4) foreign companies and other economic entities having
    establishments or sites in China and engaging in
    production or business operations, and those having
    income sources within China in absence of
    establishments or sites in China.
2.3.2 Taxable income
(1) incomes from production and business operations of the FIEs
    and foreign enterprises having establishments and sites in China,
    as well as profits (dividends), interests, rents, royalties and other
    earnings sourced inside and outside China and actually related to
    their establishments or sites in China
(2) the following incomes of foreign enterprises not having
    establishments in China:
(a) profits (dividends) obtained from enterprises inside China
(b) interests on savings, loans, bonds, payments for others or
     deferred payments in China
(c) rents from property leasing in China
(d) royalties from assignment and licensing of patent, know-how,
     trademarks and copyrights in China
(e)other incomes sourced inside China deemed to be taxed by MOF
2.3.3 Tax rate
30% + 3% local income tax

2.3.4 Tax preferential treatment Tax incentives for foreign investments
 (1) Deduction and exemption for manufacturing FIEs
 (2) Geographic and industrial reduction for FIEs and
    foreign enterprises
 (3) Tax refund
 (4) Deduction of withholding tax
 (5) Local preferential treatments Tax incentives for additional foreign
3 Turnover tax
3.1 VAT
 Any entity or individual selling goods or providing services of
 processing, repairing and supplying replacements or importing
 goods in China shall pay VAT.
3.1.2 Tax rate
                                 VAT rates
 Sector of trades                                                   Tax rate
 Selling or importing most goods                                     17%
 Selling or importing five specific types of goods                   13%
 Exporting goods                                                       0
 Such service as processing, repairing and supplying replacements    17%
3.1.3 Tax calculation

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

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

 Small-scale taxpayers: 6%
3.1.4 Tax exemption
(1) agricultural products sold by producer itself
(2) contraceptive
(3) antiquated books
(4) imported devices and equipment to be directly used in
  scientific research and experiment and education
(5) imported materials and equipments gratuitously given by
   foreign governments or international organizations
(6) imported equipment for compensation trade and
   processing with overseas customers materials and
   assembling with overseas customers parts
(7) articles imported directly by organizations of the
   handicapped people and used for the handicapped people
(8) selling one's own second hand articles
3.1.5 Tax authority
• Regular taxpayer: pay tax to competent tax authority at
  location of its organization
• If head office and branch are located in different county,
  pay to their respective competent tax authority where they
  are located
• Upon approval by SAT, the tax may be paid together to the
  competent tax authority at the location of the head office
• Irregular taxpayer: pay tax to competent tax authority
  where the goods are sold
• Import of goods: pay to Customs

3.1.6 Implications for FIEs
 3.2 Business tax
  3.2.1 Taxpayers
   Any entity or individual providing certain category of
   services, assigning intangible assets or selling immovable
   property shall pay business tax.

   3.2.2 Tax rate
                            Business tax rates
Sector of business                                                   Tax rate (%)
Communication and transportation, construction, post and                  3
telecommunications and culture and sports
Banking and insurance, service trades, assigning intangible assets        5
and selling immovable property
Entertainment                                                           5-20
3.2.3 Tax calculation

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

• In principle no deductions are allowed for business
• 6 circumstances allowing deductions:
(1) transportation entity transports goods or passengers out of China
    and changes the goods or passengers to other transportation
    entities, the business volume shall be the remaining sum of total
    freight by deducting those fees paid to the latter carrier
(2) travel entity sends touring party out of China and changes to
    other travel entities, its business volume shall be the remaining
    sum of total fees by deducting the those fees paid to the latter
    travel entities
(3) if contractor subcontracts its project to others, its business volume
     shall be the remaining sum of the total prices of contract by
     deducting prices paid to subcontractor
(4) for sub-loan business, the business volume shall be the remaining
    sum of the interest of loan by deducting interest of lending
(5) for buying and selling business of foreign exchange, securities and
     futures, the business volume shall be the remaining sum of selling
     price by deducting purchase price
(6) other circumstances provided by MOF
3.2.4 Tax exemption
• Should business volume not reach the minimum standard
  of business tax starting point, such business tax is exempted
• 6 categories of services exempted from business tax

3.2.5 Tax authority
• Taxable services: tax authority where the service is offered
• Transportation: competent tax authority at location of its
• Land-use-rights assignment, competent tax authority at
  location of the land
• Transfers other intangible assets, competent tax authority
  at the location of its organization
• Sale of immovable property, competent tax authority at
  location of immovable property
3.3 Consumption tax
It only applies to 11 categories of products

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

3.3.2 Taxable consumer goods and tax rate
                        Consumption tax rates
           Applicable goods                     Tax rate
         Millet wine          RMB 240/T
Specific Beer                 RMB 220/T
tax      Gasoline             RMB 0.2/L
         Diesel oil           RMB 0.1/L
                              Class A: 45%; class B and cigar: 40%; cut
                              tobacco: 30%
                              Cereal spirit: 25%; potato spirit: 15%; other
         Liquor and alcohol
                              liquors: 10%; alcohol, 5%
        Cosmetics            30%
valorem Skin & hair products 17%
tax     Valuable jewellery   10%
         Firecrackers         15%
         Motorcycles          10%
                              Sedan cars: 3-8%; cross country vehicles &
                              mini-bus: 3-5%
3.3.3 Tax calculation
• If taxable consumer goods produced by taxpayer are sold,
  it shall be taxed in the sales level.
• Sum of CT: sum of sales volume multiplied by tax rate or
  unit tax

3.3.4 Tax authority
• Competent tax authority where taxpayer’s business
  accounting is carried out
• Taxable consumer goods for commission order, competent
  tax authority at location of agent.
• Imported taxable consumer goods: Customs where goods
  are declared
      4 Land appreciation tax

4.1 Taxpayers
Any entity of individual obtaining incomes from
assignment of right to use State owned land buildings
and facilities shall pay land appreciation tax
4.2 Taxable value-addition and
    scope of deduction
Value-addition: the remaining sum of incomes sourced from
real estate assignment including incomes in cash, in kind
and other revenues

Deductible items:
(1) payment for acquisition of land-use-rights
(2) costs and expenses of land development
(3) costs and expenses of new buildings and their coordinate
   facilities, or evaluated prices of used houses and buildings
(4) taxes and charges related to assignment of real estate
(5) other deductible items prescribed by the MOF
4.3 Tax rate
                   Land appreciation tax rates
        Value addition                   Progressive tax rate
    1   Value addition ≤50%                      30%
    2   51%≤Value addition≤100%                  40%
    3   101%≤Value addition≤200%                 50%
    4   200%< Value addition                     60%

4.4 Tax exemption
• Taxpayer builds residences of ordinary standard whose value
  addition does not exceed 20% of the sum of deductible items,
  the land appreciation tax is exempted
• Should real estate is taken back or expropriated by State
  according to prescribed procedures necessitated by national
  construction, such tax is exempted
5 Taxation administration
5.1 Taxation registration
5.2 Tax declaration
5.3 Tax collection
 5.3.1 Prompt payment
  Failure to pay tax within such period and the withholding
  agent fails to transfer the tax within such period, the
  taxation authorities can levy 0.5‰ delay charge per day on
  the overdue payment starting from overdue date in addition
  to ordering him to pay tax in a set period of time

 5.3.2 Power of reasonable adjustment
(1) unnecessary to establish the account book according to laws
    and administrative regulations
(2) fails to establish account book though required to do so by
    laws and administrative regulations
(3) destroy account book by melting or burning, or refuse to
    provide materials regarding taxation
(4) though account book has been established, accounts are
    chaotic or the cost materials, income documents and expense
    documents are incomplete rendering difficult to check the
(5) upon occurrence of taxation obligations, fails to declare the
    tax in the period of time specified and after the taxation
    authorities order him to do so in prescribed time, still fails to
    do so after expiry of such time limit
(6) basis to calculate the taxable amount as declared is evidently
    low without justified cause
5.3.3 Guarantee and enforcement
 If there are obvious signs that taxpayer is moving away
 and hiding its taxable goods, goods and other assets or
 taxable incomes, they may order taxpayer to provide tax
 payment guarantee.

 If unable to provide such guarantee, they may:
 (1) give a written notice to the its account bank or other
     financial institutions requesting them to suspend
     withdrawing the portion of its deposits equivalent in
     value to the taxes
 (2) detain and seal up the portion of goods and other
     assets equivalent in value to the taxes
5.4 Tax inspection
(1) inspecting the taxpayer's account books, book-keeping
documents, statements and related materials, and inspection
of the withholding agent’s withholding and collecting
account books, book-keeping documents and related
(2) visiting its production and operations sites and goods
storage sites for inspecting its taxable commodities, goods or
other assets and for inspecting the withholding agent's
business operations pertinent to withholding and collecting
(3) ordering it or withholding agent to supply documentation,
evidence and related materials in connection with tax payment
or tax withholding and collection
(4) inquiring it and withholding agent about the issues and
situations relating to tax payment or tax withholding and
(5) visiting stations, wharves, airports, postal and
telecommunications enterprises and their subsidiaries for
inspecting the relevant documentary certificates, documents and
related materials of the taxable commodities, goods or other
assets consigned and sent by the taxpayer
(6) checking its deposits accounts and that of withholding agent
at banks or other financial institutions upon approval by director
of tax bureau above county level and upon presentation of
certificate in nationwide uniform format permitting inspection of
deposits accounts
5.5 Legal responsibilities
5.5.1 Responsibilities for violating taxation
 Rectification within prescribed time, cancellation of business
 license by AICs, and fine between RMB 2000-50000

 (1) fails to make declaration and go through formalities for
     tax registration, alteration or cancellation within the
     specified time
 (2) fails to establish and keep account books or accounting
     documents and related materials according to provisions
(3) fails to submit the financial and accounting system or
   methods to the taxation authorities for file
(4) fails to report all the bank accounts to the taxation
(5) fails to install and use the devices with tax control or
   destroy or change such devices
(6) fails to use the taxation registration certificate, or lend,
   tamper with, damage, transfer or forge such certificates
(7) withholding agent fails to establish and keep withholding
   and collection account books or keep the accounting
   documents and related materials in connection with tax
   withholding and collection
(8) taxpayer fails to declare the tax within the specified time, or
   withholding agent fails to submit tax withholding and
   collecting reports to the taxation authorities within specified
5.5.2 Responsibilities for tax evasion and rebellion
      against tax collection
 Payment of evaded taxes and overdue charges, fine between
 50% and 5 times of evaded taxes
Illustration: Enwei Group’s tax evasion
In 1990 Enwei Group established a JV entitled Chengdu Enwei Shiheng
Pharmaceuticals Company with the HK partner, i.e. HK Shiheng Trading Company.
Such JV terminated in 1994 with an actual 4 years operation, thus it should make up
the FIE income tax of RMB 44.693 million resulting from the FIE’s tax exemption and
reduction. In October 1993 Enwei Group entered into JV with another HK resident to
establish the Chengdu Enwei Pharmaceuticals Company. The HK venturer did not
make actual capital contribution, but the JV enjoyed a total amount of RMB 37.1223
million as the enterprise income tax preferences. In addition such company employed
blank receipts to withdraw fees and evaded an amount of tax RMB 2.2381 million in
the 1993 fiscal year. In 1994 and 1995 such company made no entry for part of the
exported products and evaded an amount of tax RMB 1.7126 million. In 1998 such
company forged accounts, hided part of the revenues and evaded an amount of tax
RMB 1.2672 million.
Illustration: Nangong city’s false VAT invoice
According to the investigation by the Henan provincial SAT which lasted for half a
year, as many as 49 enterprises issued VAT invoices fraudulently. For a period of two
years such enterprises fraudulently issued 17587 pieces of VAT invoices with a total
value of RMB 1065 million among which the value addition was RMB 916 million and
VAT tax was RMB 149 million. However such enterprise merely paid an amount of
VAT RMB 12.72 million, thus the State suffered a total loss of VAT RMB 137 million.
5.5.3 Responsibilities of taxation officer’s offences
(1) taxation officer conspires with the taxpayer and/or
    withholding agent, instigates or assists it and/or withholding
    agent in committing tax evasion
(2) tax officer takes advantage of the conveniences in his duties
    and take or requests money and/or property from the
    taxpayer or withholding agent
(3) tax officer neglects his duties thus collects none, or less than
    the payable tax causing great losses to the State
(4) tax officer illegally begins, terminates, reduces, exempts or
    rebates taxation or collects back tax
Administrative punishments: warning, fine and confiscation of
illegal incomes

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