Categorization of Taxation
The major tax categories applicable to FIEs can be divided into 2 groups according to their respective levying authorities.
Taxes Levied by Tax Bureau
a. A turn over tax system on business transactions, including:
* Value-added tax;
* Consumption (excise) tax;
* Business tax.
b. Taxes on income, including:
* Income tax for foreign investment enterprises and foreign enterprises;
* Individual income tax.
c. Taxes on property and behavior, including:
* Urban real estate tax;
* Vehicle and vessel usage and license plate tax;
* Stamp taxes;
* Land appreciation tax.
d. Taxes on natural resources, including:
* Resources tax.
Taxes Levied by Customs
a. Customs duty;
b. Vessel tonnage tax.
Tax Items and Tax Rates
Value Added Tax (VAT)
There are three tiers of rates for VAT:
* For taxpayers selling or importing goods, or providing services of processing, replacement and repairs, the tax rate is 17%.
* For taxpayers selling or importing grains, edible vegetable oil, coal gas, natural gas, coal or charcoal products for household use, books, newspapers, magazines, chemical fertilizers, agricultural chemicals, agricultural machinery, etc., the tax rate is 13%.
* For taxpayers exporting goods, except as otherwise stipulated by the State Council, the tax rate is 0.
For enterprises and individuals engaged in production or providing taxable labor service with an annual sales volume under RMB 1 million, those engaged in wholesale and retailing with an annual sales volume under RMB 1.8 million, and those designated by the tax authority as small VAT payers, the tax rate is 6% on a tax-in-price basis.
The computation o f tax payable for Consumption Tax shall follow either the rate on value method or the amount on volume method. 11 taxable items and 25 tax rates ranging from 3% to 20% are formulated. Taxpayers selling or importing taxable consumer goods shall pay tax upon the sales or importation of these goods. The taxable export consumer goods, except for those subject to special State provisions, should be exempted from consumption tax.
9 taxable items are subject to Business Tax, whose tax rates range from 3% to 20%.
Enterprises Income Tax
The income tax for enterprises with foreign investment and the income tax which shall be paid by foreign enterprises on the income of their establishments or places set up in China to engage in production or business operations shall be computed on taxable income at the rate of 30%; local income tax shall be computed an taxable income at the rate of 3%.
Any foreign enterprise which has no establishment or place in China but which derives profits, interest, rent, royalties or other income from sources in China, or which, though it has an establishment or place in China, derives such income and the income is not effectively connected with such establishment or place, shall pay a withholding tax of 20% on such income.
FIEs of production natures and FIEs in coastal open cities, Special Economic Zones (SEZ) and Economic and Technological Development Zones may enjoy tax exemptions or reductions of income tax.
Land Appreciation Tax
The appreciation amount shall be the balance of proceeds received by the taxpayer on the transfer of real estate, after deducting the sum of deductible items as prescribed by law.
Land Appreciation Tax adopts four levels progressive rate ranging from 30% to 60% on the basis of the appreciation amount and deductible amount.
Urban Real State Tax
The owner or renter (agent and user, in case it is unidentifiable) is the taxpayer.
And this tax is levied in 2 parts and levied annually.
* The first part, tax on buildings, is calculated on 1% of the buildings' standard price.
* The second part, tax on land, is calculated on 1.5% of the land's standard price.
* If it is difficult to separate the buildings' standards price and the land's standards price, then use the mixed price for the real estate at the rate of 1.5%.
* If it is difficult to get the mixed price for the real estate, then use the standard annual rent price at the rate of 15%.
The following categories of documents are regarded as taxable documents:
* contracts or documents in the nature of a contract with regard to: purchases and sales, the undertaking of processing, contracting for construction projects, property leasing, commodity transport, warehousing, loans, property insurance, technology contracts;
* documents transferring property rights;
* business account books;
* certificates evidencing right or licenses; and
* other documents which the MOF determines to be taxable.
According to the nature of the taxable documents, taxpayers shall calculate the amount of tax due on the basis of a percentage tax rate or a fixed amount per document.
License Fare of Vehicles and Vessels
Users of automobiles and vessels are taxpayers and should register and pay the subject tax.
Individual Income Tax (IIT)
a. Tax Payer
Individuals who are neither domiciled nor resident in China, or who are domiciled or reside in China for less than one year shall pay IIT on income derived from sources within China.
For income derived from sources outside the PRC of individuals not domiciled in the PRC, but resident for more than one year and less than five years, subject to the approval of the tax authorities-in-charge, individual income tax may be paid on only that part which was paid by companies, enterprises or other economic organizations or individuals which are inside the PRC. Individuals who reside for more than five years shall, commencing from the sixth year, pay IIT on the whole amount of income derived from sources outside the PRC.
For individuals who are not domiciled in the PRC, but who reside inside the PRC consecutively or accumulatively for more than 90 days (183 days for those from countries with which China has taxation agreement) in any one tax year, their income derived from sources inside the PRC which is paid by an employer outside the PRC, and which is borne by the employer's establishment or business place within the PRC, shall pay IIT.
For individuals who are not domiciled in the PRC, but who reside inside the PRC consecutively or accumulatively for not more than 90 days (183 days for those from countries with which China has taxation agreement) in any one tax year, their income derived from sources inside the PRC which is paid by an employer outside the PRC, and which is not borne by the employer's establishment or business place within the PRC, shall be exempt from IIT.
b. Taxable Income
Individual income tax shall be levied on the following categories: income from wages and salaries; income from production or business operation derived by individual industrial and commercial households; income from contracted or leased operation of enterprises or institutions; income from remuneration for personal service; income from author's remuneration; income from royalties; income from interest, dividends and bonuses; income from lease of property; income from transfer of property; contingent income and other income specified as taxable by MOF.
c. Tax Rates
Income from wages and salaries is taxed at 9 progressive rates, ranging from 5% to 45%. For foreign taxpayers, the monthly deduction is RMB 4,000 Yuan (RMB 840 Yuan for domestic employees). Income from compensation for personal services, royalties, interest, dividends, bonus, lease of property, transfer of property, contingent income and other kinds of income shall be taxed at a proportional rate of 20%.
1. Import Tariff
Imported goods are taxed at its normal C.I.F. The custom has authority to determine the taxable price if the goods' C.I.F. isn't quotable. The tariff rates are set in a detailed name list and for some special imported goods, tariff is exempted.
2. Export Tariff
Export products produced by the FIEs itself, except those prohibited from exportation by the State and those subject to other State regulations, shall be exempted from export tariff.
3. Bonded Commodities
The necessary import goods, such as raw materials, fuel, parts and components, accessories or packaging materials for FIEs to produce export products, are regarded as bonded commodities and are supervised by the customs.
The Law of People's Republic of China on Taxation Administration is the basic law on taxation administration and is also a procedural law. All enterprises, no matter domestic or foreign, should be treated equally by this law.
1. Taxation Authorities
In China, a separate tax system was set up in 1994, i.e., taxes were divided into central taxes, local taxes and central-local share Taxes. The Ministry of Finance (MOF) and the State Tax Bureau are the executive authorities in charge of taxation. The State Tax Bureau is responsible for taxation administration. Two tax bureaus are set up at each administrative level all over the country, one is in charge of the collection of central taxes and central-local share taxes, such as the VAT, Consumption Tax and FIEs' Income Tax, etc., the other is in charge of the collection of local taxes, such as Individual Income Tax, Business Tax, Land Appreciation Tax, Stamp Tax and Urban Real Estate Tax, etc.
2. Taxation Control
FIEs should complete tax registration, file tax returns, maintain accounting records and correctly use invoices in accordance with related policies. The major policies on the filing of tax returns are as follows:
a. Tax Year
The tax year is the calendar year, i.e., from January 1 to December 31. If a foreign enterprise experiences difficulties in computing its taxable income on the calendar-year basis, it may apply to the tax authorities to adopt its own fiscal year as the tax year. An enterprise that commences business within a calendar year or has operated for less than 12 months in a calendar year treats the actual operating period as the tax year.
b. Filing Tax Returns
An FIE is required to file its annual tax returns, audited financial statements and the auditor's report to the tax bureaus within 4 months after the end of the year. The application for deferring the filing of the above documents should also be submitted within this period of time. The penalty for failure to file the above documents within the prescribed time limit is 0.2 percent per day on the tax amount overdue.
c. Tax payment and collection
FIEs are required to pay their provisional taxes within the require time limit.
Any taxpayer or withholding agent who fails to perform tax registration procedures, fails to set up accounting system and fails to keep its business records within a prescribed time limit is required to redress within a prescribed time limit. Any failure to redress will be subject to a fine of up to RMB 2,000 Yuan; if the violation is serious, a fine up to RMB 10,000 Yuan will be imposed.
Any taxpayer or withholding agent who fails to file tax returns within the prescribed time limit is required to redress and will be imposed a fine of RMB 2,000 Yuan. A fine over RMB2,000 Yuan but under RMB10,000 Yuan will be imposed if the taxpayer or withholding agent fails to meet the due date a second time.
The fine for tax evasion which involves such unlawful activities as forgery, falsifying or concealing relevant information, fraud, or failure again to pay tax within the prescribed time period is up to but not more than 500 percent of the tax due. In most of the above cases, serious offenders will be prosecuted.
Since FIEs with their head office in China are taxed on their worldwide income, double taxation of foreign-source income may be avoided by way of a foreign tax credit. Foreign income tax paid abroad in respect of foreign-source income can be claimed against the Chinese tax payable in respect of the same income. The unutilized foreign tax credit can be carried forward for not more than five years under local tax statutes. China has signed double taxation agreements with 46 countries by the end of May 23, 1995.