Overview of Taxation in China
China Taxation Services
Hotline: 86-755-82143348, Email:firstname.lastname@example.org
The Tax System in China has undergone tremendous changes in recent years. Currently, there are 24 different types of tax imposed on a wide range of incomes and transactions. Taxpayers can be individuals, entities or economic organizations. To fulfill its WTO commitments, the Chinese government is currently preparing for another round of tax reform, which is expected to take place in 2009. The goals of this reform are to unify current tax laws and to develop a level playing field for domestic enterprises and foreign investment enterprises, to promote the harmonized growth of taxation and the economy, and to improve the efficiency of tax collection and administration.
Keeping place with compliance obligations in such a rapidly changing regulatory environment can be a major challenge. You are advised to seek professional advice regarding your particular circumstances.
1. Business and Tax in China
Any investors who want to succeed in their business-doing in China, are strongly advised to better understand tax departments, tax categories, tax rate and official invoices in China.
As far as China tax department is concerned, China has two functional tax departments: national tax department (NTD) and local tax department (LTD), the former is for national use while the later is for local use. In every city or town there are national and local departments. Any person can contact these departments for information.
The China tax could be classified as follows: Value Added Tax (VAT), Business Tax (BT), Enterprise Income Tax (EIT), Individual Income Tax (IIT), Consumption Tax by customs (CT), Resource Tax (RT), City Maintenance and Construction Tax (CMCT), House Property Tax (HPT), Stamp Duty (ST), Urban and Township Land Use Tax (UTLU).
Taxpayer should know which tax department to go to and the tax rate before tax return, here are some guidelines for you: Value Added Tax should be paid to NTD at rate of 0-17% monthly, Business Tax to LTD at rate of 3-20% monthly, Individual Income Tax to LTD at rate of 5-45% monthly, Enterprise Income Tax (EIT) is 25% to NTD at basis of quarterly return and annual renew,
Tax Return should be done monthly, quarterly and annually, Tax is collected on the basis of invoice volume, in China the invoices are granted from the NTD or LTD,
2. China Tax Category and rate
The China tax could be classified as follows: Value Added Tax (VAT) at rate of 0-17%, Business Tax (BT) at rate of 3-20%, Enterprise Income Tax (EIT) at rate of 25%, Individual Income Tax (IIT) at rate of 5-45%, Consumption Tax by customs (CT) at rate of 3-5%, Resource Tax (RT), City Maintenance and Construction Tax (CMCT) at rate of 1%, House Property Tax (HPT), Stamp Duty (ST) at rate of 0.5-1%, Urban and Township Land Use Tax (UTLU)
3. Value Added Tax (VAT)
VAT is levied at a general rate of 17 per cent on all units and individuals engaged in the sale of goods; the provision of processing , repairs and replacement services; and the importation of goods into China. A special rate of 13 percent applies to certain items, such as utilities, cereals and edible vegetable oils, animal feed, fertilizers and insecticides. Exported goods are generally zero-rated, but some exceptions apply.
According to the companies of different sizes，the companies can be divided into normal taxpayers and small taxpayers.
To compute the VAT payable, the normal taxpayers need to separately calculate the output tax and the input tax for the current period. Then the difference between the output tax and the input tax shall be the actual amount of VAT payable.
The formula for computing the tax payable is as follows:
Tax payable = Output tax payable for the current period - Input tax for the current period
Output tax payable = Sales volume in the current period × Applicable tax rate
Small taxpayers are taxed on the basis of the revenue derived from sales of goods or provision of taxable services by applying proper rates 3% The computing formula is:
Tax payable = Sales amount × Applicable rate
The imported goods are taxed on the basis of the composite assessable price by applying the applicable tax rate.
VAT refund for exporters
In case of 0% rate applicable to the exported goods, the exporters may apply to the tax authorities for the input tax refund on those goods exported. At present, the refund rates consist of 5%, 6%, 9%, 11%, 13% and 17%.
The exempted items include: self-produced primary agricultural products sold by agricultural producing units and individuals; imported goods being processed for exportation; the self-use equipment imported out of the total investment for the projects with foreign investment or domestic investment which are encouraged by the State; contraceptive medicines and devices; antique books purchased from the public; instruments and equipment imported for direct use in scientific research, experiment and education; imported materials and equipment granted by foreign governments or international organizations; articles imported directly by organizations for the disabled for exclusive use by the disabled.
4. Business Tax (BT)
Business tax ranging form 3 percent to 20 percent is levied on various types of services provided, and on the transfer of intangible assets or the sale of immovable properties within China. Transportation, construction, post and telecommunication, cultural activities and sports are taxed at 3 percent, while the financial and insurance industries and most services are taxed at 5 percent. The entertainment business, including operation of music halls, ballrooms, karaoke, billiard rooms, golf courses, bowling alleys, recreation rooms and internet cafes, is taxed at between 5percent and 20 percent. Business tax is imposed on gross receipts, including additional fees and charges. Certain services, such as educational, nursing, medical, cultural and agricultural development services, are exempt. The transfer of intangible assets or the sale of immovable properties is subject to business tax of 5percent.
The amount of Business Tax payable is equal to the turnover times the applicable tax rate. The computing formula is:
Tax payable = Turnover × Applicable tax rate
Business Tax may be exempt for: nursing services provided by nurseries, kindergartens, old people's homes, welfare institutions for the handicapped, matchmaking and funeral services; services provided individually by the disabled to the public; medical services provided by hospitals, clinics and other medical institutions; educational services provided by schools and other educational institutions, and services provided by students in part-time work; agricultural mechanical plough, irrigation and drainage, prevention and treatment of plant diseases and insect pests, plant protection, insurance for farming and animal husbandry, and related technical training services, breeding and the prevention and treatment of diseases of poultry, livestock and aquatic animals; admission fees for cultural activities conducted by memorial hall, museum, cultural centre, art gallery, exhibition hall, academy of painting and calligraphy, library and cultural protective units, admission fees for cultural and religious activities taking place at religious premises.
5. Enterprise Income Tax (EIT)
The Enterprise Income Tax is computed on the basis of the taxable income which is equal to the total income earned by the taxpayers in a tax year less allowable deductions for the same tax year.
Normally, the amount of Enterprise Income Tax payable is computed on the basis of the taxable income and by applying the rate of 25%. The formula for computing the tax payable is:
Income tax payable= Taxable income × 25%
6. Individual Income Tax (IIT)
The Individual Income Tax Law, Individual Income Tax Implementing Rules and the tax circulars issued by various levels of tax administration form the prevailing legal basis of individual income tax (IIT) in China.
PRC nationals domiciled in China are subject to tax on their worldwide income. Foreigners who reside in China for less than a year are subject to tax on heir China-sourced income. Foreigners who reside in China for at least a full year but less than five consecutive years are subject to tax on employment income derived from inside China and foreign-sourced employment income if paid or borne by PRC persons. Foreigners who reside in China for more than five consecutive years are subject to tax on their worldwide income, starting from the sixth year. Foreigners who have lived in China for more than 90 days in a tax year, or more than 183 days if they are from a country with which China has a tax treaty, are subject to tax only on their China-sourced income. Temporary visitors who spend fewer than 90 days in China, or 183 days if a tax treaty applies, are only subject to tax on employment income that is paid or borne by an establishment in China.
There are 11 categories of taxable income according to the IIT Law, including wages and salaries, business income and various other specified items of income and compensation. IIT is generally assessed on a monthly basis. The tax rates for wages and salaries are progressive and range from 3 per cent to 45 per cent, in nine tax brackets.
In general, all non-PRC nationals must register with the Chinese tax authorities as soon as they become liable to IIT. In most cases, an employer or any other person who pays taxable income to an individual tax-payer is obliged to act as a ‘withholding agent’ and is responsible for filing tax returns and remitting payments to the tax authorities on the individuals’ behalf. If there is no withholding agent, the individual is responsible for filing his or her tax return and paying the tax assessed.
7. Consumption Tax (CT)
consumption tax is levied on units and individuals engaged in the manufacturing, processing and importation of specific non-essential or luxury goods, such as tobacco, alcohol, cosmetics, jewellery and automobiles. Tax rates range from 3 percent to 5 percent.
The computation of Consumption Tax payable shall follow either the ad valorem principle or quantity-based principle. Generally, the producers of taxable consumer goods are the taxpayers and the Consumption Tax shall be paid on sales of the goods by the producers. The computing formula is:
a. Tax payable =sales amount of taxable consumer goods × Applicable tax rate , or
b. Tax payable = sales volume of taxable consumer goods × Tax amount per unit
Imported taxable consumer goods to which Ad valorem method is applied in computing the tax payable shall be assessed according to the composite assessable price and the applicable rate.
8. Resource Tax (RT)
Resource Tax applies to all units and individuals engaged in the exploitation of mineral resources or production of salt prescribed
9. City Maintenance and Construction Tax (CMCT)
The enterprises of any nature, units, individual household businesses and other individuals (excluding enterprises with foreign investment, foreign enterprises and foreigners) who are obliged to pay Value Added Tax, consumption Tax and/or Business Tax are the taxpayers of City Maintenance and Construction Tax.
Differential rates are adopted: 7% rate for city area, 5% rate for county and township area and 1% rate for other area.
10. House Property Tax (HPT)
House Property Tax is levied in cities, county capitals, townships and industrial and mining districts. Taxpayers are owners of house property, operational and managerial units of house property, mortgagees, custodians and users of house property
11. Stamp Duty (ST)
All enterprises or individuals executing or obtaining certain types of document must pay stamp duty. Such as documents include sales and purchase contracts, lease or rental contracts, loan contracts, documents relating to the transfer of property, business account books, certification of rights of licenses an other documents specified by the Ministry of Finance. Stamp duty is assessed on the contracting parties at rates ranging from 0.005 percent to 0.1 percent.
12. Urban and Township Land Use Tax (UTLU)
Urban real estate tax applies to owners of land and buildings in urban areas, primarily FIEs. The tax is levied on the net book value of the property as determined by a local real estate appraisal committee. For an owner-occupied building, the rate is 1.2 percent a year on the building’s net book value. If the owner leases out the building, tax is levied instead at a rate of 12 percent on the rentals pan. The tax is payable in quarterly or semi annual installments, as determined by the local tax authorities.
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