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China Taxation -- AHKCPA

1.....Type of Chinese  tax

2.....How to sell into China to save home tax

3......Reforms of Corporate Income tax in  China

4.....Tax watch - Expatriate working in China

5.....Value Added Tax in China

6......Social insurance

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(1).Type of Tax in Mainland of China

 Value Added Tax: VAT applies to all enterprises and individuals engaged in sales of goods, provision of processing, repairs and replacement services, and the importation of goods into China. General VAT rate is 17%, but necessities goods are taxed at 13%. VAT payable or refundable is based on output VAT (for Sales) minus input VAT (for Purchases). Generally, there is no VAT payable for export. Click More

 Business tax: all enterprises and individuals engaged in transportation, construction, post and telecommunications, finance and insurance, as well as transfer of immovable properties and intangible assets shall be liable for business tax. Business tax is charged on gross revenue at a rate from 3% to 20%

 Corporate income tax: An entity in China is subject to corporate income tax.  The CIT rate is usually 25% charged on net profit. Depending the location or business of entities, the CIT rate may be reduced. Click More

 Individual income tax: Individuals are subject to PRC IIT on their salaries, allowances, rental income and other income at progressive tax rates ranging from 5 – 45% respective of 500 – 100,000 RMB per month. Click More

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(2).How to sell into China to save home tax

This article illustrates how to use a Hong Kong Trading company in order to achieve tax efficiency to an overseas supplier that sells its products into China. Many overseas suppliers these days selling their products directly to China either might have set up their own subsidiary in China or not. Under both circumstances, one may find several advantages to use an intermediate Hong Kong company to undertake the trading transactions with the Mainland China. First, we shall look into the direct trading business where the overseas supplier sells directly to the China buyer. In our examples, we use USA for instance (equally applicable to other countries) as overseas seller for illustration purpose.
This model is characterized by having the Chinese buyers or independent third party importer responsible for importing goods into China and arranging the payment for sales proceeds out of China. The weakness of this trading model is that it is difficult for the overseas seller to expand its market share without sufficient distribution channels. To save home tax to overseas seller, it is advisable to add a Hong Kong trading company to buy from US seller and in turn sell to China buyers as an alternative.


The advantages for doing this can be summarized as follows:

a. Shifting profit from home country to HK- Trading profit reported in HK trading company attracts very low tax merely 16.5% on net profit, or even wholly exempt if offshore source profit can be proven. It is here worth to highlight the HK’s “Territorial Source Tax Principle” that only profit derived from HK is taxable in HK. Profits derived from offshore trading transactions are tax exempt subject to proof of offshore income source. Transactions derived from Mainland China are classed as offshore in terms of HK tax perspective even though HK is a part of China. Buying from USA and selling to China could be, prima facie, construed as offshore trading transactions that are tax exempt in HK. It is crucial, inter alia, that no HK customers nor suppliers are involved to achieve offshore status.

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b. Preventing profit repatriation to home country - Trading profit can be retained in Hong Kong that prevents immediate home tax for trading profit. However, money can be pushed back into US parent company by way of loan as an alternative to dividend payment.


c. Unlike China, there is no withholding tax in HK for profit repatriated back to the US parent company.

d. Pragmatically, most Chinese domestic buyers could find it easier to pay sales proceeds into a HK bank account than a US bank account.


Then, we move on our discussions to the trading model with Chinese Subsidiary established in the Mainland.

Under trading model in diagram 2, the US parent first sells to its Chinese subsidiary that in turn sells to end buyers. It will then likely be the Chinese subsidiary that imports good into China, receives money from domestic buyers within China and pays the purchases proceeds out of China. Under the company structure where US parent holding 100% Chinese subsidiary directly, dividend paid out of China subsidiary will attract immediately the home tax to the parent company in US. Because of foreign exchange control in China, there is no alternative means to push money back to the US parent other than dividend payment and purchases proceeds. In order to relieve the harshness of the company structure, it is worth to add HK Company as intermediate holding company between US parent and China subsidiary.


The advantages of applying this proposed model are summarized as follows:

a. Shifting the profit to HK from US and China thru trading prices – HK takes the lowest tax 16.5% of net profit or no tax at all either. Contrast the income tax rates in China: 25%, US: above 30%. Transfer pricing issues must be monitored and handled carefully. Overly transfer pricing may trigger concerns from the tax authorities.


b. Dividend out of China subsidiary to HK holding company is tax exempt in HK. And there is no withholding tax in HK neither for dividend repatriation to the US parents. This prevents immediate home tax for dividend paid out of China subsidiary.


c. Hong Kong subsidiary, instead of leaving it dormant, could also be used to deal with directly China buyers that are capable of importation and remitting payment out of China (see Diagram 1). This relieves the Chinese subsidiary from dealing with harsh Value Added Tax system in China. Further, it enables the overseas seller to take out whole of trading profit from China to HK and accommodates a more flexible trading model.



Any tax planning might involve risk of drawing concerns from tax authorities or effecting anti-tax avoidance provisions. The above is only for your information but not professional advice, please consult professionals before you implement any of the above information.

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(3).Reforms of Corporate Income tax in China

The new China Corporate Income Tax Law has been passed by the China Central government on 16 March 2007 and will become effective on 1st August 2008. Previously, we have two separate tax law systems applicable to Foreign invested enterprises (FIE) and domestic enterprises. But now, with promulgation of new Corporate tax law, both FIE and domestic enterprises are governed under a single unified Corporate income tax law.

The followings are extracts of key Clauses about the new Corporate income tax law and our commentary to note:

Clause two: Enterprises are divided into resident enterprises and non-resident enterprises. Resident enterprises are defined as enterprises incorporated in China or its central management organization is operated within a China enterprise. Non-resident enterprise is defined as incorporation outside China and its central management organization is situated beyond China territory. Non-resident enterprise might include those with office established in China or those without an office in China but have source of income derived from China territory.

Commentary: Previously, corporate taxpayers are fundamentally divided into FIEs and domestic enterprises.

Clause three: Resident enterprises are subject to Corporate income tax for both of its income derived from China territory and offshore. Non-resident enterprises with China office established are subject to Corporate income tax for income derived from China and income related to office activities. Non-resident enterprises without China office are subject to Corporate income tax for income derived from China territory.

Commentary: Offshore income is taxable under resident enterprises, but is excluded from tax under non-resident enterprises. Onshore income is taxable either for resident or non-resident enterprises.

Clause four: The corporate income tax rate is 25%. The tax rate applicable for non-resident enterprises without a China office is 20%.

Taxable income

Clause five: The net of total revenue after non-taxable income, deductions and loss carried forward from the previous years is the taxable income.

Commentary: No change in principle

Clause nine: The maximum allowance deduction of charitable donations is determined at 12% of total net profit.

Clause ten: Non-deductible outgoings comprises: a) dividend, bonus, or gain on equity investment payable to investors, b) corporate income tax, c) tax surcharge, d) penalty or surcharge or loss on seizure, e) charitable donations in excess of allowance deductions, f) sponsorship, g) provision not yet approved, f) expenditures not related to gained income.

Commentary: More clear definition of non-deductible expenditures

Clause eighteen: Yearly tax loss can be carried forward and net off against subsequent year profit, but not more than 5 years following the year of loss.

Commentary: No change                                           [ Return ] [ Top ]

Tax incentives

Clause twenty five: Tax incentive is available for industries or project encouraged by the State

Commentary: Previously, tax incentives are labeled and more distinguishable for FIE projects.

Clause twenty seven: tax exemption or reduction on particular income including: a) income on agriculture, foresting, breeding, fishing industries, b) income on utilities construction, c) income on environment protection projects or energy/ water savings projects, d) gain on technology transfer with conditions, e) gain on income derived by non-resident enterprises from China territory.

Commentary: it is worth to note for specific tax exemption or reduction available to non-resident enterprises.

Clause twenty eight: Small scale enterprises are taxed at a reduced corporate tax rate of 20%. High technical enterprises are taxed at a reduced corporate tax rate of 15%.

Commentary: The conditions for satisfying small scale are not clear.

Transitional arrangements

Clause fifty seven: Enterprises that were established before this tax law, and are granted tax incentives under the previous tax laws, might be required to adopt new tax rate under the new tax law over five years progressively. Details of such tax incentives available are subject to the rulings promulgated by the State Council of Administration (SCA). Enterprises established in special economic zone or enterprises of high technology encouraged by the government, might continue to enjoy transitional tax incentives, details of such rulings are at the discretion of SCA.

Commentary: Transitional rulings of SCA have not yet been announced.
 

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(4).Tax watch - Expatriate working in China

Because of increasing economic ties and foreign direct investments in Mainland China, more expatriates are working in China these days. This article is to outline an overall view on the key aspects of taxation for expatriates working in China.


TAXABLE INDIVIDUALS

Under PRC individual income tax laws, taxpayers are distinguished into two categories: PRC-domiciled and Non-PRC domiciled individuals. Expatriates working in Mainland China could fall under either category. According to the principle laid down by the PRC Individual Income Tax (IIT) Law, PRC-domiciled individuals are charged tax on income sourced from China and offshore, but non-PRC domiciled individuals are charged tax on income sourced from China only. PRC-domiciled individuals are defined as Chinese citizens, persons habitually reside in China, or persons residing in China for more than one full year residence. Non-PRC domiciled individuals are defined as persons not habitually reside in China or persons residing in China for less than one full year residence.

The test for one full year residence is that a person is qualified to reside in China for 365 days in a calendar year, temporary absences are not deducted. Temporary absence from China is defined as not more than 30 days per trip, or 90 days in aggregate multiple trips in a calendar year. In other words, if an expatriate is absent from China for more than 30 days per trip, or 90 days in multiple trips in a calendar year, he is not regarded as one full year residence.

In general, the scope of tax on services rendered by expatriates is dependent on the length of residency in China. Non-PRC domiciled individuals (less than one full year residence) are subjected to IIT on income derived from services rendered in China only. In order to arrive at the income deemed to be derived in China, the total income paid in or outside China for the month will be taken into account for apportionment. However, a Non-PRC domiciled individual might apply for tax exemption if he or she stays in China for not more than 90 days (183 days for specific nationalities) for a calendar year and provided that such income was not paid or borne by a China establishment.

PRC domiciled individuals (more than one full year residence) are subjected to IIT on income derived from services rendered both in China and outside China. The total income paid in or outside China for the month is apportioned for arriving at the taxable income for services rendered. PRC domiciled individuals who stay for more than 5 full year residence would be subject to world wide income in the sixth year. The chain of five full year residence can be broken down by restricting the residence in the sixth year with less than one full year residence. If the residence in the sixth year is less than one full year, the overseas income will not be taxable in the sixth year.

For expatriates representing or holding out as senior officers for a China establishment, whose income paid or borne by China establishment is wholly taxable irrespective of where the services are rendered.

The Charging of IIT on expatriate working in China (apart from those holding senior officers position of a China establishment) can be summarised as follows:

Length of residency
Services rendered in China
Services rendered outside China

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TAXABLE INCOME AND TAX RATES

Taxable incomes from employment comprise salaries and wages, housing allowance (in excess of statutory limit), bonuses, tax reimbursements, stock option, severance payment (in excess of statutory limit), and so on. Standard monthly tax deduction is RMB 4,800 per month for an expatriate, and RMB 1,600 per month for a local citizen. Taxable income is arrived at after deduction of monthly standard deduction. Tax rates are progressive ranging from 5% to 45% on different respective hierarchy of income levels from RMB500 to above RMB100,000 per month.


FILING OF TAX RETURNS AND TAX PAYMENT

Generally speaking, tax returns are filed by the employers (China establishment) on monthly basis, individual income tax is withheld by employers for direct payment to the tax authorities concurrently. But the State of Administration has recently issued a circular no. 162 Guo Shui Fa [2006] on 2006 November 6 to request filing of tax returns by individuals themselves. As stipulated by the circular the following group of individuals (Group a to e) are required to report their income directly to tax authorities for clearance:

a. annual total income more than RMB120,000

b. income derived from two sources of employment or more

c. income derived from overseas entity

d. without withholding agent (China establishment)

e. other as specified by the State of Admin

These groups are required to file self reporting returns for clearance irrespective of tax due already paid. However, non-PRC domiciled expatriates with less than one full year residence falling under group (a) are exempted from filing self reporting tax returns.

Due dates:

Group (a) and (c) are required to file self reporting returns on annual basis in the subsequent year. The due date for filing 2006 income for group (a) and (c) is on 31 March and 31 January 2007 respectively. Group (b) and (d) are required to file self reporting returns on monthly basis for income derived from 1 Jan 2007.

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(5).Value Added Tax

VAT applies to all enterprises and individuals engaged in sales of goods, provision of processing, repairs and replacement services, and the importation of goods into China. General VAT rate is 17%, but necessities goods are taxed at 13%. VAT payable or refundable is based on output VAT (for Sales) minus input VAT (for Purchases). Generally, there is no VAT payable for export

Input VAT

Input VAT 17% is computed on the total basis of CIF value and import custom duty paid and is payable by consignee in China on import declaration of goods, for example, CIF value =CNY 1000; custom duty 5% thereon =CNY50; input VAT = 17% x (CNY1000 + CNY 50 ) = CNY178.5.  Input VAT and import custom duty, CNY (50 + 178.5) are direct costs of sales for a trading company. The China custom will be the one to issue the import VAT invoices.

Output VAT

Output VAT is due payable when goods are sold locally in China which generally coincides with the delivery of goods to customers. In China there are two types of taxpayers for VAT, namely General taxpayer GTP, and Small taxpayer STP. General taxpayers have higher status, representing larger trading companies, being GTPs enabling themselves to issue 17% VAT invoices. Under GTP status, a taxpayer pays net of output VAT 17% less deduction of input VAT paid to the State tax bureau. While, STP is restricted to open 4% VAT invoices for trading company (6% for production). STP is liable to pay gross output VAT 4% based on sales amount, without deduction of input VAT paid.  Below is analysis of comparing output VAT payable under GTP and STP, it is assumed that a company can market its product and receive sales amount including VAT in the total amount of CNY1,400 from its customer.

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GTP status

Input VAT payable on import = CNY178.5, see above

When goods are sold out, Net Output VAT payable

= Output 17% VAT – Input VAT paid

= 17% x Sales price excluding VAT – Input VAT paid

= 17% x CNY 1,400 / (1+17%) – CNY 178.5 = 17% x CNY 1,196.6 – CNY 178.5

= CNY 203.4 – CNY 178.5

= CNY 24.9 (favorable)

 

STP status

Input VAT payable on import = CNY 178.5 same

When goods are sold out, output VAT is payable on gross sales amount (not allowing input VAT deduction)

= 4% on sales price excluding VAT = 4% x CNY 1,400 / (1+4%) = 4% x CNY 1,346.2

= CNY 53.8

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Relevant tax laws

The tax law states doing local sales in mainland China without VAT invoice is not legal. Both seller and buyer may be liable to prosecution and penalty.

 

Whenever the turnover of a trading company reaches CNY 1.8 million for a calendar year, a taxpayer is enforced by the State tax bureau to pay 17% output VAT instead of 4% output VAT.  The deduction of input VAT against 17% output VAT, is not taken for granted, and can be allowed if and only if the company can successfully achieve the GTP status. Therefore, it saves tax for a trading company to apply for GTP status if its turnover reaches CNY 1.8 million or above.

 

 

 

 

 

 

General

 

Small

 

 

 

 

taxpayer

 

taxpayer

Source data

 

 

 

 

 

Sales (including VAT)

 

1400.00

 

1400.00

Import value

 

 

1000.00

 

1000.00

Custom duty

 

 

50.00

 

50.00

Input VAT (17%)

 

 

178.50

 

178.50

Output VAT (17%/4%)

 

 

24.90

 

53.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement

 

 

 

 

 

Sales (including VAT)

 

1400.00

 

1400.00

Cost of sales

 

 

 

 

 

  Import value

 

 

-1000.00

 

-1000.00

  Custom duty

 

 

-50.00

 

-50.00

  Input VAT

 

 

-178.50

 

-178.50

  Output VAT

 

 

-24.90

 

-53.80

Profit before tax

 

 

146.60

 

117.70

Corp. Tax

 (25%)

 

 

-36.65

 

-29.42

Profit after tax

 

 

109.95

 

88.28

 

 

 

 

 

 

 

 

 

A foreign investor might be puzzled to set up a Representative office versus a Wholly  Owned Foreign Enterprise (WOFE) in China.  How does it differ between a Rep office and a WOFE ?  This article outlines the key factors and differences foreign investors should consider while they decide on which establishment is more appropriate to their circumstances.

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(6).Social insurance rates are :

 Welfare insurance (employer 10%, staff 8%)

 Medical insurance (employer 8%, staff 2%)

 Unemployment insurance (employer 0.4%, 0)

 Accident insurance (employer 0.5%, 0)

 The above rates are applicable in Shenzhen, these rates may vary depending on location of  entities.  Expatriates working in China are not required to contribute PRC social insurance and pension




We Colvass act as tax representative for clients and handle many aspects of corporate and non-corporate tax matters. We provide taxation consultancy to local and overseas clients, individuals and corporate, including tax planning, tax filing, objections and appeals. Our partners are specialized in handling tax investigation and field audit cases.


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