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
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● 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
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● 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
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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 Colake 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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