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Introduction to China tax  中國税法的基礎知識

Corporate Income Tax 企業所得稅

Corporation Income Tax (CIT) is a tax paid by an enterprise (i.e. an economic organization set up in accordance with law) on their world-wide income from production and business operation.

A Hong Kong  company having a permanent establishment (PE) in China is taxed in respect of its income effectively connected to the PE.  A Hong Kong company, whether it has PE in China or not, receives dividend, interest and royalty from a China enterprise is subject to withholding tax at the following rates: dividend at 10% for at least 25% shareholding, 5% for other case; interest 7%; royalty 7%.

CIT is chargeable on taxable income after allowable deductions in a tax year at standard rate of 25% subject to certain reductions and exemptions.

Tax year is from 1 Jan to 31 Dec. CIT is usually payable on quarterly basis based on quarterly financial statements. Tax is paid within 15 days of the quarter end. Yearly tax returns for the tax year must be submitted within 5 months after the year end and balance of tax liability, if any, must be paid accordingly.

Taxable incomes include business income, production income and other incomes. Other taxable incomes include dividend income, interest income, rental income, sale of fixed assets, and income from royalty, trademark or technology. Most government subsidies are exempt.  Allow deduction for reasonable business expenses, charitable donations and depreciation on fixed assets and intangible assets at prescribed rates. Non-deductible items include dividend payment, CIT, tax penalty and expenses not for production of chargeable income. Business loss can be carried forward to set off future profits subject to a limit of 5 years.

Certain types of enterprise enjoy lower tax rates or exemption. For example, high-tech enterprises and foreign enterprise in Special Economic Zone are taxed at 15%. Small enterprises and foreign enterprises without permanent establishments in China are taxed at 20%. Certain government encouraged activities such as scientific research, exploration of energy, development of transportation etc. are exempt.


Individual Income Tax 個人所得稅

An individual who has domicile in China pays Individual Income Tax (IIT) on his world-wide taxable income.

An individual without domicile in China is taxed according to his length of stay in China:

  • for 1 to 5 years: the taxable world-wide income refers to the amount paid in China;
  • for more than 5 years: the taxable world-wide income covers both paid in China and paid outside China;
  • for stay of less than 1 year, only income derived from China is taxable. No world-wide basis.

Full exemption of IIT for Hong Kong resident under Double Taxation Arrangement if (1) he stays in China for not exceeding 183 days in 12 month starting or ending in the year concerned; (2) the income is paid by an employer who is not a resident in China; and (3) the income is not borne by a permanent establishment in China.  To prove the Hong Kong resident status, he needs to obtain a Certificate of Hong Kong Resident Status from HK Inland Revenue Department. An individual who has moved his permanent base to China cannot qualify a Hong Kong resident.

For a Hong Kong  resident rendering services both in Hong Kong and China, only his income sourced in China is subject to IIT.  The income sourced in China is computed on time basis. If he stays in China not exceeding 183 days in the calendar year concerned, only the income paid in China is included in the time basis apportionment. If exceeding 183 days, all incomes including those paid outside China are included in the income for time apportionment. All days of presence in China are counted. Nevertheless, the taxpayer may ask Hong Kong  Inland Revenue Department to raise the issue with China tax authority if he is also assessed under HK salaries tax with double counting of days.

For a Hong Kong resident rendering services in China only, all income sourced in China is taxable: no time apportionment is allowed.

Taxable income includes wages, salaries and allowances. It is reported by employer to tax authority on monthly basis. A fixed amount of deduction is allowed. Tax is calculated by applying the applicable progressive rate to the taxable income after deduction of expenses deduction and other allowable deductions. See example below.

  •  Taxable Income = Gross Monthly Salary – Social Benefits Contributions – Deduction ¥3,500
  •  A HK resident having no domicile in China can get Expenses Deduction ¥4,800
  •  IIT = Taxable Income x Tax Rate – Quick Deduction

Monthly taxable income ¥

Applicable tax rate

Quick deduction

1 - 1,500

3%

0

1,501-4,500

10%

105

4,501-9,000

20%

555

9,001-35,000

25%

1,005

35,001-55,000

30%

2,755

55,001 - 80,000

35%

5,505

80,001 and above

45%

13,505

Example: Mr. Chan, a HK resident, worked as a factory supervisor in China. He did not work in HK. In Mar 2013 his monthly salary was ¥50,000 (tax borne by employee). If he does not own a permanent residence in China, he has deduction of ¥4,800. So, his taxable income in June is 50,000 – 4,800 = 45,200, giving an IIT of 45,200 x 30% – 2,755 = ¥10,805. The IIT is paid by his employer in China to local tax authority within 7 days after the month end (that is on or before 7 Apr 2013).

IIT is also levied on income from solely owned business, rental income, royalty income, dividend, interest income. Except business income and rental income, IIT is deducted and paid by the payer of the income for the recipient. 

  • Income from solely owned business is taxed at a separate set of progressive rates (from 5% to 35%).
  • Rental income, royalty income, dividend income are taxed at standard rate of 20%.
  • Individual’s working income such as writer’s fee attracts an expenses deduction (20% deduction for payment over ¥4,000, ¥800 deduction for payment under ¥4,000) and then the balance is taxed at 20%. 
  • Interest income is taxed at 5%, .

An individual earning income without deduction of IIT must file a tax return with local tax authority within 7 days of the following month and pay IIT accordingly.

An individual having an annual income of ¥120,000 or above must file an annual tax return to tax authority within 3 months after the year end.


Value Added Tax增值稅

Any enterprise and individual engaged in sales of goods, provision of services of processing, repairs and replacement must pay Value Added Tax (VAT).

Exporters of goods are exempt and may apply for refund of VAT for input tax on goods purchased.

Tax rates:

  • Necessities such as food, water, natural gas, books, newspapers, magazines etc. : 13%
  • All other goods; services of processing, repairs and replacement : 17%

General taxpayers need to separately calculate the output tax and the input tax for the VAT period. Then the difference is the actual amount of VAT payable.

  • Tax payable = Output tax payable for the VAT period - Input tax for the VAT period
  • Output tax payable = Sales in the current VAT period (excluding VAT) × Applicable tax rate

For purchase of goods, the input tax is the VAT in the VAT special invoices received from suppliers.

For importation of goods, the input tax is the VAT in the tax certificates issued by Custom Authority.

Input tax for transportation cost of goods purchased is computed at 7% on transportation cost.

No input tax deduction is allowed for purchase of fixed assets.

VAT period may be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter as set by the tax authority. Usual VAT period is 1 month and for these taxpayers VAT must be paid within 5 days after the month end.

Small-scale taxpayers are taxed on the revenue from sales of goods or provision of taxable services by applying 3%. Small-scale taxpayers are those engaged in sales of goods with annual turnover <¥ 800,000; or engaged in production of goods with annual turnover < ¥ 500,000. VAT payable = Sales amount (excluding VAT) × 3%.

Exemption is granted for individual taxpayer whose sales does not meet the monthly threshold of goods ¥30,000.

Exempt items include contraceptive medicines and devices; antique books; instruments and equipment imported for scientific research, experiment and education; articles imported for the disabled etc.

Mixed sales means sales activities involve both goods and services. Mixed sales arising from manufacturing, wholesaling and retailing are deemed to be sale of goods and subject to VAT. In any other cases, Business Tax is payable instead of VAT.

VAT special invoice sets out the VAT and selling prices separately. Enterprises involved in printing and using invoices are subject to control by tax authority.  For goods sold to consumers, the invoices need not show the VAT separately. Small-scale taxpayers are not required to issue VAT special invoices.


Business Tax 營業稅

Taxpayers of Business Tax (BT) include all enterprises and individuals engaged in provision of service (transportation 3%, service industry 5%, entertainment 5% to 20%), transfer of intangible asset (5%) or transfer of immovable property (5%) – PRBT Article 1. 

Items taxed under BT are not chargeable to VAT.

For transfer of immovable properties, the purchase price of the property or land use right can be deducted from the sale consideration.

Tax payable = [ Turnover (excluding BT) in BT period – Allowable deductions ] × Applicable tax rate

BT period may be 5 days, 10 days, 15 days, or 1 month as set by the tax authority. Usual BT period is 1 month and for these taxpayers BT must be paid within 5 days after the period end.

BT may be exempt for schools, medical organizations, handicapped services, cultural services, religious activities etc.

Concurrent activities: Where the turnover of goods and services is accounted separately, enterprises pay VAT or BT separately as verified by tax authority. For example, the catering and lodging revenue of hotel is subject to BT whereas its merchandise sales revenue is subject to VAT. Where the turnover of services and goods cannot be accounted separately, the total revenue is subject to VAT.


Consumption Tax 消費稅

Every enterprise and individual engaged in the production and importation of consumer goods (e.g. tobacco, alcoholic drinks, cosmetics, jewel, fireworks, gasoline, diesel oil, tires, motorcycles, automobiles) may pay Consumption Tax (CT) – PRCT Article 1.

The tax is computed on sales price or sales volume.

Exporters are exempt and may apply for refund of VAT for input tax on goods purchased.

If an enterprise purchases consumer goods from a producer for further production, the CT paid by the producer can be deducted from the total CT on the final taxable consumer goods. Deduction is based on the amount of the consumer goods used in the further production during the relevant CT period.

Taxable goods include tobacco products, alcoholic drinks, cosmetics, skin-care products, gold and jewel, firework, gasoline and diesel, motor-car, motorbike, car-tyre etc.

Tax rates vary from 3% to 50% according to the types of consumer goods.

Tax payable = Turnover in CT period × Applicable tax rate; or = Quantity sold in CT period × Applicable tax rate

CT period may be 1 day, 5 days, 10 days, 15 days or 1 month as set by the tax authority. Usual CT period is 1 month and for these taxpayers CT must be paid within 5 days after the month end.


Tax Administrative Review

Where a taxpayer believes his legitimate rights were infringed by a tax officer, he can request for a tax administrative review by a higher authority. .If the taxpayer is not satisfied with the review, he can take legal proceedings in Peoples’ Court.


Study of China Tax for HK taxation examination

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