China Market Guide

Taxation in China

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.

Consumption Tax

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.

Business Tax

9 taxable items are subject to Business Tax, whose tax rates range from 3% to 20%.

Enterprises Income Tax

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.

    d. Penalties
    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.

International Taxation

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.