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Tax Framework in China

China has a wide range of taxes, which can be broadly categorized into turnover taxes, including VAT, Consumption Tax and Business Tax; income taxes, including CIT and Individual Income Tax (IIT); property related taxes, including Real Estate Tax, Urban and Township Land Use Tax, and Land Appreciation Tax; and other taxes, such as Tariff, Stamp Duty, and Deed Tax.

An overview of the major taxes in China is provided as below.

1.                     CIT

On February 24, 2017, the newly amended Corporate Income Tax Law of the People’s Republic of China (the “CIT Law”) entered into force upon approval at the 12th National People’s Congress. According to the law, enterprises in China, consisting of resident and non-resident enterprises, are obliged taxpayers of CIT.

A resident enterprise refers to a company established in China in accordance with Chinese laws, or incorporated under laws of a foreign country (region) but with its management body operating in China. A non-resident enterprise means a company set up under laws of a foreign country (region) with its management body located outside China, which has establishments or offices within, or without China but with profits derived from the country.

Monetary and non-monetary profits constitute an enterprise’s total income which is the basis for calculating its CIT payable according to the following formula:

Gross Income – Nontaxable Income – Tax Exempt Income – Deductions – Allowable Losses Carried from Previous Years = Taxable Income

Taxable Income × Applicable CIT Rate = CIT Payable

·         Resident Enterprises

A resident enterprise is taxed on its incomes sourced from both within and outside the territory of China at a rate of 25%.

·         Non-resident Enterprises

A non-resident enterprise that sets up an organ or establishment within the territory of China shall pay its CIT at the rate of 25% on its incomes sourced within the territory of China and beyond but actually connected with the said organ or establishment.

A non-resident enterprise that has an organ or establishment within the territory of China, but generates its incomes with no actual connection to the said organ or establishment, or that has no organ or establishment within the territory of China, but has income sourced from China, shall pay its CIT at a lower rate of 20% (currently at a reduced rate of 10%) for the incomes sourced within the territory of China.

·         CIT Return and Payment

Under the CIT Law, a resident enterprise set up in China shall pay the tax to the local tax authority in the place where the company was registered, and if it was founded overseas, the tax shall be paid to the tax authority in the place where its management body in China is operated.

For a non-resident enterprise, the tax shall be paid to the tax administration in the place where its organ or establishment is run; for those with two or more organs or establishments in China, upon approval by the local tax authority, the income tax is allowed to be paid in a consolidated manner by the major organ or establishment which shall be responsible to supervise and manage the production and operation of other establishments or offices, and have complete account books and documents which accurately record the incomes, costs, expenses, profits and losses of each organ or establishment. CIT is levied on an annual basis from January 1 to December 31 of a calendar year.

An enterprise shall file a CIT return and pre-pay the tax on a monthly or quarterly basis, and settle the amount after the end of each tax year. To be specific, an enterprise shall, within 15 days following the end of a month or quarter, submit a CIT return and prepay the current tax to the tax authority, and within 5 months following the end of each tax year, file an annual CIT return to the tax authority for settlement. In case of corporate income denominated in currencies other than RMB, the enterprise shall convert the amount into RMB-denominated number for CIT calculation and payment.

·         Tax Incentives

According to the tax law, enterprises engaged in investment projects with the government support are eligible for tax breaks. Below is a partial list:

Table 1 Catalogue for CIT Incentives (2017 Version)

Eligible Projects/Enterprises

Tax Incentives

Duration

Applicable Context

Agricultural, forestry,

animal husbandry or fishery projects

Exempted or 50% reduction

Throughout the project

At pre-payment

Non-profit activities by non-profit organizations

Exempted

Throughout the activities

At pre-payment

Key public infrastructure projects supported by the Chinese

government

3+3 tax break

Six years starting from the tax year in which the first operating revenue is generated

from such project

At pre-payment

Qualified environmental protection/energy-

and water-saving projects

3+3 tax break

Six years starting from the tax year in which the first operating

revenue is generated from such project

At pre-payment

New and high-tech enterprises incorporated and certified after Jan 1, 2008 in Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Shanghai Pudong

New Area

2+3 tax break

Five years starting from the tax year in which the first operating revenue is generated from such project

At pre-payment

Qualified software enterprises

2+3 tax break

Five years starting from the first profit- making year for enterprises/projects set up by December

31, 2017

At pre-payment

IC design start-ups

2+3 tax break

Five years starting from the first profit- making year for enterprises/projects

set up by December 31, 2017

At pre-payment

Energy Performance Contracting (EPC)

projects by qualified

3+3 tax break

Six years starting from the tax year in which the first operating

At pre-payment


energy-saving

services enterprises

revenue is generated from such project

Start-ups in underdeveloped regions in Xinjiang

2+3 tax break

Five years starting from the tax year in which the first operating revenue is generated from such

project

At pre-payment

Projects under the Clean Development Mechanism (CDM)

3+3 tax break

Six years starting from the tax year in which the first revenue is generated from the

transfer of emission reduction credits

At pre-payment

Note:

1.        “a+b tax break” refers to (a) years of exemption and (b) years of 50% reduction of CIT.

2.        For a complete catalogue, please refer to applicable laws and regulations of China, such

as the Catalogue for CIT Incentives (2017 Version) and Regulation on the Implementation of the Corporate Income Tax Law of the People’s Republic of China.

Source: Catalogue for CIT Incentives (2017 Version)

In addition to tax breaks, eligible enterprises enjoy lower CIT rates according to the tax law. For example, qualified new and high-tech enterprises, after certification by competent authorities, are eligible for a reduced rate of 15%; qualified small and low profit enterprises are entitled to a reduced rate of 20%; and in some economic zones, enterprises that fall within the local catalogue for CIT incentives enjoy tax reductions as defined by the zones.

·         Withholding Income Tax Deferral for Foreign Investors in China

To attract more foreign investment, China issued a policy in 2017 which provides foreign investors with a withholding income tax deferral incentive for their equity investments with profits distributed to them, and has expanded the applicable scope in 2018 from foreign investment projects that are in the encouragement category to all projects and fields that are not prohibited.

2.                     IIT

On August 31, 2018, the Amendments to the Individual Income Tax Law of the People’s Republic of China was passed by the Standing Committee of the 13th National People’s Congress and took effect from January 1, 2019. It was followed by the launch of the Regulation on the Implementation of the Individual Income Tax Law of the People’s Republic of China on December 18, 2018, which took effect with the new IIT law. An overview of the newly introduced IIT system is provided as below.

The new IIT law revised the criteria for who shall pay IIT. A resident individual is an individual who is domiciled in China or who is not domiciled in China but has stayed in the aggregate for 183 days or more of a tax year in China. The Draft which provides a detailed definition of taxpayers stipulates that for an individual who is not domiciled in China and who has been present in China for less than five consecutive years, or who has stayed five consecutive years but has a single absence from China for more than 30 days, the individual may not pay IIT for non-China sourced income after the completion of relevant registration with in-charge tax authority.

A non-resident individual is an individual who neither is domiciled in China nor stays in China or who is not domiciled in China but has stayed in the aggregate for less than 183 days of a tax year in China. The Draft provides non-resident individuals an incentive policy that an individual who is not domiciled in China and who has been present in China for no more than 90 days, consecutively or cumulatively, in a tax year, will be exempted from paying IIT for the incomes sourced in China, but paid by overseas employers instead of China based establishments or office. A tax year starts from January 1 to December 31 of a calendar year.

·         Tax Rate

As stipulated in the new IIT law, comprehensive income and business income shall apply progressive tax rates; interests, dividends, bonuses, income from property leasing and transfer, and contingent income shall apply a proportional tax rate of 20%.

(i)   Comprehensive Income

Comprehensive income which includes wages and salaries, income from remuneration for personal services, author’s remuneration and royalties, is subject to a 7-grade progressive tax system at a tax rate from 3% to 45%. For income from remuneration for personal services, author’s remuneration and royalties, a deduction by 20% shall be allowed when calculating the comprehensive income. For income from author’s remuneration, a further deduction by 30% shall be allowed, so 56% of the actual income from author’s remuneration is effectively included in the comprehensive income for IIT purposes.

Although the new IIT tax law has not been fully implemented when the report is released, the standard basic deduction for calculation of taxable income is increased to RMB 5,000 per month on October 31, 2018 and the new comprehensive tax rate schedule has taken effect.


Table 2 IIT Rate Schedule (Applicable for Comprehensive Income)

Grade

Annual Taxable Income (RMB)

Tax Rate

1

≤36,000

3%

2

36,000 and ≤144,000

10%

3

144,000 and ≤300,000

20%

4

300,000 and ≤420,000

25%

5

420,000 and ≤660,000

30%

6

660,000 and ≤960,000

35%

7

>960,000

45%

(Note: The annual taxable income above equals the comprehensive income of a resident individual in a tax year less RMB 60,000, special and additional special deductions, and other statutory deductions.)

Source: Individual Income Tax Law of the People’s Republic of China

(ii)   Income from Business Operation

A 5-grade progressive tax system with a tax rate from 5% to 35% is applied for the income from production or business operation conducted by self-employed industrial and commercial households, and sole proprietorship and partnership enterprises, and income from contracted or leased operation of enterprises or institutions. The latest business income tax rate schedule is as follows:

Table 3 Business Income Tax Rate Schedule

Grade

Annual Taxable Income (RMB)

Tax Rate

1

≤30,000

5%

2

30,000 and ≤90,000

10%

3

90,000 and ≤300,000

20%

4

300,000 and ≤ 500,000

30%

5

500,000

35%

(Note: The annual taxable income in the above table equals the gross revenue of each tax year less costs, expenses and losses.)

(iii)     Interests, Dividends, Bonuses, Income from Property Transfer and Leasing, and Contingent Income

A tax rate of 20% is applied in this category of income. For the income from property leasing, if the payment is less than RMB 4,000, a deduction by RMB 800 is allowed when calculating the taxable income; if the payment is more than RMB 4,000, the deduction is 20% of the payment. For the income from property transfer, a deduction of the net value of the property and a reasonable expense amount is allowed, while no deduction is allowed from the income from interests, dividends, and bonuses, and contingent income.

·         IIT Return and Payment

The IIT on comprehensive incomes of resident individuals is levied on a yearly basis by withholding and settlement, with withholding agents prepaying the IIT monthly; that of non-resident individuals will be paid by withholding agents on a monthly basis or when taxable income arises. The IIT on business operation is levied on a yearly basis with taxpayers prepaying each month or quarter. The IIT on other incomes is levied monthly or each time when taxable income arises, and prepaid by the withholding agents, if any.

·         Special Provisions on IIT for Expatriates in China

The following items received by expatriates are exempted from IIT:

a.    allowances for housing, meals, relocation, and laundry provided in a non-cash form or on a reimbursement basis;

b.   reasonable allowances for trips within China or beyond;

c.    allowances for home visits, language training, children’s education expenses, recognized by local tax authorities as reasonable exemptions;

d.   dividends and bonuses from foreign-invested companies;

e.   wages and salaries of national recognized foreign experts;

f.   dividends (bonuses) from the B shares or overseas listed shares including H shares of companies within China.

3.                     VAT


VAT is imposed on entities and individuals engaged in marketing goods; providing processing, repair and replacement services, marketing services, intangible assets, or immovable properties; or importing within China. VAT is collected by taxation authorities and the import-incurred VAT by customs authorities. China adopts the international practice of tax deduction in computing VAT with the principle of taxation on incremental gains. The difference between the output tax paid for selling products or services and the input tax paid for purchasing such products or services is the VAT payable.

Since May 1, 2018, three new policies have been implemented to deepen the VAT reform: reducing the rates of two VAT brackets, unifying the criteria for small-scale VAT payers, and giving a lump-sum refund for the excess input VAT payments yet to be deducted in some industries. Specifically, one percentage point is lowered for manufacturing from 17% to 16%, and construction, transportation and other industries from 11% to 10%. On June 27, 2018, a plan on the refund for excess input VAT payments was released by the Ministry of Finance and SAT, clarifying that the electric utilities and eligible enterprises in advanced manufacturing such as equipment manufacturing and modern services such as R&D, shall receive a lump-sum refund for their excess input VAT payments yet to be deducted in a given period of time.

·         Tax Rates

The VAT rates for general taxpayers are as follows:

Table 4 VAT Rates

Taxable Items

Tax Rates

Selling or importing general goods

16%

Processing, and repair and replacement services

16%

Selling or importing specific goods

10%

Exporting goods

0%

International transportation and space transportation services

Specific services exported for overseas consumption only

Leasing of tangible movables

16%

Transportation services

10%

Postal services

10%

Telecommunication services

N/A

(1) Basic telecommunication services

10%

(2) Value-added telecommunication services

6%

Construction services

10%

Leasing of immovable property

10%

Sale of land use rights

10%

Sale of immovable property

10%

Financial services

6%

Selected modern services

6%

Services for living

6%

Sale of intangible assets (excluding land use rights)

6%

Source: SAT

For small-scale taxpayers, the simplified calculation method with a tax rate of 3% shall apply.

·         VAT Return

A VAT return deadline is correlated with the applicable VAT taxable period determined by the competent State taxation authority. The latter could be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter. Taxpayers who have a VAT taxable period of a monthly basis or a quarterly basis must submit VAT returns within 15 days after the end of the taxable period; and those having a VAT taxable period of 1 day, 3 days, 5 days, 10 days, or 15 days must make prepayments within 5 days after the end of the taxable period, and submit VAT returns and settle the VAT payable on any date between the 1st and the 15th day of the next month. The VAT taxable period of a quarterly basis applies to small-scale taxpayers only. A business with a fixed premise shall submit its VAT returns to the local taxation authority, while a business without fixed premises to the taxation authority in the jurisdiction where the sales are made.

4.                     Tariff

Tariff, collected by the General Administration of Customs of China, is imposed on consignees of inbound goods, consigners of outbound goods, and owners of inbound or outbound goods. China has introduced a series of measures to reduce its tariffs on a voluntary basis since 2018, such as a zero tariff on most imported drugs starting from May 1, 2018, and a reduction in the tariffs on automobiles, auto parts and some consumer goods effective July 1, 2018. In addition, tariff rates on 1,585 taxable industrial items have been cut since November 1, 2018, as noted by Chinese Premier Li Keqiang at a State Council executive meeting in September 2018. According to a spokesman for the Tariff Commission of the State Council of China, the adjusted tariff rate is slightly higher than that of the EU but lower than that of most developing countries, which will serve as an impetus to the balanced development of foreign trade and further opening up.

The Chinese government has announced further reductions on the most favored nation (MFN) tariff rates, effective November 1, 2018, on a wide range of commodities, including mechanical and electrical equipment, textiles, building materials, paper products and other resource-based products and primarily processed goods. The average reductions in MFN tariff rates for imported commodities covered in the announcement are summarized as follows:

Table 5 Average Reductions in MFN Tariff Rates for Imported Commodities

Commodities

Before

After

Number    of Taxable Items

Mechanical and electrical equipment, including engineering machinery, instruments and meters

12.2%

8.8%

396

Textiles, building materials, and steel products

11.5%

8.4%

677

Resource-based products and primarily processed goods, including paper products, non-metallic minerals, inorganic chemicals and gemstones

6.6%

5.4%

390

Other commodities

12.3%

8.5%

122

Total

10.5%

7.8%

1,585

Source: State Council of China

·         Computation

The duty on import or export goods shall be collected in the form of ad valorem duty, specific duty, or other forms prescribed by the State.

(i)   Ad valorem Duty

Ad valorem duty is computed based on the dutiable value of imported or exported goods,

i.e. the product of the dutiable value and the applicable duty rate.

(ii)   Specific Duty

Specific duty is computed based on units, such as quantity, weight, volume, length and area, i.e. the product of the quantity of goods and the applicable unit duty.

5.                     Consumption Tax

Consumption tax is imposed on entities and individuals engaged in producing, consigned processing, or importing specified consumer goods within the territory of China.

The current system of consumption tax in China is based on the Interim Regulations on Consumption Tax (the “Regulations”) issued by the State Council in 2008 and the supplementary implementation details, and complemented by small adjustments to the taxation scope and tax rates made by the Ministry of Finance, the State Administration of Taxation, and other competent authorities. The consumption tax is levied on specified consumer goods including tobacco, alcohol, cosmetics, precious jewelry and gems, firecrackers and fireworks, petroleum products, sedans, motorcycles, golf balls and clubs, luxury watches, yachts, wooden disposable chopsticks, and solid wood flooring. In terms of tax rates, China adopts the proportional tax rate and the norm quota one.

Consumption taxes shall be paid to tax authorities, while those on imported taxable consumer goods shall be paid to customs offices. The consumption tax assessable period shall be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month or 1 quarter. According to the Regulations, such tax is calculated (i) ad valorem by multiplying taxable sales value and proportional tax rate, (ii) on the basis of quantity by multiplying taxable sales quantity and norm quota tax rate, or (iii) through a combination of these two methods.

6.                     Environmental Protection Tax (EPT)

The Environmental Protection Tax Law of China (the “Law”) passed by the Standing Committee of the 12th National People’s Congress in December 2016, and the Regulations on the Implementation of the Environmental Protection Tax Law of China issued by the State Council in December 2017, both came into force on January 1, 2018, replacing the pollutant discharge fee with the EPT.

According to the Law, the EPT is levied on private and public institutions and other types of producers and operators that discharge air and water pollutants, solid wastes or noise directly to the territory of China and sea areas under the jurisdiction of China. Collected based on the volume of the pollutants or noise discharged, EPT is the product of the taxable pollutant equivalent weight / solid waste emission amount / decibels exceeding the state-stipulated limit, and the applicable tax rate.

Certain types of pollutants are exempt from taxation, including pollutants discharged from agricultural production, transportation and sewage treatment, or by enterprises applying comprehensive waste utilization technologies. Where the concentration level of taxable pollutants is lower than national or local standards, taxpayers can get a 25% or 50% cut.

EPT is calculated on a monthly basis and settled on a quarterly basis.

7.                     Land Value-added Tax (LVAT)

Corporations and persons shall pay LVATs on their incomes which are derived from transference of use rights of state-owned land and property rights of buildings and attached installations thereon. The remainder (added value) of the taxpayers’ gains, in currency, kind or other forms, from the real estate transference after deduction of stipulated deductible amounts shall be subject to LVAT at the applicable tax rate. According to the Interim Regulations of the People’s Republic of China on Land Value- added Taxes (revised in 2011), other than conditions that (i) the taxpayer builds houses of ordinary standard for sale and the added value does not exceed 20% of the deducted amount; and (ii) land and properties recalled and requisitioned by Chinese governments according to law for construction purposes, the LVAT shall be collected by taxation authorities in four progressive levels as follows:

(i)    The tax rate is 30% for that part of the added value which does not exceed 50% of the deducted amount;

(ii)   The tax rate is 40% for that part of the added value which does not exceed 50% but less than 100% of the deducted amount;

(iii)  The tax rate is 50% for that part of the added value which is greater than 100% but less than 200% of the deducted amount;

(iv)  The tax rate is 60% for that part of the added value which exceeds 200% of the deducted amount.