China

96
Country starter pack
Business practicalities in China
and accurate documentation of its costs and expenses
to enable its taxable income to be calculated, Normally,
a deemed profit percentage is applied to its gross
income or turnover. This deemed profit percentage will
vary depending on the industry in which the enterprise
operates and will usually be between 15 per cent and 50
per cent for non-TREs.
In addition, gains (or losses) of all direct transfer or
indirect transfer (including debt restructuring, share
transfer, assets acquisition, merger and spin-off) shall
be subject to CIT when the transaction takes place. Fair
value shall be used to determine the gains or losses.
Restructuring transactions meeting certain prescribed
conditions are eligible for concessionary treatment, such
as the realisation of the gain arising from the corporate
restructuring that may be deferred wholly or partly
to later years, and the resulting tax liabilities may be
effectively deferred. As such the related tax implications
should be well planned before the restructure or transfer.
Tax Treaty: China and Australia have a tax treaty that
aims to eliminate double taxation and provide for reduced
rates of withholding tax on dividends, interest payments
and royalties. A tax residence certificate is required to
claim benefits under the China-Australia tax treaty. This
certificate is issued by the tax authorities of the country
where the recipient is resident, and must be submitted
with supporting evidence of residence in that country.
China does not have a separate corporate capital gains
tax. Instead, a company’s capital gains and losses are
usually considered part of operating income and taxed at
the normal corporate tax rate; with Land Appreciation
Tax applying to any gains made on real property (net of
development costs).
Wage tax and social security contributions: As in
Australia, employers are responsible for withholding the
correct amount of income tax from their employees and
sending it to the relevant authorities. Employers must
also contribute to a number of state-administered social
security insurance funds covering areas such as workplace
injury, unemployment, medical and maternity costs.
On top of this, employers are levied around 20 per cent
of payroll expenditures for a state-run retirement fund.
This may add up to a sizeable contribution, potentially
totaling 40 per cent of an employee’s base salary.
Employees also contribute a portion of their monthly
salary to these funds at a percentage set by local
authorities which varies across the country. Australians
working in China will also need to contribute to social
security funds in China.
Indirect taxes
Value added tax (VAT): This is a national tax levied on the
sales or importation of goods and the provision of repairs,
replacement, and processing services. VAT is applied
at two levels: small-scale VAT payers and general VAT
payers. Entities engaged in manufacturing or providing
VAT-qualifying services with annual sales not exceeding
RMB500,000 per year are regarded as small-scale VAT
payers. Wholesale and retail trade businesses with sales of
less than RMB800,000 are also small-scale VAT payers.
Small-scale VAT payers incur VAT at the rate of three per
cent. General VAT payers, who are considered to be all
other tax payers, pay at the standard VAT rate of 17 per
cent, except on goods considered to be necessities, such
as agricultural items, water, gas and so forth, which carry
the tax at the reduced rate of 13 per cent. For general
VAT payers, input VAT incurred may be credited against
output VAT in deciding the correct amount of VAT that
is payable.
Exporters of goods from China may be entitled to a
refund of VAT that has been incurred on materials
purchased domestically. The refund rates range from
0 to the full 17 per cent. There is a prescribed formula
for determining the amount of any refund, under which
many products do not obtain the full input VAT credit and
suffer different degrees of export VAT costs. All general
VAT payers must register for VAT purposes with the local
tax authorities. A non-resident company is not required
to register for VAT.
Business tax (BT): Enterprises may be liable to business
tax instead of VAT, depending on the business or assets
involved. Business tax (BT) is imposed on services
provided by enterprises, except for a few prescribed
services, provided that the service provider or the service
recipient is within China. In addition, the transfer of
immovable properties and intangible assets in China
are also liable for business tax, which is levied on gross
turnover at rates of between three and 20 per cent. The
most common rates are three per cent or five per cent.
Limited exemptions from business tax may apply in the
case of some services.
It is important to note that China’s VAT and BT systems
are currently in a state of transition. The pilot VAT reform
program launched in Shanghai in 2012, and expanded
nationwide in 2013, aims to shift service industries away
from paying business tax to paying VAT instead. Up
to now, the VAT reform has covered modern services,
rail transportation, post and telecommunications and
entertainment services. By the end of the 12th Five Year
Plan period (2011-2015), the VAT reform is expected to
expand to cover all other sectors currently still subject
to business tax (i.e. real estate, construction, consumer
services and financial services).