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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).
Country starter pack Business practicalities in China 97 Other taxes Consumption tax: This is levied on manufacturers and importers of specified categories of consumer goods, including tobacco, alcoholic beverages, ethyl alcohol, cosmetics, jewellery, fireworks, gasoline and diesel and certain petroleum products, automobile tyres, motorcycles, automobiles, golf equipment, yachts, luxury watches, disposable chopsticks and wooden floorboards. The tax liability is calculated based essentially on sales volume and on the type of goods concerned. Consumption tax is imposed in addition to applicable customs duties and VAT. Urban construction and maintenance tax: This is levied at varying rates on the indirect tax liability (i.e. BT, VAT, and consumption tax) of the taxpayer. Stamp tax: All enterprises and individuals who execute or receive ‘specified documentation’ are subject to stamp tax (known in Australia as stamp duty). Rates vary between 0.005 per cent of the value of on loan contracts to 0.1 per cent on the value of property leasing and property insurance contracts. A flat amount of RMB5 applies to business licences and patents, trademarks or similar rights. Real estate tax: This is a tax imposed on the owners, users or custodians of houses and buildings. The tax rate is 1.2 per cent of the original value of the buildings. A tax reduction of 10 per cent to 30 per cent is commonly offered by local governments. Alternatively, tax may be assessed at 12 per cent of the property’s rental value. Motor vehicle acquisition tax: This is levied at a rate of 10 per cent on the purchase and importation of cars, motorcycles, trams, trailers, carts and certain types of trucks. Vehicle and vessel tax: This tax is levied on all vehicles and vessels within China. A fixed amount is levied on a yearly basis. Transport vehicles are generally taxed on a fixed amount according to weight, with passenger cars, buses and motorcycles being taxed on a fixed unit amount. Vessels are taxed on a fixed amount according to deadweight tonnage. National education surcharge and local education surcharge: The former applies to entities and individuals who are subject to BT, VAT or consumption tax and is applied at a rate of three per cent. The local education surcharge is similar to the national surcharge but is applied at the discretion of local government at a rate of two per cent in all provinces. Compliance Tax year and tax returns: The tax year in China is the calendar year. Annual tax returns must be filed on or before May 31 the following year (subject to local variation). Provisional reporting and payments must be made on either a monthly or quarterly basis, determined by jurisdiction. Provisional payments are usually settled within 15 days of the end of each month/quarter. Consolidated CIT filing: TREs in China are not allowed to file consolidated returns on a group basis unless prescribed by the State Council. Until now, the State Council has not yet issued any regulation to allow group consolidated CIT filing. However, a non-TRE having two or more establishments in the PRC may select one establishment for combined tax filing and payment upon approval by the appropriate tax authorities. That establishment must meet the following requirements: • It assumes supervisory and management responsibility over the business of the other establishment(s) • It keeps complete accounting records and vouchers that correctly reflect the income, costs, expenses, profits and losses of the other establishment(s).
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PEOPLE'S REPUBLIC OF China COUNTRY
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9.6 million square kmS GDP 2014 SUR
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