Appendix V Summary of New Tax System
- David Burton, Wanda Tseng, Kalpana Kochhar, Hoe Khor, and Dubravko Mihaljek
- Published Date:
- September 1994
Enterprise Income Tax
Liability: SOEs, collective enterprises, private enterprises, joint-ownership enterprises, joint-stock enterprises, and any other organizations (except foreign investment enterprises and foreign enterprises) that derive income from production and business operations and other income defined by law, including income from sources both within and outside China, are subject to the enterprise income tax.
Coverage: Income from production and business operations, the transfer of property, interest (except from government bonds), leasing, royalties and license fees, dividends, and other income (including foreign exchange gains) are subject to the enterprise income tax.
(Yuan per year)
Tax base: Taxable income = business income -business expenses.
Deductible business expenses: Costs, expenses, and losses incurred by the taxpayer in earning income, including direct and indirect costs of production, sale of goods, or rendering of services; administrative, financial, and sales expenses; indirect taxes (consumption tax, business tax, urban maintenance and development tax, resource tax, real estate value-added tax, and education surcharge); and business, investment, and other losses;127
Depreciation of fixed assets and amortization of intangible assets;
Interest expenses on borrowings from financial institutions during the course of production and business operations;128
Salaries and wages paid to employees based on the amount of “tax salaries and wages” as determined by the governments of provinces, autonomous regions, and directly administered municipalities;
Employees’ union expenses, employees’ welfare costs, and employees’ educational expenses, which are deductible at 2 percent, 14 percent, and 1.5 percent, respectively, of the amount of tax salaries and wages;
Donations for community benefits and charitable donations, which are deductible for up to 3 percent of the taxable income in a year;
Income tax paid to foreign tax authorities in respect of the income derived from sources outside China up to the amount of income tax payable under the provisions of Chinese tax law; and
Other costs, expenses, and losses (including business-related entertainment expenses, government-mandated pension and unemployment insurance premiums, property and transportation insurance premiums, fees on the lease of fixed assets, and foreign exchange losses) incurred by the taxpayers determined by laws, executive regulations, and relevant tax rules promulgated by the state.
Nondeductible expenses: Capital expenditure on the purchase and construction of, and investment in, other enterprises; expenditure on the license or development of intangible property; the portion of losses due to natural disasters or accidents for which insurance compensation is received; losses from fines for illegal business activities, and tax payment fines and penalties; donations in excess of deductible amounts; expenditure on all nonadvertising sponsoring fees; and expenditure not related to income-earning purposes.
Tax treatment of assets: Fixed assets include buildings, structures, machinery, equipment, transportation equipment, and tools and appliances used for the purpose of production and business operations with a useful life of more than one year.
Intangible assets include patents, trademarks, copyrights, land use rights, proprietary rights, goodwill, and so on.
Articles that are not major items of equipment, cost less than Y 2,000. or have a useful life of under two years can be expensed currently.
Fixed assets are valued according to the original purchase value (including freight and installation costs and taxes); special provisions apply to fixed assets that are not purchased (self-built assets, leased assets, gifts, and so on).
Intangible assets are valued on the basis of the actual cost of acquisition.
Fixed and intangible assets are depreciated according to the straight-line method; in certain circumstances the tax authorities may allow accelerated depreciation.
Minimum useful life is 20 years for buildings and structures; 10years for trains, ships, machinery, and other production equipment; and 5 years for electronic equipment, transportation equipment other than trains and ships, and appliances, tools, and furniture relating to production and business activities.
Inventories of finished and semifinished goods, raw materials, and so on are priced at cost. The actual cost may be calculated according to one of the following methods: “first in, first out”; moving average; weighted average; or “last in, first out.”
Preferential tax treatment: Tax reductions or exemptions are available for a specified period for enterprises operating in minority autonomous regions, subject to approval of the provincial governments.
Tax reductions or exemptions may also be granted for a specified period to certain enterprises under laws, regulations, and other provisions of the State Council.
Payment of tax: Enterprise income tax is levied on an annual basis and paid in monthly (or quarterly) installments 15 days after the end of the month (or 45 days after the end of the quarter); the final settlement has to be made 45 days after the end of the year. Enterprise income tax is payable to the local tax authority where the enterprise is located, except when provided otherwise. Income taxes payable by financial and insurance enterprises are governed by the relevant regulations.
Personal Income Tax
Liability: Individuals who have residence in China or have stayed in China for more than one year are liable for individual income tax on income earned in China and the income earned outside China that is derived from sources within the territory of China. Nonresidents who live in China for less than a year must pay income tax on incomes earned within China.
|Taxable Income||Tax Rates|
|Income from wages and salaries||Schedule A|
|Income derived from production and business operations by individual households engaging in industry and commerce||Schedule B|
|Income derived from contracting or leasing operations by enterprises or institutions||Schedule B|
|Other individual income||20 percent|
|Remuneration for personal services|
|Remuneration to authors|
|Royalties, interest income, and dividends|
|Income from lease of property|
|Income from transfer of property|
|Income from lotteries|
|Other kinds of income specified by the State Council|
|Schedule A (wages and salaries)|
|Monthly taxable income (In renminbi)||Tax rate (In percent)|
|Schedule B (production and business income of individual households; leasing and contracting income of enterprises)|
|Monthly taxable income (In renminbi)||Tax rate (In percent)|
Tax base: Taxable income = gross taxable income – deductions.
Deductions: With respect to income from wages and salaries, Y 800 a month is the standard personal allowance for Chinese residents, and Y 4,000 a month for foreign residents.
For production and business income, costs and expenses incurred in earning income and losses incurred during production and business operations are deductible.
For income from contracting or leasing operations, the standard personal allowance applies.
For income from remuneration to authors, 30 percent of the taxable amount plus the standard personal allowance is deductible if the monthly income does not exceed Y 4,000.
For income from remuneration for personal services, royalties, and the leasing of property, the standard personal allowance is deductible if the monthly income does not exceed Y 4,000; 20 percent of the taxable amount is deductible if the monthly income exceeds Y 4,000.
For income from the transfer of property, the original value of the property and reasonable expenses is deductible.
Part of the donations made to educational and other public establishments can be deducted.
Individual income tax paid to foreign tax authorities by taxpayers who derive income outside the territory of China is deductible, provided that the amount of such tax is not greater than the tax payable under Chinese law.
No deduction is allowed for income from interest, dividends, and extraordinary dividends.
Payment of tax: Wages and salaries are taxed on a monthly basis; payment must be made by the withholding agent, or the taxpayer must submit the tax returns within the first seven days of the following month.
Income from production and business operations by individual households is computed on an annual basis and paid in advance in monthly installments by withholding agents within the first seven days of the following month; final settlement must be made within the first three months from the end of the tax year.
Tax payable by enterprises and institutions on income from contracting or leasing operations is computed on an annual basis and must be paid within 30 days after the end of the tax year.
Tax payable on income derived from sources outside China must be paid within 30 days after the end of the tax year.
All categories of income must be computed in renminbi. Income in foreign currency is taxed on the equivalent amount converted into renminbi, according to the exchange rate quoted by the SAEC.
Tax returns for payment and withholding of individual income tax are standardized.
Value-Added Tax (VAT)
Liability: All enterprises, institutions, or individuals that sell goods or provide processing, repair, and replacement services in China or import goods into China are subject to the VAT. Enterprises, institutions, or individuals with monthly sales volumes below the threshold level (Y 600–2,000 for selling goods; Y 200–800 for providing taxable labor services) are exempt.
|VAT Rates (In percent)|
|Grains and vegetable oil for human consumption||13|
|Tap water, heating, air conditioning, hot water, gases used for heating, and charcoal||13|
|Books, newspapers, and magazines||13|
|Animal feeds, fertilizer, pesticide, agricultural machinery, and plastic materials for agricultural use||13|
|Other goods specified by the State Council||13|
|All goods that are sold or imported by taxpayers other than those listed in the above categories or those goods listed below under “exemptions”||17|
|Processing, repair, and maintenance services||17|
Tax base: The sales or purchase value of taxable goods and services is the tax base.
Calculation method: Tax payable = Output VAT of the period – Input VAT of the same period, where output VAT is the tax collected by a seller from a buyer and input VAT is the tax payable by a buyer of goods and services.129 Sales values must be calculated in renminbi.
Input VAT is nondeductible on the following items: purchases of fixed assets; purchases of goods or services that are used in nontaxable activities, exempt from the VAT, or used for collective welfare or personal consumption; purchases of goods that are lost in abnormal circumstances (including natural disasters, theft, and mismanagement); or purchases of goods or services that are lost (other than in the ordinary process of production).
Small-scale businesses are permitted to adopt a simplified method of calculation for the VAT. Under this arrangement, no input VAT is deducted, but goods and services supplied by such businesses are subject to a flat rate of 6 percent. Taxpayers engaged in production activities are defined as “small scale” if their annual sales volumes are less than Y 1 million; the same definition applies to taxpayers engaged in wholesale and retail trade with annual sales volumes of less than Y 1.8 million.
The purchasers of agricultural goods have to pay the VAT, but they can claim a credit for the purchase; the amount of the VAT is deemed to be 10 percent of the purchase price.130
Exemptions: Agricultural goods produced and sold directly by farmers; contraceptive medicines and instruments; antique books; imported equipment and instruments that are used directly for scientific research, experiments, and education; imported equipment and instruments that are gifts from foreign governments and international organizations; equipment imported for the purposes of processing foreign goods, assembling foreign goods, and for compensation trade; goods imported by organizations for the disabled; and used goods are exempt from the VAT.
Payment of tax: Accounting and collection of the VAT are carried out through a system of invoices. Each seller of goods or services is required to provide a VAT invoice to each buyer for each sale; the amount of the VAT deductible is the amount shown on such invoices.
The VAT is collected by the NTS, except in the case of the VAT on imports, which is collected by customs authorities.
Payment periods for the VAT are I, 3, 5, 10, or 15 days, or 1 month, depending on the amount of tax payable. Payment of the tax is due within 5-10 days following the end of the payment period.
Liability: The consumption tax is an excise tax, based on the previous product tax, that applies to all enterprises, institutions, and individuals that manufacture, subcontract for processing within China, or import into China certain types of consumer goods (see list below).
|Taxable Items||Tax Rates (In percent or yuan)|
|Cigarettes, cigars, and tobacco||30–45|
|Alcoholic beverages and alcohol|
|Yellow rice wine (tonne)||Y 240|
|Beer (tonne)||Y 220|
|Skin and hair care products||17|
|Jewelry made of pearls, gold, silver, or gemstones||10|
|Firecrackers and fireworks||15|
|Petroleum (liter)||Y 0.2|
|Diesel fuel (liter)||Y 0.1|
|Four–wheel drive vehicles||3–5|
Tax base: The tax is based on the sales price (for goods subject to ad valorem rates) or sales quantity (for goods subject to specific rates). Sales values must be expressed in renminbi.
For goods manufactured for a taxpayer’s own use, goods manufactured by subcontractors, or imported goods, the tax base is given by the “composite tax calculation price,” which is equivalent to the “full price” (cost and profit, cost of materials and subcontracting fees, or landed price plus customs duty, respectively) divided by (1 – the consumption tax rate).
Exemptions: Exports and goods manufactured for continuous production of other taxable consumer goods are exempt.
Payment of tax: Consumption tax is paid by the taxpayer to the tax authorities or. in the case of imports, to the customs authorities. Taxes are payable every 1, 3, 5, 10, or 15 days, or 1 month, or on the basis of transactions, depending on taxable amounts. Payment of the tax is due within 5-10 days following the end of the payment period.
Liability: The business lax is a turnover tax that applies to alt enterprises, institutions, or individuals that provide certain types of services (see list below), assign intangible assets, or sell immovable property within China. Only enterprises with turnover greater than a threshold specified by the Ministry of Finance are liable for business tax.
|Type of Activity||Taxable Services||Tax Rate (In percent)|
|Communications and transportation||Transportation by land, sea, air, and pipeline; loading; unloading and haulage||3|
|Construction||Construction, installation repairs, decorating, and other construction work||3|
|Banking and insurance||5|
|Postal and telecommunication services||3|
|Culture and sports||3|
|Entertainment||Singing halls, dance halls, karaoke parlors, music teahouses, pool-rooms, golf courses, bowling alleys, and recreation halls||5–20|
|Services||Factorage, hotels, restaurants, travel agencies, warehousing, leasing, advertising, and other services||5|
|Transfer of intangible property||Transfer of land use rights, patents, unpatented technology, trademarks, copyrights, and goodwill||5|
|Real estate sales||Sales of buildings and other structures on land||5|
Tax base: Total business turnover must be expressed in renminbi.
Deductible expenses: For travel agencies and transportation companies, the amounts paid for foreign portion of passenger or cargo transportation are deductible; for construction companies, the amounts paid to contractors or subcontractors are deductible; for banks and insurance companies, interest cost of borrowing funds is deductible; and for foreign exchange, securities, and futures traders, acquisition costs of financial assets are deductible.
Exemptions: Services provided by nurseries, kindergartens, old-age homes, matchmakers, and funeral arrangers; labor services provided by the handicapped; medical, educational, and agricultural-training services; and certain cultural and religious services are exempt.
Payment of tax: Business tax must be paid by the taxpayer (or the withholding agent) to the tax authorities where the taxable service is provided or, in the case of transportation companies and the transfer of intangible property, where the taxpayer’s establishment is located.
Taxes have to be declared every 5, 10, or 15 days, every month, or on the basis of transactions, depending on the volume of turnover. Payment is due within 5–10 days following the end of the payment period.