1 Value-Added Tax
As a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, or on the value-added of commodities. All enterprises and individuals engaged in the sale or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.
In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting and auditing system, with different methods of tax computation. Small-scale taxpayers are taxpayers without a sound accounting and auditing system whose taxable value of sales is below the prescribed standards, namely Rmb1 million for taxpayers engaged in the production of goods or the provision of taxable services, and less than Rmb1.8 million for those engaged in wholesaling or retailing business. General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.
(b) Taxable Items and Tax Rates
There are two VAT rates in China, a basic rate of 17% and a lower rate of 13%. The sale and import of the following commodities are subject to VAT at the lower rate of 13%: grains, edible vegetable oil, drinking water, heating, air-conditioning, hot water, coal gas, liquefied petroleum gas, natural gas, methane, coal products for domestic use; books, newspapers and magazines; feedstuffs, chemical fertilisers, pesticides, agricultural machinery, agricultural plastic sheeting; and other commodities as specified by the state.
(c) Special VAT Invoice
General taxpayers may purchase special VAT invoices from the tax authorities. Small-scale taxpayers and non-VAT taxpayers may not purchase or use such invoices. General taxpayers selling taxable items must issue special VAT invoices to the buyer. However, for the sale of taxable items to consumers and the sale of duty-free goods or goods for export, no special VAT invoices have to be issued. It is also not mandatory to issue special VAT invoices for the sale of taxable items to small-scale taxpayers. Special VAT invoices that are not up to specifications may not be used to claim deduction or exemption for input VAT.
(d) Tax Liability and Payment Period
In the supply of goods or taxable services, the VAT liability arises on the day the taxpayer receives full payment for the transaction or obtains a payment voucher for the transaction. In the case of import goods, VAT for the transaction. In the case of import goods, VAT liability arises on the day of customs declaration.
The payment period may be one day, three days, five days, ten days, fifteen days or one month, to be determined by the competent tax authorities based on the amount of VAT payable by the taxpayer.
2 Consumption Tax
Consumption tax is tax payable on the sales value or volume of taxable consumer goods sold in China by enterprises and individuals engaged in the production, subcontracted processing or importation of any of the following 11 items of goods: cigarettes, alcoholic drinks and alcohol, cosmetics, skin- and hair-care products, fine jewellery and precious stones, firecrackers and fireworks, gasoline, diesel oil, motor vehicle tyres, motorcycles, and small motor cars. It is levied on consumer goods on top of VAT. Consumption tax is included in the transaction price and is only payable on the production, subcontracted processing and importation of taxable consumer goods. Since consumption tax is included in the transaction price, it is not payable in the subsequent stages such as wholesaling and retailing. The tax is ultimately borne by consumers.
Payers of consumption tax are enterprises and individuals engaged in the production, subcontracted processing and importation of taxable consumer goods.
(b) Taxable Items and Tax Rates
Consumption tax is payable on 11 taxable items at 25 different tax rates (tax amounts), ranging from 3% to 50%. It is levied by value (ad valorem tariff) or by volume (specific duty) at the production stage; but for white spirits made from cereal and potatoes, beer and cigarettes, they are subject to consumption tax under the combination of by volume and by value. Taxable consumer goods for export are exempt from consumption tax unless otherwise stipulated by the state.
(c) Tax Liability and Payment Period
In the sale of taxable consumer goods, the consumption tax liability arises on the day the taxpayer receives full payment for the transaction or obtains a payment voucher for the transaction. In the import of goods, it arises on the day of customs declaration. The consumption tax payment period may be one day, three days, five days, ten days, fifteen days or one month, to be determined by the competent tax authorities based on the amount of consumption tax payable by the taxpayer.
3 Customs Duty
Customs duty is levied by Customs on commercial commodities or articles entering or leaving China's national boundaries or customs territories.
Payers of customs duty on commercial commodities are consignees of imports and consignors of exports. The former have to pay import tariffs while the latter have to pay export tariffs. Payers of customs duty on articles include: incoming passengers carrying personal luggage and articles, service attendants on different modes of transport carrying personal articles, owners of gifts and personal articles that enter China through other means, and addressees of incoming personal mail.
(b) Tariff Rates
China adopts a two-column tariff for imports: a general rate and a preferential rate. The general tariff rate applies to goods from countries and regions that have not signed reciprocal tariff agreements with China, while the preferential tariff rate applies to goods from countries and regions that have signed such agreements with China. The current average import tariff rate of China is 10.4%. For exports, tariffs range between 0% to 20%.
(c) Dutiable Value
The dutiable value of imported goods in general is their CIF price while the dutiable value of exports is their FOB price.
(d) Payment of Customs Duty
Taxpayers or their agents should make payment at designated banks within 15 days from the date of issuance of the customs duty payment notice by Customs.
4 Business Tax
Business tax is a kind of turnover tax levied on the revenue generated from the provision of taxable services, such as communications and transportation, construction, finance and insurance, posts and telecommunications, culture and sports, entertainment and other taxable services, as well as the transfer of intangible assets and the sale of immovable properties within the territory of China.
Payers of business tax are enterprises or individuals engaged in the provision of taxable services, transfer of intangible assets or sale of immovable properties in China.
(b) Taxable Items and Tax Rates
There are nine taxable items for business tax, ranging from 3% (for communications and transportation) to 20% (for entertainment).
(c) Tax Liability and Payment Period
The business tax liability arises on the day the taxpayer receives the full amount of business proceeds or obtains a payment voucher for the proceeds. The payment period may be five days, ten days, fifteen days or one month, to be determined by the competent tax authorities.
5 Income Tax on FIEs and Foreign Enterprises
(a) Object of Taxation
Foreign-invested enterprises (FIEs) and foreign enterprises have to pay income tax on their income derived from production, business operations and other sources within the territory of China. As Chinese 'residents', FIEs are required to bear full tax liabilities and pay income tax on all incomes derived from sources inside and outside China. However, foreign enterprises, which are not Chinese 'residents', will only bear limited tax liabilities and pay income tax on incomes derive from sources inside China.
FIEs established in China include Sino-foreign equity joint-venture enterprises, Sino-foreign contractual joint-venture enterprises and wholly foreign-owned enterprises. Foreign enterprises refer to foreign companies, enterprises and other economic organisations with establishments or venues engaged in production or business operations within China, as well as those which, though without establishments or venues in China, have incomes from sources within the territory of China.
(c) Taxable Items and Tax Rates
FIEs and foreign enterprises that have establishments or venues in China have to pay corporate income tax of 30% and local income tax of 3% on their incomes from production and business operations and on profits (dividends), interest, rentals, royalties and other incomes derived from sources both inside and outside China that are effectively connected with such establishments or venues. Foreign enterprises that have no establishment or venue in China but derive profits, interest, rentals, royalties and other incomes from sources in China, or although they have establishments or venues in China the said incomes are not effectively connected with such establishments or venues, have to pay income tax of 10% on such incomes.
(d) Filing of Tax Returns
Income tax on FIEs and foreign enterprises is levied on an annual basis and paid in advance in quarterly instalments. Taxpayers should file their quarterly income tax returns with the local tax authorities and pay the tax within 15 days as from the end of each quarter. They should file their annual income tax returns together with their final account statements within four months as from the end of each tax year, and make their final settlement within five months as from the end of the tax year. Any excess will be refunded and any deficiency will have to be paid. For FIEs and foreign enterprises that have no establishment or venue in China but derive incomes from profits, interest, rentals, royalties and other incomes from sources in China, and for those that do have establishments or venues in China but derive incomes that are not effectively connected with such establishments or venues, the income beneficiary should be the taxpayer and the payer should be the withholding agent. The tax should be withheld from the amount of each payment by the payer. The withholding agent should, within five days, turn the amount of taxes withheld on each payment over to the State Treasury and submit a withholding income tax return to the local tax authorities.
6 Individual Income Tax
Individual income tax is levied on the incomes derived from sources both inside and outside China of individuals who have domicile in China, or although without domicile have resided for one year or more in China; and on the incomes derived from sources within China of individuals not domiciled or resident in China, or individuals not domiciled but have resident in China, or individuals not domiciled but have resided in China for less than one year.
(a) Taxpayer and Tax Liability
Resident taxpayers refer to Chinese citizens and foreign nationals residing in China. They are individuals domiciled in China (who, by reason of their permanent registered address, family or economic interests, habitually reside in China); or foreign nationals, overseas Chinese, and Hong Kong, Macau and Taiwan compatriots who have resided in China for a calendar year in a tax year. Resident taxpayers have unlimited tax liabilities and have to pay individual income tax to the Chinese government on incomes from global sources. Non-resident taxpayers refer to foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are neither domiciled nor resident in China; or foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are not domiciled in China and have resided in China for less than a calendar year in a tax year. Non-resident taxpayers have limited tax liabilities and are required to pay individual income tax to the Chinese government only on incomes from sources inside China.
(b) Taxable Items, Tax Rates and Deduction Standards
Income from wages and salaries
Income from wages and salaries is taxed at progressive rates ranging from 5% to 45%.
Taxable income: For people working in China, the taxable income is the balance of their monthly income after deducting Rmb1,600 (the allowable deduction may be increased by the local tax bureaus depending on the living standard of each city). For personnel recruited from outside China, the taxable income is the balance of their monthly income after deducting Rmb4,000.