Company and individual tax
In our experience, one of the major concerns of foreign investors in respect of their existing or planned investments in China, is taxation. Their concerns are about both tax exposure and compliance obligations.
There are 13 types of Chinese tax applicable to foreign investors and their establishments in China. They are: Customs Duty, Value-Added Tax (VAT), Consumption Tax (CT), Business Tax (BT), Foreign Enterprise Income Tax, Individual Income Tax, Deed Tax, Land Appreciation Tax, Resources Tax, Slaughter Tax, Stamp Duty, Urban Real Estate Tax and Vehicles & Vessels Usage License Tax. The taxes that foreign investors encounter most frequently and are thus of most concern, are turnover taxes (VAT, CT and BT) Foreign Enterprise Income Tax and Individual Income Tax.
Companies engaged in trading, manufacturing and servicing industries are subject to VAT and/or Business Tax. Any company engaged in the importing and manufacturing of the eleven goods specified in the Consumption Tax regulations (tobacco, alcohol, cosmetics, skin and hair care products, jewellery, fireworks, gasoline, diesel oil, tires, motor-bikes and automobiles) are also subject to Consumption Tax in addition to VAT. China-based Foreign Investment Enterprises are also subject to Foreign Enterprise Income Tax (FEIT) on both worldwide income and China-sourced income. It should be noted that representative offices that receive no income but are considered to be carrying out taxable activities by the tax authorities are subject to Business Tax and Enterprise Income Tax.
In addition to corporate taxes, employers in China have the obligation of withholding and reporting the Individual Income Tax (IIT) of their staff. Under certain circumstances, an organization in China (a representative office or foreign invested enterprise) is responsible for withholding and reporting IIT for expatriates working in the office. This is even though their salary is paid directly by an overseas affiliate outside of China.
It should be noted that tax compliance in China is generally on a voluntary basis. Under normal circumstances, the tax authorities will not issue any correspondence informing or reminding you of your tax obligations. You may receive a notice from the tax authorities, however this is probably after you have been identified for a tax examination or audit. Thus, it is important to understand your compliance obligations and observe those requirements. Otherwise, you will be subject to penalties and a late payment surcharge. The following is a brief account of various tax compliance requirements and the possible consequences of a failure to comply.
Tax registrations
Joint Ventures, Wholly Foreign-Owned Enterprises, Representative Offices and other similar organizations in China are required to register with the tax authorities within the time limit prescribed in the relevant regulations. In general, this has to be completed within 30 days after the business license is issued. Registrations have to be filed with both the State Tax Bureau and Local Tax Bureau. The two bureaus have their own tax jurisdictions. To qualify as an ordinary VAT payer and be able to issue VAT invoices, a taxpayer has to undertake VAT registration as well.
Upon completion of the tax registrations, the tax authorities will issue a tax registration certificate which must be renewed every year. During the registration process, you should discuss with the tax officers and confirm the basis for tax calculation and filing. The consequences of late registration is a maximum penalty of RMB10,000 or even the repeal of your business license. In addition to commencement registration, changes in business license details and office closures also require registration with tax authorities.
Keeping of records
In pursuance of the relevant tax regulations, accounting records and ledgers have to be set up and kept properly. Accounting and financial systems (policies) should be filed with the tax authorities within 15 days from the issuance of tax registration certificates. Failure to comply with this rule will result in a maximum penalty of up to RMB10,000.
Tax reporting and payment
Different taxes have different reporting periods and payment due dates. In general, Foreign Enterprise Income Tax is paid on a quarterly basis, VAT and Business Tax are usually on a monthly basis and IIT is also on a monthly basis. Tax authorities will not send you tax returns. Instead, you should collect blank tax returns from tax offices, complete them and file accordingly.
Acceptable ways of submission differ from place to place and depends on the nature of the tax. For some locations and/or tax returns, reporting by mail is acceptable, while in others, submission must be in person. Some cities have also recently launched electronic filing. Maximum penalty for late filing of a tax return is RMB10,000 plus 50% - 500% of the tax involved. Late payment of tax will be subject to 0.05% a day penalty for the tax owing. Withholding agents who fail to observe obligations will be subject to a maximum penalty of 500% of tax involved. Under the tax regulations, you may apply to the tax authorities for an extension for tax filing and payment.
Tax audit
The tax authorities have the power to carry out tax audits to examine taxpayers’ records, relevant documents and information. Refusal of tax examination will be subject to a maximum penalty of RMB50,000. In general, tax authorities shall provide you with reasonable notice in writing about the impending tax audit. You should adopt a co-operative attitude, but don’t forget to check with the tax officers the exact scope of audit and ensure they show you their staff identity cards.
Foreign investors often have the impression that China tax is complicated. This is partly because China keeps on changing her tax legislation in response to the nation’s economic development and changing business environment. Different practices of tax offices and the difficulties involved in accessing a complete and up-to-date set of tax regulations are also important factors. These phenomena are expected to improve as China, being a WTO member, complies with the transparency principle of WTO. It is nevertheless advisable to have staff and/or professionals with China tax expertise handle your China tax affairs.
