AF5220 Strategic China Tax

Planning and Management

Lecture No. 1
Overview of China Tax
System

AF5220_L1 Overview of China Tax System 1

 Agenda

• Sources of law
• Types of law
• Current PRC tax regime
• Overview of taxes
• Penalties

AF5220_L1 Overview of China Tax System 2

 Sources of law

• A civil law (as opposed to common law) system,

regulations are codified.
• The supreme legislative authority is vested in the
National People's Congress (NPC) and its Standing
Committee. In practice, much of this power has
been delegated to the State Council.

AF5220_L1 Overview of China Tax System 3

 Sources of law

• Administrative regulations made by the State

Council rank immediately below those laws
enacted by the NPC.
• These regulations are supplemented by
instructions, orders and rules issued by the
appropriate subordinate ministries under the State
Council.

AF5220_L1 Overview of China Tax System 4

 Sources of law

• The primary ministry responsible for tax matters is

the State Taxation Administration (STA).
• At the provincial level, People's Congresses are
empowered to make local rules and regulations,
provided they do not contravene the Constitution or
the laws made by the NPC or the administrative
regulations made by the State Council.

AF5220_L1 Overview of China Tax System 5

 Overview of China tax system

• evolving since the 1994 tax reform and as a result

of the subsequent changes in the relevant tax laws.
• 18 types of taxes; six categories: income, turnover,
resource, property and behavior, prescribed items
and customs.
• taxpayers can be individuals, entities or economic
organizations.

AF5220_L1 Overview of China Tax System 6

 Current PRC Tax
Regime

Turnover Tax

Value-added Tax
(“VAT”)

Consumption Tax
(“CT”)
AF5220_L1 Overview of China Tax System 7
 Current PRC Tax Regime
(Cont’d)
Income
Tax Enterprise Income Tax
(“EIT”)
Individual Income
Tax (“IIT”)
AF5220_L1 Overview of China Tax System 8
 Current PRC Tax Regime
(Cont’d)
Property Stamp Duty
and
Other
Behaviou
Land VAT
r Taxes
Real Estate Tax
Resource Tax
Deed Tax
AF5220_L1 Overview of China Tax System 9
 Current PRC Tax Regime
(Cont’d)

Custom Duties
• Tariff on Imports and
Exports
AF5220_L1 Overview of China Tax System 10
 Overview of taxes
• Corporate (/Enterprise ) Income tax
• Individual income tax
• Turnover tax
• Value-added tax
• Consumption tax
• Property and behaviour taxes

AF5220_L1 Overview of China Tax System 11

 PRC resident, world-wide source income
taxable, 25% on net taxable income, tax
credit on overseas income tax paid

CIT- Non-PRC resident with establishment in

Charging PRC, 25% on PRC source income and
non-PRC source income connected to
Scope PRC establishment taxable

Non-PRC resident without

establishment in PRC, Only PRC source
income taxable, 10% on withholding
basis

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 The rule:

Example
PRC resident, world-wide source income
- CIT taxable, 25% on net taxable income, tax
credit on overseas income tax paid
overseas
tax credit Situation:

ABC Co is a PRC resident company, carries

on business in mainland China and Hong
Kong, with the following operating results
 RMB
China sales 1,000,000
Hong Kong sales 2,000,000
Example: CIT – Operating expenses for China 300,000
overseas tax sales
credit
Operating expense for Hong Kong 500,000
sales

Profits tax paid in Hong Kong 247,500

Operating results of ABC Co
China corporate income tax ???
payable

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 RMB
China sales 1,000,000

Example: Hong Kong sales 2,000,000

Less: Operating expenses for China sales 300,000
CIT – Operating expense for Hong Kong 500,000
overseas sales
Net profit (world-wide) 2,200,000
tax credit China corporate income tax payable
before tax credit @25%
550,000

Less: Profits tax paid in Hong Kong 247,500

China corporate income tax payable 302,500
after tax credit

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 • Non-PRC resident with establishment in PRC, 25%
on PRC source income and non-PRC source income
connected to PRC establishment taxable,
establishment includes:
1) a place of management, operation or
administration;
2) a farm, factory or place of extraction of
Non-Resident natural resources;
with 3) a place where services are rendered;
4) a place of construction, installation,
Establishment assembly, repair, and
5) exploitation, etc.;
6) other establishments engaged in
manufacturing and business operating
activities.
7) a business agent which signs contracts, or
stores and delivers commodities on behalf
of the non-resident enterprise on a regular
basis

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 • Non-PRC resident without establishment in PRC,
Only PRC source income taxable, 10% on
withholding basis
• PRC SOURCE PASSIVE INVESTMENT income, include
• Dividend from a Chinese resident company
• Interest income from a Chinese resident
company
• Royalty income from a Chinese resident
company
Non resident • Rental income from immovable property
without located in China
establishment • Gain on disposal of shares of a Chinese
resident company
• The Chinese resident payer have to withhold,
report and pay tax for the non resident
• 10% withholding tax rate may be reduced based on
the relevant double tax treaties

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Residence rule

PRC Tax Resident Enterprise incorporated in

Enterprise China or
(TREs) Enterprise incorporated outside
China but with “effective
management” in China

Non PRC Tax Resident Enterprise incorporated outside China and with
(NTREs) Enterprise “effective management” outside China

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Residence and Source
PRC Non PRC sourced income
sourced
income
Connected w/ NOT connected
PRC w/PRC
establishment establishment
(PE for DTA (PE for DTA
states) states)
PRC resident taxable taxable taxable
Non PRC w/ PRC taxable taxable Non-taxable
resident establishment
(PE for DTA
states)
w/o PRC Taxable N/A N/A
establishment (withholding)
(PE for DTA
states

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 Income exempted

Preferential
tax Tax Holidays
treatments
Reduced Tax rates

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 • China-domiciled individuals and non-
China-domiciled individuals who reside
in China for 183 days or more in a tax
IIT- year are considered residents for IIT
purpose. Residents in general are
General subject to IIT on their worldwide
income.
Charging • Non-China-domiciled individuals who
reside in China for less than 183 days
Scope in a tax year are considered non-
residents for IIT purpose. Non-
residents in general are subject to IIT
on their China-source income only.

2023 AF5208_L9_IIT 21
 • If a non-domiciled individual
resides in mainland China
(“China”) for 183 days or more in
a tax year, he will be subject to IIT
on both China and non-China
Non-domiciled sourced income
individual • provided that the individual
resided 183 days resided in mainland China for 183
days or more in each of the
or more preceding 6 years
• without being absent from China
for more than 30 days
consecutively in any of the
preceding 6 years.
2023 AF5208_L9_IIT 22
 • If in any of the preceding 6 years, the
individual resided in China for less than
183 days or was absent from China for 30
days consecutively,
• the non-China sourced income received
Non-domiciled in the tax year will be exempt from PRC
IIT if it is paid by overseas enterprises,
individual organizations or individuals.
resided less than • “Preceding 6 years” refers to the six
consecutive years from the preceding
183days or year of the tax year to the preceding 6th
absent > 30days year of the tax year, which is counted
from 2019 and onwards.
• A stay in mainland China of 24 hours shall
be counted as a China day while a stay in
mainland China of less than 24 hours
shall not be counted as a China day.

2023 AF5208_L9_IIT 23
 China- • Individuals maintaining residence in
China because of legal residency
domiciled status, family, or economic ties and
habitually residing in China, or
individuals • Chinese nationals
Definition

2023 AF5208_L9_IIT 24
 Nine Categories of Income

An individual is taxed in China on one's income by category. China's IIT law

groups personal income into 9 categories.

1. Employment income (i.e. wages and salaries).

25 2. Remuneration for labour services.
3. Author's remuneration.
4. Royalties.
5. Business income.
6. Interest, dividends, and profit distribution.
7. Rental income.
8. Income from transfer of property.
2023 AF5208_L9_IIT

9. Incidental income.

Each income category has its own tax rate(s), allowable deductions, etc.
 Different treatments for residents v
2023 AF5208_L9_IIT

non-residents

For residents, employment

income, remuneration for labour
Income from the other
services, author’s remuneration,
categories is taxed separately by
and royalties are combined as
category on a monthly or
'comprehensive income' for
transaction basis.
aggregate tax calculation
purpose on an annual basis.

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 Different treatments for
residents v non-residents

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• For non-residents, income from each of the 9 categories is
taxed separately on a monthly or transaction basis.
2023 AF5208_L9_IIT
 Table 1 - PRC IIT Level Cumulative Taxable Withholding Quick
Withholding Rates Income Rate （ % ） Deduction
for Residents 1 not in excess of 3 0
(applicable to RMB36,000
salary and wages) 2 RMB36,000 to 10 2,520
RMB144,000
3 RMB144,000 to 20 16,920
RMB300,000
4 RMB300,000 to 25 31,920
RMB420,000
5 RMB420,000 to 30 52,920
RMB660,000
6 RMB660,000 to 35 85,920
RMB960,000
7 in excess of 45 181,920
RMB960,000

2023 AF5208_L9_IIT 28
Table 2 - PRC IIT Withholding Rates for Residents (Applicable to independent
personal services income)

Level Taxable Income Withholding Quick

Rate （ % ） Deduction

1 not in excess of RMB20,000 20 0

2 RMB20,000 to RMB50,000 30 2,000

3 in excess of RMB50,000 40 7,000

2023 AF5208_L9_IIT 29
Table 3 ： IIT Withholding Rates for Non-residents
(applicable to salary and wages, personal services
income, author’s remuneration and royalties)

Level Taxable Income Tax Rate （ % ） Quick Deduction

1 not in excess of 3 0
RMB3,000
2 RMB3,000 to 10 210
RMB12,000
3 RMB12,000 to 20 1,410
RMB25,000
4 RMB25,000 to 25 2,660
RMB35,000
5 RMB35,000 to 30 4,410
RMB55,000
6 RMB55,000 to 35 7,160
RMB80,000
7 in excess of RMB80,000 45 15,160

2023 AF5208_L9_IIT 30
 Value-added tax (VAT) is levied on:
• sale of goods;
VAT • provision of processing, repair or
replacement services;
Charging • importation of goods; or
• sales of services, intangible assets
Scope ( include license right to use IP) or real
property.
within China.

2023 AF5208_L10_VAT 31
31
 Within China refers to:
• the seller or purchaser of services
(except for lease of real property) or
intangible assets (except for the right
to use natural resources) is located
within China (IP is used in CHINA);
Location • the real property sold or leased is
located within China;
of services • the natural resources whose using
right is sold is located within China; or
• other circumstances specified by the
Ministry of Finance (MOF) and the
State Taxation Administration (STA).

2023 AF5208_L10_VAT 32
 the service sold from overseas entities to
Chinese entities and it is consumed
completely outside China;

the intangible asset sold from overseas

NOT entities to Chinese entities is used
completely outside China;
within the tangible and moveable asset leased
China from overseas entities to Chinese entities
is used completely outside of China; or

other circumstances specified by the MOF

and the STA.

2023 AF5208_L10_VAT 33
 Art 2 clarifies:
• • “Goods” = tangible moveable property,
as well as electricity, heat and gas.
• • “Processing” = processing goods under
contract, where the contractor supplies
Goods and services the raw or major materials and the
subcontractor manufactures the goods,
subject to VAT and receives a processing fee.
• • “Repair and replacement” = repairs of
(Provisional VAT damaged or malfunctioning goods to
restore the goods to their original
Implementation condition and function.
Rules) VAT Reform Pilot Programme
• Services: transportation services, postal
services, telecommunication services,
construction services, financial services,
modern services and lifestyle services.
• real estate industry and transfer of
intangibles.

2023 AF5208_L10_VAT 34
 VAT Credit Mechanism
Input VAT
• VAT paid on purchases
• Import
VAT payable = Composite value x VAT rate
Where
Composite value = CIF (cost+insurance+ flight) price + Customs duty +
Consumption tax
Output VAT
 VAT collected on sales of taxable goods and services

Output VAT = Sales amount x VAT rate

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2023 AF5208_L10_VAT 35
 VAT Credit Mechanism (cont'd)

VAT payable = Output VAT - Input VAT

Need to be
supported by VAT
• VAT paid is NOT an expense, Special Invoice
• It is the excess of VAT received
over VAT paid.
• The “remaining amount” received
from customers, after setting off
VAT paid.

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2023 AF5208_L10_VAT 36
 VAT Rates (1)
• Sale and importation of goods; provision of repairs, replacement, and
processing services - 13%
• Sales or importation of necessities (e.g. agricultural products, water
gas) – 9%
• Leasing of movable property -13%;
• Transportation services postal services, basic telecommunications
services construction services, leasing /sale of real estate and transfer
of land use right – 9%;
• Modern services (except for leasing) and value-added
telecommunications services, financial services, consumer services and
transfer of intangibles (except) land use right – 6%; and
• https://taxsummaries.pwc.com/peoples-republic-of-china/corporate/o
ther-taxes
37 (last reviewed on 30 December 2022)

37 2023 AF5208_L10_VAT 37
 Tax rates (2)
• Exportation of goods; exportation of repair, replacement, and processing
services; international transportation services and spacecraft transportation
services; exported services that are completely consumed outside China,
including:
– Research and development (R&D) services.
– Energy performance contracting services.
– Design services.
– Production and distribution services for radio, film, and television programs.
– Software services.
– Circuit design and testing services.
– Information system services.
– Process management services.
– Offshore outsourcing services.
– Transfer of technology
• Exportation of above services - 0%
2023 AF5208_L10_VAT 38
 Tax rates (2)
• Exportation of goods; exportation of repair, replacement, and processing
services; international transportation services and spacecraft transportation
services; exported services that are completely consumed outside China,
including:
– Research and development (R&D) services.
– Energy performance contracting services.
– Design services.
– Production and distribution services for radio, film, and television programs.
– Software services.
– Circuit design and testing services.
– Information system services.
– Process management services.
– Offshore outsourcing services.
– Transfer of technology
• Exportation of above services - 0%
2023 AF5208_L10_VAT 39
 VAT Rates (2)
• Small-scale taxpayer:
No input VAT credit and Tax rate:3%

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2023 AF5208_L10_VAT 40
 Consumption tax

• Consumption tax (CT) – manufacturing,

commission processing or importation of specified
non essential or luxury goods within China –
generally at 20%-40%

AF5220_L1 Overview of China Tax System 41

 Property and behaviour taxes
• Stamp duty – documents for transfer of property,
accounts, business books
• Deed tax – assignment/transfer of land use right @ 3-5%
on value of property, within China
• Land Value Appreciation Tax – gain realized on
assignment of land use right, buildings, and associated
structures within China
• Urban real estate tax – charged on owners on the
appraised standard value of the land and buildings
• Resource tax – extraction of certain mineral products
AF5220_L1 Overview of China Tax System 42
 Penalties for taxpayers
• Late tax payment
• 0.05% late payment interest,
• 50% to 500% of tax unpaid/underpaid as fine,
• criminal liability for under-payment of tax possible results in
imprisonment
• Non compliance
• Tax authorities order to remedy the situation w/in specified
time limit + a fine of RMB10,000 at max
• Misuse of tax registration
• A fine from RMB2,000 to 50,000
AF5220_L1 Overview of China Tax System 43
Penalties for withholding agents

• Non compliance (keeping books and records)

• Order to comply + a fine of RMB5,000, a further fine of
RMB10,000 if can not comply with by stipulated time
limit

AF5220_L1 Overview of China Tax System 44

 Penalty for tax evasion under
Criminal Law
• Evasion
• Forgery, revision, concealment or unauthorized destruction
of account books or supporting accounting vouchers
• Overstatement of expenses, omission or understatement of
income
• Refusal to file tax returns following notification from tax
authorities or filing fraudulent tax returns
• filing a fraudulent tax return or failing to file a tax return
through means of fraud or concealment.

AF5220_L1 Overview of China Tax System 45

 Quantum of penalties

AF5220_L1 Overview of China Tax System 46

 Reading Assignment

• China master tax guide (2021)

• Chapters 1 & 2

AF5220_L1 Overview of China Tax System 47

Discuss the
China taxes
implication
of the
1. Company A (incorporated in Country A) selling
following goods in Mainland China

three 2. Company C (incorporated in China) selling goods

in Mainland and Hong Kong
situations 3. Company U (incorporated in UK), managed,
owned and controlled by a Chinese individual in
mainland, selling goods in China

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