New Rules For Non-Resident Enterprise Income Tax
March 24, 2010
On February 20, 2010, the State Administration of Tax (the “SAT”) issued “Measures on the Administration of Approval and Collection of Non-resident Enterprise Income Tax” (the “Measures”). Non-resident corporations, defined in Article 3, Paragraph 2 of the Enterprise Income Tax Law of China, are governed by the Measures regarding enterprise income tax (EIT) issues. The EIT of representative offices of foreign enterprises is covered by Circular 18 [2010] issued by SAT on the same day. The Measures went into effect of the date of issuance.
Under the Measures, non-resident enterprises shall: set up their account books in accordance with the Law on the Administration of Tax Collection and relevant laws and regulations; record and settle their accounts in accordance with legal and valid invoices; and, in accordance with the principle of correspondence of actual functions to assumed risks, accurately calculate their taxable income, and report and pay the EIT for their actual situation.
If a non-resident corporation has not properly kept account books and cannot calculate the amount of its taxable income, the tax authority will use one of the following methods to decide the amount of payable EIT.
(1) Gross Income-Based Method — This method should be applied when a non-resident corporation calculates its gross income correctly but cannot accurately compute its costs and expenses. The formula is as follows:
Deemed taxable income = Gross income * Deemed profit rate
(2) Cost-Based Method – This method applies when a non-resident corporation calculates its costs and expenses accurately but cannot correctly compute its gross income. The formula is as follows:
Deemed taxable income = The total of costs and expenses / (1 – Deemed profit rate) * Deemed profit rate
(3) Expenditures-Based Method – This method applies when a non-resident corporation accurately calculates its expenditure for operations but cannot correctly compute its gross income or its costs and expenses. The formula is as follows:
Deemed taxable income = Total of expenditure for operations / (1 – Deemed profit rate – EIT rate) * Deemed profit rate
The tax authority should use the deemed profits rate below when calculating the deemed taxable incomes:
(i) The deemed profit rate for income from project construction, design and consulting is 15% to 30%;
(ii) The deemed profit rate for income from management service is 30% to 50%;
(iii) The deemed profit rate for income from other business activities should be no less than 15%.
The tax authority may raise the profit rate if it reasonably holds, with good grounds, that the actual profit rate of a non-resident corporation is higher than the corresponding deemed profit rate. Where a non-resident corporation generates income from more than one type of the activities listed above, the tax authority shall divide the income from the different types of activities and apply appropriate deemed profit rate to the different elements of the income. If the income cannot be divided accurately, the higher deemed profit rate will be applied.
When a non-resident corporation provides equipment installment, training, management and other services to a Chinese resident buyer of its equipment or other goods, the sales contract of such equipment or goods may not stipulate the price of such related services, or the price of service may be unreasonable. In those cases, the tax authority can refer to the general price in the same or similar industry and decide the deemed income from the services provided. In case where there is no general price to refer to, the tax authority may decide the deemed income from the service, which should be no less than 10% of the total price of the sales contract.
With regard to non-resident enterprises providing labor services for customers located in China, if the entire service is provided within China, the revenue in full shall be subject to EIT in China. If the service is provided both inside and outside of China, then the revenue shall be divided by services provided within China and outside of China, and the revenue derived inside China shall be subject to EIT.
Source: Jingyuan Sun
www.sheppardmullin.com
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Enterprise Income Tax
April 6, 2009
(1) Taxpayers
The taxpayers of Enterprise Income Tax include any state-owned enterprise, collective enterprise, private enterprise, joint operation enterprise, joint equity enterprise, and other organizations.
(2) Tax base
The taxpayers’ world-wide income from production and business operations and from other sources shall be subject to Enterprise Income Tax according to law. The Enterprise Income Tax is computed on the basis of the taxable income which is equal to the total income earned by the taxpayers in a tax year less allowable deductions for the same tax year.
(3) Tax rates and computation of tax payable
Normally, the amount of Enterprise Income Tax payable is computed on the basis of the taxable income and by applying the rate of 33%. The formula for computing the tax payable is:
Income tax payable= Taxable income × 33%
Besides the statutory rate, two lower rates of 18% & 27% are designed for some less profitable enterprises.
(4) Major tax exemptions and reductions
a. Enterprises operating in autonomous regions requesting for preferential treatment and incentives may be, upon the approval of the People’s Government at provincial level, given tax reductions or exemptions for a specified period;
b. Tax exemption or tax reduction may be granted to enterprises or businesses that meet the relevant rules of the State, such as high-technology enterprises and enterprises engaged in tertiary industry set up in line with the relevant regulations of the State, enterprises using wastes as their key raw materials, newly-registered enterprises located in the revolutionary base areas, minority nationality areas, remote areas and poor areas approved by the State, enterprises-suffering from serious natural disasters, newly-registered service enterprises providing social employment opportunities, factories and farms run by schools under the educational administration departments, welfare production enterprises belonging to the civil administration departments, township enterprises, State-owned agricultural enterprises, etc.
Source: Beijing Local Taxation Bureau
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Overview of China’s Current Tax System
April 6, 2009
Tax is the most important source of fiscal revenue of China. It is also an important economic lever utilized by the State to strengthen macro-economic regulation, which produces important impacts on China’ s economic and social development. After the tax system reform in 1994 and the fine-tuning of it in subsequent years, China has preliminarily built up a tax system adaptable to the socialist market economy, which has been playing an important role in assuring China’s fiscal revenue, broadening the opening to the outside world and promoting the sustained, fast and healthy development of China’s national economy.
1. TYPE OF TAXES
Under the current tax system in China, there are 25 types of taxes, which, according to their nature and function, can be divided into the following 8 categories:
a) Category of turnover taxes. It includes 3 kinds of taxes, namely, Value – Added Tax, Consumption Tax and Business Tax. The levy of these taxes are normally based on the volume of turnover or sales of the taxpayers in the manufacturing, circulation or service sectors.
b) Category of income taxes. It includes Enterprise Income Tax (applicable to such domestic enterprises as state-owned enterprises, collectively-owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises), Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals.
c) Category of resource taxes. It consists of Resource Tax and Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources.
d) Category of taxes for special purposes. These taxes are City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax and Land Appreciation Tax. These taxes are levied on specific items for special regulative purposes.
e) Category of property taxes. It compasses House Property Tax, Urban real Estate Tax, and Inheritance Tax (not yet levied).
f) Category of behaviour taxes. It includes Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax (not yet levied), Slaughter Tax and Banquet Tax. These taxes are levied on specified behaviour.
g) Category of agricultural taxes. The taxes belonging to this category are Agriculture Tax (including Agriculture specialty Tax) and Animal Husbandry Tax which are levied on the enterprises, Units and/or individuals receiving income from agriculture and animal husbandry activities.
g) Category of customs duties. Customs Duties are imposed on the goods and articles imported into and exported out of the territory of the People’s Republic of China.
Source: Beijing Local Taxation Bureau
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