Indirect tax snapshot
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The Indirect tax consists of Value Added Tax and Consumption tax in China. VAT is levied on entities and individuals engaging in the sale of services, intangible assets or immovable assets within the territory of China. Consumption tax is levied on individuals or entities that manufacture, subcontract or import chargeable items into mainland China as specified in the PRC Provisional Regulations for Consumption Tax. Those chargeable items include tobacco, alcohol, cosmetics, precious jewelleries and precious jade and stones, firecrackers, processed oil, automobile tyre, motorcycles, motor vehicles, golf and golf facilities, luxurious watches, yachts, disposable wooden chopsticks and wooden floor boards. Consumption tax (CT) rates shall be computed on the basis of the good’s value, volume or the combination of the value and volume (compound tax). Export sales are exempt from CT.
As a principle point of view, VAT is a tax on newly generated value (ie added value) in multiple areas of commodity production, commodity circulation and labour services and services or the one imposed on added value of a commodity. Organisations and individuals engaging in the sale of goods or providing processing, repair and assembly services (hereinafter referred to as ‘labour services’), the sale of services, intangible assets, immovables and the importation of goods in the People’s Republic of China shall be taxpayers of VAT and shall pay VAT pursuant to these regulations.
The VAT payable shall be computed on an indirect basis (ie VAT deduction basis), normally output VAT would be charged for sales activities and/or certain services following the regulations with respect to VAT reform, and input VAT occurs on the purchases of goods (inclusive VAT paid on importation) and/or receiving certain services. The balance of output VAT and input VAT (ie output VAT minus input VAT) shall be VAT payable to Chinese tax authority. A negative balance could be carried forward to the next tax period for deduction without time restrictions.
VAT taxpayers are classified as either a VAT general taxpayer or a VAT small-scale taxpayer based on their business size and soundness of financial accounting. Multi-level tax rates on various activities for the VAT general taxpayer include the following:
- VAT rate of 13% for the sale of goods, the provision of processing, repair and replacement labour activities, the leasing of tangible (movable) property or importing
- VAT rate of 9% for the provision of transportation services, postal services, basic telecommunications services, construction, the lease of immovable assets, the sale of immovable assets, the transfer of land use rights or the sale or importation of specific
- VAT rate of 6% for the sale of services and tangible assets, unless otherwise
- VAT rate of 0% for exports (pursuant to tax circulars issued subsequent to the Provisional Regulations, VAT refund rates for export sales vary depending on the specific nature of Thus, VAT on export sales is in effect not subject to zero rate for certain items).
- VAT rate of 0% for organisations and individuals in China engaging in the cross-border sale of services and intangible assets within the scope stipulated by the State Council.
A VAT levy rate of 3% is chargeable for small-scale taxpayers.
If the amount of annual VAT taxable revenue is not in excess of RMB 5 Million Yuan, they could be identified as a small-scale taxpayer. Small-scale taxpayers could be registered as a VAT general taxpayer on a voluntary basis if the annual sales do not meet the threshold.
In principle, in addition to taxable items with a VAT rate of 0%, any purchase of goods or receipt of services, intangible assets and/or immovable that would not and/or could not be applied to taxable items on which output VAT would be generated (eg a VAT exemption), therefore the input VAT cannot be claimed for deduction.
Following the Provisional Regulations of People’s Republic of China(PRC) on VAT, Article 10 (with unofficial English translation), we have included a short list of what cannot be deducted.
- procurement of goods, labour services, services, intangible assets and immovable assets to be used for tax items which adopt a simple tax method, VAT-exempt items, collective welfare or personal consumption
- procurement of goods of abnormal losses, and the related labour services and transportation services
- procurement of goods consumed by work-in-progress and finished products of abnormal losses (excluding fixed assets), and the related labour services and transportation services
- any other items stipulated by the State Council.
China has a legal regime of tax registration that requires the taxpayer to register its business activity with the related tax authorities for tax management purposes. From 1 October 2016, China implemented the registration system by integrating the business license, organisation code certificate, tax registration certificate, social insurance registration certificate, and statistical registration certificate of companies into one consolidated business license (hereinafter referred to as ‘Five in One’ in short). The corporation has a unified business license with a unified social credit code. The taxpayer/withholding agent must register when the organisation is newly formed or before the business is formally shut down and when change occurs during the operation period. They must do this in official written form and within the statutory time limits.
The tax authority would determine and elect the type of applicable tax on which should be imposed based on the description of taxpayer’s registered business scope during the process of tax registration.
The implementation of a VAT regime relies on a formal VAT invoice (including VAT invoice and VAT special invoice) issued by Chinese tax authority. As mentioned, VAT taxpayers are classified as a VAT general taxpayer or as a VAT small-scale taxpayer in China, it’s necessary that a VAT general taxpayer shall use a VAT special invoice through the VAT anti-forgery tax control system for the purpose of purchase, issuance, cancellation and verification of printed copies of VAT special invoices and the corresponding electronic data.
In China, each organization should be registered as an independent taxpayer, consolidated VAT tax filing occurs under very rare circumstances.
Generally only organisations legally established within China’s territory will be required to register with the tax authority, non-resident enterprises are not required to declare its tax status.
If any taxable activities performed by non-resident enterprises in China, withholding agent or related party in the transaction should withhold tax on behalf of non-resident enterprises in accordance with relevant regulations.
There is no specific legislation that applies to non-resident supplies of electronically supplied/digital services from a Chinese tax perspective.
No, it is not required that a non-established business needs to appoint a fiscal representative in order to register. Nevertheless, a withholding agent will be needed for withholding tax purpose if any taxable activities occur according to the Provisional Regulations of People’s Republic of China(PRC) on VAT, Article 18.
We listed the below provision of Article 18 with unofficial English translation for your reference:
- Provisional Regulations of the People’s Republic of China on Value-added Tax
Article 18, where overseas organisations or individuals engaging in sale of labour services in the People’s Republic of China do not have a business establishment in the People’s Republic of China, their agent in the People’s Republic of China shall act as the withholding agent; where there is no agent in the People’s Republic of China, the buyer shall act as the withholding agent.
A newly formed company is required to start filling VAT tax returns to its relevant tax authority in the following month after its official tax registration. A VAT return normally covers an accounting period of one month from the first day to the last day of a calendar month. A taxpayer should submit monthly VAT returns and settle any payments due within 15 days of the following calendar month.
A fine of RMB 2000 Yuan to EMB 10000 Yuan may be imposed if the taxpayer does not comply with tax filing rules such as a delay in the submission of tax returns. While a delay of the tax payment may be subject to a tax overdue charge at the rate of 0.05% on a daily basis according to the Law of Administration of Tax Collection, Article 62 and Article 32.
We listed the below provision of Article 62 and Article 32 with unofficial English translation for your reference:
- Law of Administration of Tax Collection
Article 62, where, within the specified time limit, a taxpayer fails to go through the formalities for tax declaration and submit information on tax payment or a withholding agent fails to submit to the taxation authorities statements on taxes withheld and remitted, or collected and remitted and other relevant documents, the taxpayer or withholding agent shall be ordered by the taxation authorities to rectify within the specified time and may be fined not more than 2,000 yuan; if the offenses are serious, the taxpayer or withholding agent may be fined not less than 2,000 yuan but not more than 10,000 yuan.
Article 32, where a taxpayer fails to pay taxes or a withholding agent fails to remit tax payments within the specified time limit, the taxation authorities shall, in addition to ordering the taxpayer or withholding agent to pay or remit the tax within the specified time limit, impose a penalty for late payment on a daily basis at the rate of 0.05% of the amount of tax in arrears, from the date the tax payment is defaulted.
Yes, special tax declarations will be required if the taxpayer operates in a non-registered area.
A Chinese resident enterprise that performs business activities beyond the scope of registered area, would be required to fill in the Report Form for Cross-regional Tax-related Matters instead of obtaining special certification issued by the relevant tax authority for approval. These provisions came into force on 30 September 2017 on a trial basis, and was officially effective on 30 October 2017.
For example: A company registered in Beijing city needs to sell goods in Nanjing city, the company should fill in the Report Form for Cross-regional Tax-related Matters, otherwise the company will be subject to tax filing obligation in Nanjing city.
Yes, where a taxpayer is identified as having a deliberate intention to commit tax evasion, a penalty may be imposed ranging from 50% to 500%, according to the Law of Administration of Tax Collection, Article 63.
We listed the below provision of Article 63 with unofficial English translation for your reference:
- Law of Administration of Tax Collection
Article 63, where a taxpayer evades tax, the taxation authorities shall recover the payment of the amount of tax the taxpayer fails to pay or underpays and the penalties for late payment, and the taxpayer shall also be fined not less than 50 percent but not more than five times the amount of tax the taxpayer fails to pay or underpays; if a crime is constituted, the taxpayer shall be investigated for criminal liability in accordance with law.
The concept of VAT in China applies to domestic organisations under most circumstances, normally a VAT refund occurs when Chinese resident enterprises export goods or certain services to overseas customers, a Chinese resident can declare a refund or exemption of VAT and consumption tax paid in the multiple segments of commodity production, commodity circulation, ie exportation of goods has a VAT rate of 0% and is exempt from consumption tax.
From 1 January 2018, when the taxpayer issues a VAT invoice through the new VAT invoice management system, the abbreviation corresponding to the tax classification code of goods and services will be automatically displayed and printed in the column of ‘Name of goods or taxable labor or service’ or ‘Item’ on the invoice.
A VAT invoice must show:
- an invoice number which is unique and sequential
- the invoice date
- the buyer’s name, tax identification number, address and phone, name of bank and bank account number
- the security code(password)
- a description sufficient to identify the goods or services supplied to the customer
- the seller’s name, tax identification number, address and phone, name of bank and bank account number
- name of payee, reviewer, drawer and the seal of the seller.
For each different type of item listed on the invoice, the following must be shown:
- the name of goods or services supplied to the customer
- the specification models
- the unit, quantity, unit price and total amount, excluding VAT
- the rate of VAT that applies to what’s being sold
- the amount of tax to be paid
- the total amount payable, including VAT.
The VAT invoice that applies to VAT small-scale taxpayers is similar to a VAT special invoice which applies to the VAT general taxpayer, except for the number of copies. There is one more copy namely ‘deduction form’ in the VAT special invoice for input VAT deduction purposes compared with the VAT invoice.
Note: Appendix I listed sample of VAT invoice (Chinese version and English translation version).
There is no SAF-T requirement in China. From 8 August 2016, the ‘Golden Tax System Phase III’, the new tax management system of China, has been generalized throughout the country. ‘Golden Tax System Phase III’ achieves nationwide online tax registration, and full tax (fee) online declaration.
The tax bureau can achieve multi-level and multi-angle tax analysis and assessment on ‘Big data’ of comprehensive tax by industry, type of tax, enterprise type, business model, business nature, and region. The bureau also can realise dynamic comprehensive tax analysis of the operating situation of a certain enterprise. ‘Golden Tax System Phase IV’ is on the way of reform with much stronger digitization and intelligentization.
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