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Tax Administration

Introduction to the Tax System

 

· INSIGHTS

§ Taxation Environment

China’s competent department of taxation is the State Taxation Administration directly subordinate to the State Council. Responsible for nationwide tax collection management, it has four levels of subsidiary taxation organs (provincial, municipal, county, and township) which carry out tax collection within the scope of their respective administrations under the leadership of the State Taxation Administration. In October 2018, national tax bureaus and local taxation bureaus at and below the provincial level formally completed merger for a dual-leadership management system led by the State Taxation Administration and supported by the provincial people's governments (including provincial-level autonomous region and municipal governments). Effective January 1, 2019, with the transfer of responsibilities, all social insurance premiums for government organs, public institutions, and urban and rural residents are now collected by tax departments. In principle, the basic pension and other insurance premiums of corporate employees will continue to be collected in accordance with the current tax collection system; meanwhile, a reasonable scope has been determined for non-tax revenue whose collection is now the responsibility of tax departments. The State Taxation Administration has successively issued a number of new measures to optimize the tax business environment and facilitate private tax/fee payment. These have simplified tax procedures in line with policy tax/fee cuts and the tax system reform to "streamline administration, delegate power, strengthen regulation, and improve services".

§ Tax Categories

Like other countries in the world today, China adopts a compound tax system of multiple tax types. Under the current system, 18 types of tax are divided into five categories according to the object of taxation:

  1. Income taxes: corporate income tax, individual income tax
  2. Turnover taxes: value-added tax, consumption tax, tariff
  3. Property taxes and act taxes: house property tax, deed tax, vehicle and vessel tax, stamp tax, city and town land use tax, land value increment tax, tonnage tax
  4. Resource taxes: resources tax
  5. Special-purpose taxes: urban maintenance and construction tax, vehicle purchase tax, farmland conversion tax, tobacco tax, environmental protection tax

This Investment Guide will give an overview of the five major tax categories.

(1) Corporate Income Tax

Enterprises and other organizations that have obtained income within the territory of China are the taxpayers responsible for payment of the corporate income tax in accordance with regulations. Enterprises are categorized as resident or non-resident enterprises. Resident enterprises refer to enterprises established within Chinese territory in accordance with the law of China or those established in accordance with the law of foreign countries (or overseas regions) with actual management bodies in China. Non-resident enterprises refer to enterprises established in accordance with the law of foreign countries (or overseas regions) with actual management organs outside China but with other establishments or sites within China, or those enterprises without establishments or sites within China but have incomes obtained from China. The statutory tax rate for resident enterprise income obtained both within and outside Chinese territory is 25%. For non-resident enterprises that have establishments or sites within Chinese territory, the statutory tax rate of 25% applies to the income of those establishments or sites obtained within the Chinese territory, as well as to the income obtained from outside Chinese territory but in actual relation to the establishments or sites within China. Meanwhile, non-resident enterprise income that has no actual relation to the establishments or sites within China shall be taxed at the statutory rate of 20% (an actual discount of 10% due to preferential policies). (If a tax agreement is signed, the tax rate agreed upon shall be effective and enforced.) Corporate income tax is calculated according to the tax year, beginning on January 1 and ending on December 31 of the Gregorian calendar. Payments of corporate income tax shall be declared and submitted in advance, either monthly or quarterly, and final settlement shall be carried out at the end of the year.

(2) Individual Income Tax

On January 1, 2019, China established a comprehensive and classified individual income tax system that is fairer and more scientific than its predecessor. It has clarified the definition of and criteria for “resident individual”, adjusted income items, optimized tax rates, raised deduction standards for the comprehensive income tax, canceled additional deductions, set up special expense deductions, adjusted the tax reporting system, set up the departure tax settlement system and credit mechanism, and introduced the anti-tax avoidance clause for individuals. An individual who has a residence in Chinese territory, or one who does not have a residence in Chinese territory but has resided in China for 183 days or more within a tax year, is a “resident individual”. The income of resident individuals, both obtained within and outside the territory of China, is subject to the individual income tax in accordance with the law. An individual who does not have a residence in Chinese territory and has not resided in China, or one who does not have a residence in Chinese territory but has resided in China for fewer than 183 days within a tax year, is a “non-resident individual”. The income of non-resident individuals obtained within the territory of China is subject to the individual income tax in accordance with the law. The tax year begins on January 1 and ends on December 31 of the Gregorian calendar. Comprehensive income is subject to a seven-level progressive tax rate in excess of specific amounts ranging from 3% to 45%; business income is subject to a five-level progressive tax rate in excess of specific amounts ranging from 5% to 35%; income from interests, dividends, bonuses, the lease of property, the transfer of property, and contingent income is subject to a proportional tax rate of 20%.

For foreign nationals, the following categories of income are temporarily exempted from the individual income tax: (1) stock dividends and bonuses obtained from foreign-invested enterprises; (2) wages and salaries that are paid to foreign experts in accordance with relevant regulations in China; (3) optionally, foreign persons who qualify as resident individuals may apply for tax exemptions on housing subsidies, language training fees, child education expenses, food allowances, relocation expenses, laundry fees, travel allowances, and family visit expenses; alternatively, they may opt to enjoy special expense deductions from the individual income tax, (effective from January 1, 2019 to December 31, 2021). Regarding item (3), once a foreign national chooses one or the other, he/she may not change that decision within the tax year. Then, effective January 1, 2022, individual foreign nationals will no longer be entitled to exemption from taxes on housing subsidies, language training fees, or child education expenses, and willenjoy special expense deductions in accordance with relevant regulations.

(3) Value-added Tax (VAT)

On May 1, 2016, China’s business tax was altogether replaced by the value-added tax (VAT). Those subject to the VAT include organizations and individuals that sell goods, provide processing, repair, replacement and marketing services, manage intangible assets or real estates, or import goods within the territory of the People's Republic of China. Taxpayers fall into two categories: general taxpayers and small-scale taxpayers. For general taxpayers, tax rates of 13%, 9%, and 6% are applicable to their VAT taxable sales and imports. For small-scale taxpayers, meanwhile, a simplified taxation method applies at a 3% rate. Customs is responsible for collecting VAT on imports. The assessable periods for VAT payment are one day, three days, five days, ten days, fifteen days, one month or one quarter. From 2017 to 2019, China introduced a series of reform measures and supporting policies to reduce VAT rates and simplify the rate structure, including input deductions for domestic passenger transport services, additional deductions for production and consumer-oriented services, and a pilot incremental retention VAT rebate system.

(4) Tariffs

China Customs imposes tariffs on goods and articles imported to and exported from China. Tariff payers include the consignees of imported goods, the consignors of goods for export, and the owners of inbound and outbound articles. Regarding import tariffs, in recent years China has taken the initiative to introduce a series of new measures to reduce import tariffs. In 2018, China proactively reduced the MFN import tariff rate, making substantial tax reductions on pharmaceuticals, automobiles and auto parts, high-demand consumer goods, and certain industrial products. Since January 1, 2020, China has implemented a provisional import tax rate that is lower than the MFN import tariff rate on over 850 commodities.

(5) Consumption Tax

Organizations and individuals engaged in the production, consigned processing and import of taxable consumer goods within the territory of the People's Republic of China, as well as other organizations and individuals selling taxable consumer goods determined by the State Council, are the taxpayers responsible for paying consumption tax in accordance with the law. Commodities subject to the consumption tax fall into 15 major categories: cigarettes, liquor, high-end cosmetics, precious stones and jewelry, firecrackers/fireworks, petroleum products, motorcycles, cars, golf balls and golf equipment, luxury watches, yachts, disposable wooden chopsticks, solid wood flooring, batteries, and paints/varnishes. Consumption tax rates are either proportional or quota-based. The amount of consumption tax payable shall be calculated by the ad valorem, specific tax, or composite method (combining the ad valorem and specific tax methods). Customs is authorized to collect consumption tax on taxable imported consumer goods. Taxpayers importing taxable consumer goods must pay the applicable taxes within 15 days of the issuing of the Customs Consumption Tax Pay-In Warrant by Customs.

[1] This section cannot cover all the stipulations in the tax law. Moreover, in practice, due to possible changes in laws and regulations, it is recommended that enterprises immediately consult professional service agencies on whether or not to take action.

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