China Tax Presentation V3

China Tax Presentation

January 21, 2009

Richard Tan

Ge Wang

Part I Overview of China

PEOPLE’S REPUBLIC OF CHINA

China Tax Jan 21, 2009 4


Chinese Totem

Dragon


Location



Situated in eastern Asia on the western shore of the Pacific Ocean

An area of 9.6 million square kilometers.

Continental coastline extends for about 18,000 kilometers.

Its vast sea surface is studded with more than 5,000 islands, of which Taiwan and Hainan are the largest.


Overview


Almost 4,000 years of recorded history , one of

the world's most ancient civilizations.


The most populous country in the world,

containing about 1/5 of the world's total

population.


Many different ethnic groups, languages and

religions exist throughout the country.


The Four Great Inventions of Ancient China

Printing


Paper making



Gunpowder



Compass



Confucius

Notable figures


Notable figures

Qin Shi Huang


Mao Ze Dong

Notable figures


Yao Ming

Notable figures


Zhang Zi Yi

Notable figures


Place of Interest

The Forbidden City


The Great Wall

Place of Interest


Temple of Heaven

Place of Interest


Terracotta Army

Place of Interest


Guilin

Place of Interest


Jiu zhai

Place of Interest


The Bird’s Net Olympic Stadium

Water Cube

Place of Interest


Culture

Beijing Opera


Dragon Dance

Culture


Chinese Kung Fu

Culture


Chinese Kung Fu

Culture


Chinese Kung Fu

Culture


Tradition Spring Festival


Spring Festival

Tradition


Mid-Autumn Day

Tradition


Mid-Autumn Day

Tradition


Dragon Boat Festival

Tradition


Dragon Boat Festival

Tradition


Chinese Food Lu Cuisine


Chuan Cuisine

Chinese Food


Yue Cuisine

Chinese Food


Min Cuisine

Chinese Food


Hui Cuisine

Chinese Food


Xiang Cuisine

Chinese Food


Su Cuisine

Chinese Food


Zhe Cuisine

Chinese Food


Part II Overview of China Tax


Overview of China Tax

Tax revenue

491/21/2009

Sources of law

Tax administration

Major taxes

Income taxes

Tax treaties

Brief comparison with US tax system


I. Tax Revenue

50

Billion RMB

1999 2000 2001 2002 2003 2004 2005 2006 2007

Tax Revenue 1031.50 1266.58 1516.55 1699.66 2046.61 2571.80 3086.58 3763.63 4944.93

GDP 8967.70 9921.45 10965.52 12033.27 13582.28 15987.83 18386.79 21087.10 24661.90

Percentage 11.50% 12.77% 13.83% 14.12% 15.07% 16.09% 16.79% 17.85% 20.05%

0

5000

10000

15000

20000

25000

30000

1999 2000 2001 2002 2003 2004 2005 2006 2007

Tax Revenue

GDP

Billion RMB

Data source: China National Bureau of Statistics and China State Administration of Taxation

1/21/2009


II. Sources of Law

51

Structure of political system in China

National People’s

Congress

(NPC)

State

Council

Ministry of Finance

(MOF)

State Administration

of Taxation (SAT)Other ministries

and bureaus under

the State Council

1/21/2009


II. Source of Law

Constitution

521/21/2009

Laws promulgated by the National People’s

Congress (“NPC”) or its Standing Committee

Regulations promulgated by the State Council

Measures and Notices issued by the Ministry

of Finance (“MOF”) or the State

Administration of Taxation (“SAT”)


III. Tax Administration

Central government

531/21/2009

The State Administration of Taxation

Local government

Local Tax Bureaus

State Tax Bureaus at local levels (provincial, municipal)

Criticism and reform


III. Tax Administration

54

Local Tax Bureaus Mainly in charge of Individual Income Tax, Business Tax,

Urban Real estate Tax, Land Appreciation Tax, Deed Tax,

Corporate Income Tax (of corporations established before

2002), etc.

State Tax Bureaus Mainly in charge of Value-added Tax, Consumption Tax,

Corporate Income Tax (of corporations established after

2002), etc.

1/21/2009


IV. Major Taxes

55

Income Taxes

1/21/2009

Turnover Taxes

Property and Behavior Taxes

Others


IV. Major Taxes

56

Income Taxes

1/21/2009

Individual Income Tax

Corporate Income Tax


IV. Major Taxes

57

Turnover Taxes

1/21/2009

Value-added Tax

Business Tax

Consumption Tax

Tariff


IV. Major Taxes

58

Property and Behavior Taxes

1/21/2009

Stamp Tax

Deed Tax

Land Appreciation Tax

Urban Real Estate Tax

Resource Tax

Vehicle/Vessel Tax


Other Taxes

1/21/2009

Urban Maintenance and Construction Tax

Other minor taxes

IV. Major Taxes


V-1. Individual Income Tax

60

Taxpayers

1/21/2009

Domiciled in China Subject to tax on world-wide

income.

Not domiciled in China Subject to tax on “China-sourced income” depending on how long the individual stays in China.


China Sourced Income Foreign Sourced Income

Income paid or borne by employer / establishment in China

Income paid or borne by foreign employer / establishment

Income paid or borne by employer / establishment in China

Income paid or borne by foreign employer / establishment

< 90 / 183 (when tax treaty applies) days

Taxable / / /

90 / 183 (when tax treaty applies) days –1 year

Taxable Taxable / /

1 year – 5 years Taxable Taxable Taxable /

>5 years Taxable Taxable Taxable Taxable

A brief explanation of taxable income and days spent in China

1/21/2009



Taxpayers

1/21/2009

Partnerships are transparent entities.

No option for choosing to be treated as taxable entity.

The tax liabilities of partnerships flow directly to the partners.



wages and salaries from employment;

business income by industrial and commercial households/entrepreneurs;

Income from contracting for or leasing operations of corporations or institutions;

remuneration for personal services performed by an independent contractor;

remuneration for manuscripts;

royalty income;

interest income, dividends and bonuses;

Income from leasing properties;

Income from assignment or transfer of properties;

contingency income;

other income specified to be taxable by the competent authority.

1/21/2009

Taxable Income



Individual Income Tax

64

Tax-exempt Income

Monetary awards granted by the Central Government, provincial Governments, international organizations for achievement in science, education, technology, culture, public health, sport, etc;

Interest on State treasury bonds;

Qualified Subsidies, allowances, welfare benefits, etc.;

Insurance indemnities.

Income of diplomatic representatives;

Tax-exempt income as stipulated in international conventions ;

Tax-exempt income as approved by the finance department of the State Council.

1/21/2009


Monthly Income (RMB¥)Rate (%)

Basic Salary - if Employee pays his/her Tax

If Tax is borne by Employer

¥500 or below (after deduction of RMB¥4,800 for expenses)

¥475 or below (after deduction of RMB¥4,800 for expenses)

5

The part over ¥500[1] to ¥2,000 The part over ¥475 to ¥1,825 10

The part over ¥2,000 to ¥5,000 The part over ¥1,825 to ¥4,375 15






The part over ¥100,000 The part over ¥70,375 45

Tax rate schedule for wages and salaries, stipulated by Individual Income

Tax Law of China

Tax Rates

1/21/2009



Incomes Rate

Business income by industrial and commercial

households/entrepreneurs

Progressive rate from

5% to 35%

Remuneration for personal services performed by an independent

contractor;

Progressive rate from

20% to 40%

Remuneration for manuscripts

20%, with deduction

of 30% in taxable

income

Royalty income, interest income, dividends and bonuses; income

from leasing properties;

income from assignment or transfer of properties;

contingency income

20%

Tax Rates

1/21/2009



Tax calculation (salary)

Possible reforms in the future

Tax liability = (Salary amount – standard deduction ) *

applicable tax rate

A higher threshold

Flexible deductions

Joint returns



V-2. Corporate Income Tax

68

Corporate Income Tax Law, effective from January 1, 2008

1/21/2009

Detailed Implementation Rules of the Corporate Income Tax

Law

Transitions from old systems to the new unified system

Other Notices and Interpretations issued by the MOF and SAT


Reform from 2008Before Jan 1, 2008 After Jan 1, 2008

Two previous parallel systems: one for

domestic corporations and the other for

foreign invested corporations

One unified system

General tax rate: 33% General tax rate: 25%

Tax holidays and incentives for foreign

invested corporations;

Preferential tax measure in Special

Economic Zones

Industry-based tax incentives

without geographic limitation

Tax refund for reinvestment Appealed

Thin capitalization, anti-

avoidance measures

1/21/2009


China Tax Jan 21, 2009 70701/21/2009

Taxpayers

Resident corporations

Incorporated in China

Incorporated outside of China but effectively managed in China

Subject to tax on worldwide income

Non-resident corporations Subject to tax on China sourced income


China Tax Jan 21, 2009 71711/21/2009

Taxable Income

Accrual basis

Monetary and non-monetary revenue

Revenue from sale of goods

Revenue from provision of services

Revenue from transfer of property

Dividends, profit distribution and other returns on equity investment

Interest

Rent

Royalties

Donation, and

Other revenue


China Tax Jan 21, 2009 72721/21/2009

Deductions

Reasonable expenses incurred by the corporations in

connection with the deriving of revenue, including costs,

fees, taxes, losses, etc. can be deducted when calculating

taxable income.

Donation, capped at 12% of total annual profit

Loss carry-forward for up to 5 years


China Tax Jan 21, 2009 73731/21/2009

Tax Rates

25% for normal resident corporations

20% for qualified small-scale corporations

15% for qualified High and New Technology Corporations

20% normal withholding tax rate for non-resident

corporations, subject to special provisions or tax treaties


China Tax Jan 21, 2009 74741/21/2009

Withholding Tax Rates

Dividends – 10%

Interest – 10%

Royalties and fees – 10%, generally subject to additional

Business Tax of 5%

The above rates may be reduced by an applicable tax treaty


China Tax Jan 21, 2009 75751/21/2009

Tax Incentives

Exemption or 50% exemption for income from

Encouraged agricultural activities

Qualified infrastructure projects

Qualified Environmental protection projects

Qualified technology transfer

Super deduction for R&D expenses

Accelerated depreciation for technology advancement


China Tax Jan 21, 2009 76761/21/2009

Anti-avoidance Rules Thin capitalization

Controlled foreign company

Transfer pricing Cost sharing

Documentation requirements

Foreign tax credit – credit system



VI. Tax Treaties

771/21/2009

Up till Jan 1, 2009, 87 tax treaties plus tax arrangement with Hong Kong and Macau

Australia Belgium Brazil

Canada France Germany

India Japan Kazakhstan

Luxembourg Netherlands

Portugal Russia Singapore

Sweden Switzerland United Kingdom

United States

Reference on OECD Model though China is not an OECD member


VII. Brief Comparison with

US Tax System No AMT

1/21/2009 78

No “check-the box rule”

No distinction between “ordinary income” and

“capital gain”

No consolidated filings unless specially

approved

No Branch Tax


Thank you!

Welcome to China!

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