KNOWLEDGE BASE Taxation Triggers China
Taxation Triggers In China
When doing business in China, you need to consider whether your activities will trigger tax obligations, even if you are not a China based business and have no physical presence in China. There are several ways in which you could trigger tax obligations by doing business in China or with Chinese residents. In 2016, China completely eliminated business tax (BT) in lieu of a value-added tax (VAT) system, to reach its goal to modernize its taxation system by 2020. Below is a discussed of the new VAT system.
Because taxes are one of the most complex areas of law and are completely business specific, you should speak with a tax attorney and/or accountant to learn about and understand your tax obligations in China.
What is VAT?
Value Added Tax (VAT) is a broad-based consumption tax levied on the sale of all supplies of goods and services in China. With the recent VAT expansion in China, VAT now potentially applies to the sale and importation of all goods and the provisions of all services in, from, or to China. In the context of VAT, output refers to VAT charged and collected (generally by the business) on the sale of goods or services and input refers to VAT charged and paid on the purchase of goods and services to be used by the business. In many countries, input VAT is refundable to the business, in China however, excess input VAT credits are generally not refundable, rather they carry forward to offset future output VAT.
To whom does VAT apply?
Businesses automatically have VAT liabilities on their taxable transactions, regardless of their annual turnover. VAT registration in China is required at the branch level, rather than the entity level. This means a company may have multiple VAT registrations. Foreign companies cannot generally register for VAT, which means they cannot claim input VAT credits. VAT thresholds apply only to individuals, although these thresholds are very low, ranging from RMB 5,000-20,000 per month in sales, or RMB 300-500 per transaction in most Chinese provinces.
“Small scale taxpayers” are treated separately, and include those with annual sales turnovers of not more than:
RMB 800,000; or
RMB 500,000 if they are only engaged in the production of goods or in the provision of repair, replacement, and processing services; or
RMB 5 million if they provide any other service that was recently transitioned from BT to VAT.
A small-scale taxpayer is an entity of individually-owned business whose annual taxable sales exceeds the stipulated standard (listed above) but whose taxable acts are infrequent.
The Chinese tax system is essentially linked to the business licensing and registration system, therefore, foreign entities are not eligible to register as general VAT taxpayers in China. Foreign companies that want to do business in China must typically establish a Chinese foreign invested commercial enterprise (FICE), a wholly foreign owned entity (WFOE), or a joint venture.
When a foreign company provides services in China, VAT will typically be collected by withholding from the price and accounted for by the service recipient. When a foreign company sells goods into China, VAT on importation is typically accounted for by a local customs agent or by the buyer.
How do companies comply with VAT?
VAT is generally payable on the gross selling price, payable by the recipient.
China, unlike many other countries, has several different VAT rates. Below is a list of VAT rates as of January 1, 2017, as well as examples of what each rate applies to. It’s always a good idea to confirm current rates, as they change from time to time.
17%: This is the standard rate, which applies to most goods and processing, and repair and replacement services;
13%: This rate applies to the sale of foodstuff, utilities, such as heating, air conditioning, and certain gas supplies, books, newspapers, and magazines;
11%: This rate applies to transportation services, postal services, basic telecommunications services, real estate and construction services (many real estate and construction transactions are eligible for a reduced rate (5%) pursuant to transitional (“grandfathering”) rules from May 1, 2016);
6%: This rate applies to ‘modern services,” which includes research and development, information technology services, cultural and creative services, logistics and ancillary services, financial and insurance services, and ‘lifestyle services,’ which includes education, healthcare, travel, entertainment, food and beverage, accommodation, and cultural and sports services.
5%: This rate applies to certain real estate transactions, and is effectively a transitional measure applied to certain real estate transactions held as of May 1, 2016.
3%: This rate applies to ‘small-scale taxpayers,’ which includes those without sophisticated business, accounting, and auditing systems and whose turnover is below certain thresholds (ranging from RMB 500,000 to RMB 5,000,000 for services that have recently transitioned from BT to VAT). These ‘small-scale taxpayers’ pay output VAT, but cannot claim input VAT credit on purchases.
Zero-rated: This rate applies to exported goods, certain exported services (though most exported services are exempt rather than zero-rated. Unlike many other countries, the refund provided on zero-rated goods is, in most cases, less than the amount of VAT incurred on inputs.
Exempt: Agricultural products, contraceptive drugs and devices, antique books, and certain exported services are exempt from VAT.
Out of Scope: Interest income on deposits derived by financial institutions, claims paid by insurers, and certain merger and acquisition activities are out of the scope of VAT.
VAT on Exports
In general, exports are zero-rated, however how zero rating is achieved may differ depending on the type of company. Zero rated does not have the same meaning as in many other countries. In China, the type of goods being exported (determined by the HS Customs code of goods) determines the percentage of input VAT that will be refunded based on a scale with 7 different refund rates, ranging from 0% (no recovery) to 17% (full recovery). Claiming zero rating in China is complex, and the administrative practices differ from province to province. Specific documentation is required and claims are scrutinized closely.
VAT on Imports
Imported goods are subject to VAT, which is payable to Customs. Online sellers into China typically need to appoint a customs agent or broker who handles VAT payable on importation. VAT on imports is calculated based on the aggregate of Customs dutiable value with any Customs duty and consumption tax payable.
All account books, vouchers, statements, tax payment certificates, and other tax records must be retained for 10 years. Furthermore, invoices and accounts must be kept in China in the Chinese language.
What are the consequences of noncompliance?
If you fail to register for VAT when required in China you could face penalties, which include fines and interest. Furthermore, the tax authorities have the authority to revoke business licenses for failing to register for VAT.
KNOWLEDGE BASE Taxation Triggers China