Taxation in China
Corporate Income Tax
All enterprises in China are subject to corporate income tax (CIT) and it is one of the main taxes for businesses. A thorough understanding of China’s Corporate Income Tax framework is crucial to be fully compliant with the laws and requirements in China.
This article examines the corporate income tax framework in China, including the legal basis for CIT, who it applies to, its rates, and how to calculate it.
Value-added tax (VAT) is one of the major indirect taxes in China. The fundamental legal framework for VAT in China consists of the Interim Regulation of VAT promulgated by the State Council and its Implementation Guidelines released jointly by the MOF and SAT. Both were published in 2008 and entered into effect on January 1, 2009.
In the beginning of 2012, China launched a massive reform to replace business tax (BT) with VAT. Replacing BT with VAT means unifying the difference in treatment between the sale of goods and provision of services and eliminating double taxation. This aimed to enhance the competitiveness of companies in the service sector and encourage them to upgrade their infrastructure.
For more information about VAT payments, rates, and calculations, read our section on Value Added Taxes in China.
Individual Income Tax in China
In China, it’s generally the employer’s responsibility to accurately calculate and withhold individual income tax (IIT) on employment income, including wages and salaries, bonuses, stock options, and allowances, before paying a net amount to its employee.
The IIT reforms undertaken by China over the years, including the new IIT law, marks a major change in the country’s taxation policies. Low- and mid-income earners enjoy greater tax relief, while individual taxpayers of all stripes benefit from a broader range of deductibles.
At the same time, the new IIT Law has also brought significant changes to the IIT collection and administration mechanism. The adoption of an annual levy system and the 183-day residence rule marks a gradual shift towards more international tax practices.
Given the scope of the changes, and the potential for closer regulatory scrutiny from tax authorities, employers need to assess their payroll policies, implement changes to stay compliant, and communicate with their employees about any changes for them.
Withholding Tax in China
In China, withholding tax (WHT) is levied on the income of foreign enterprises that do not have a physical establishment in China but provide services to China-based businesses. Any China-derived income arising from such a transaction between an overseas entity and a Chinese business is withheld by the China-based client, deducted from the gross income amount, and taxed by the Chinese tax authorities at a flat concessionary rate.
It is the responsibility of the China-based client to ensure compliance with the withholding tax policies in China. Not doing so may lead to penalties and the local tax bureau will take up repayment with the China-based client, and not the overseas entity.
Gain more insights about withholding taxes in China in this section.
Tax incentives in China
Tax incentives are preferential tax policies offered by the government to incentivize or encourage a particular economic activity or to support disadvantaged business owners or individuals. From the investor’s perspective, tax incentives are legitimate tools for reasonable tax planning and cost savings. Also, it is a useful indicator of market trends and government priorities.
Since China’s reform and opening up began in the late 1970s, the country has implemented a series of preferential tax policies, in turn attracting a large number of foreign capital and foreign-invested enterprises and effectively promoted the adjustment and optimization of various industrial structures. Income Tax Incentives in China
For details about tax incentives offered in China, read this section.
China international taxation
China’s transfer pricing environment is more stringent than most other countries in the world. This mainly stems from how common non-compliance with the arm’s length principle has traditionally been in the country, which can result in a subsidiary of a multinational company (MNC) reporting losses that will then affect China’s tax base. However, the SAT tends to focus on the profitability of a Chinese subsidiary in the context of the MNC’s whole supply chain rather than looking at the Chinese entity in isolation.
Being well versed with various transfer pricing rules then offers a solution: it can ensure full compliance for MNCs while still guaranteeing that the transfer pricing process is effective and worthwhile. Besides, designing a transfer pricing system early in the business cycle helps to mitigate transfer pricing risk exposure and ensure that the enterprise’s adopted system is the most tax effective, consistent with its commercial objectives and documented efficiently.
Customs duties include import duties and export duties, which are computed either on an ad valorem basis or quantity basis. Import duty rates consist of most-favored-nation (MFN) duty rates, conventional duty rates, special preferential duty rates, general duty rates, tariff rates for quota items, and provisional duty rates.
Foreign currency controls
China implements a strict system of capital controls, limiting the inflow and outflow of foreign currency. This system distinguishes between transactions made under an enterprise’s current account and capital account, and requires foreign investors to open separate bank accounts for the two. The SAFE and its local branches are the bureaus in charge.