The Practical Application of China Business January and February 2010 Volume XI - Number I English French German Italian Spanish Daily Business News Now Available at www.china-briefing.com/news Preparing for Annual Audits in China Including 2010 China Tax Planner In This Issue: China s Annual Audit Regulations Corporate Income Tax Considerations Annual Business License Review Procedures Individual Income Tax in China Free Subscription for this Magazine at www.china-briefing.com J an & F eb
Happy New Year from China Briefing It s annual audit season in China, a time when companies take stock of their business on the mainland, prepare annual corporate income tax filings, and review any outstanding issues that may affect the coming year. It is also a good time to review the company business license; something that all China-based businesses must do every year. In this issue of China Briefing we take a look at some of the more pertinent aspects of China s audit regulations, examine some corporate tax considerations to take into account when filing CIT returns, and review the preparation procedure for an annual business license review. We also run through some of the salient individual income tax issues for expatriates living and working in China. The articles in this issue of China Briefing were researched and written with the help of the Chinabased foreign direct investment and tax consultancy Dezan Shira & Associates. The firm s details can be found within the magazine should you need assistance or advice. Finally, with Chinese New Year upon us, we would like to wish everyone good luck in the coming Year of the Tiger. Gong Xi Fa Cai! Andy Scott Managing Editor, China Briefing The best source of China business, legal, tax, and policy intelligence on the web. Business Advisory, Accounting, Payroll, Taxation and Audit Services Throughout Emerging Asia info@dezshira.com www.dezshira.com Nine China Offices Five India Offices Two Vietnam Offices Visit Our Other Regional Resources For ongoing coverage of Shanghai Expo 2010 www.china-briefing.com/expo EMERGING ASIA www.2point6billion.com INDIA BRIEFING www.india-briefing.com Produced in association with Dezan Shira & Associates since 1999. VIETNAM BRIEFING www.vietnam-briefing.com This Month s Cover Art This month s cover art, Huanghun (oil on canvas), is by the artist Liu Jiutong. Born in Shaanxi Province, Liu graduated from the Xi an Academy of Fine Arts and currently lives in Shanghai when he draws inspiration from the city itself, using its streets and buildings as the subjects of much of his current work. The artist combines traditional Chinese ink style painting with Western oil painting, foregoing a brush and using a knife to create the look of many of his paintings. The cover is reproduced courtesy of the artist. For more information on the artist, please contact Rebecca Wu at R&R Art: gallerina.rr@gmail.com; Tel: +86 21 6248 8716. All materials and contents 2010 Asia Briefing Ltd. No reproduction, copying or translation of materials without prior permission of the publisher. Contact: editor@china-briefing.com
China s Annual Audit Regulations [ By the Corporate Accounting Services Division of Dezan Shira & Associates ] Shenzhen Shanghai and East China Beijing and North China 2 1Al l f o r e i g n i n v e s t e d enterprises in China are required to prepare annual financial statements, including balance sheets and income statements, for their annual Chinese audit. Such accounts must be in accordance with the Chinese accounting standards for business enterprises in China, whether they be foreign or domestic. Foreign invested enterprises, including their legally responsible persons, must take full responsibility for the truthfulness, legitimacy and completeness of these financial statements. These consolidated accounts for tax purposes must be completed and submitted to the authorities by the end of April every year, for the financial calendar year ending the previous December 31. These statements will be used for computing the FIE s taxable and distributable profit. Accordingly, an annual audit by a firm of certified public accountants registered in China is required under Chinese law. In this issue of China Briefing, we take a look at the various audit requirements that FIEs need to fulfill, examine the corporate tax considerations that must be taken, and explain the individual income tax issues that affect foreigners working and living in the People s Republic of China National audit documentation In China, the following documents must be submitted: The Audited Financial Report The Foreign Exchange Audit Report The Annual Report These need to be prepared and submitted to seven different government departments, namely the Bureau of Foreign Trade and Economic Cooperation (BOFTEC), the Financial Bureau, Customs and Excise, the State Administration of Taxation (SAT), the local tax bureau, the Administration of Industry and Commerce (AIC), and the State Administration of Foreign Exchange (SAFE). FIEs may also need to submit to both the national tax bureau and local tax bureau the Annual Taxation Consolidation Reporting Package, authorized by a CPA firm by the end of April 2010. In this reporting package, a CPA firm shall verify all the taxes including value-added tax, business tax, consumption tax, corporate income tax and other taxes on the basis of the audit result. Corporate income tax is obviously the most important issue to be disclosed in this report. The related taxable elements, and in particular items involved in CIT such as income, cost and expenses, are specified in detail, while the auditing firm shall make the CIT reconciliation between financial profit and taxable profit in accordance with PRC CIT regulations. If the audited taxes are different from the taxes paid by the FIE, the FIE shall discuss the variation with the tax bureau. For example, should the audited tax figure be lower than the figure paid, the FIE will need to apply for a tax rebate or tax reduction for the fiscal year in question. Accordingly; should the audited tax figure be higher than the paid CIT, once the FIE submits the report, it would have to pay the balance due to the tax bureau. Your auditors should be competent to handle such rebate issues. Regional variations FIEs in Shenzhen Shenzhen FIEs are exempted from the requirement of providing an additional Annual Tax Final Declaration Report authorized by a local CPA firm to tax bureaus, although authorities in other Pearl River Delta cities do require it. 3 4 5 6 7 8 9 10 11 12 China Briefing January/February 2010 3
China s Annual Audit Regulations And similar to the situation in Shanghai, FIEs in Shenzhen need to complete the annual audit and obtain two auditor reports, a general one and one addressing foreign currency issues. Only after the local CPA firm has performed the audit for the FIE can the company submit the documents to the seven government authorities. All submissions should be completed before the end of June 2010. Furthermore, as part of year end closing formalities, FIEs also need to complete the final CIT declaration in order to satisfy the tax bureau s requirements. FIEs in Shanghai and East China As noted, all FIEs must receive an annual audit and provide specific documents to all relevant government authorities, including the local tax bureau, SAFE, AIC, and the Finance Bureau. The CIT declaration should be completed before the end of May in Shanghai, while annual inspection documentation needs to be completed by the end of June. When a CPA firm verifies and adjusts CIT, the main items involved in these adjustments are generally identified as being unreasonable management fees to HQ, large entertainment expenses, penalties for illegal transactions and penalties for late payment. If a WFOE or JV does not receive an annual audit, the operational certificates of the company will not be renewed. In that case, the FIE would not be allowed to conduct business. The government would normally achieve this by immediately not allowing the FIE to purchase pre-printed invoices from the local tax bureau. FIEs in Beijing and North China Beijing FIEs need to submit necessary documents to AIC, the finance bureau, the statistics bureau and SAFE, including an annual audit report (for businesses established for over one accounting year), an annual joint inspection report (with the signature of the legal representative), the business license (duplicated), and financial statements. The local tax authorities will require an annual audit reported to finish a CIT declaration. The annual joint examination can be done online or on-site and should be completed before June 30. As the statutory audit procedure has no major variances in China, CPAs will focus on the balance of the main accounts on balance sheets and income statements and are duty bound to express an assured audit opinion to foreign invested enterprises and the Chinese government. Please note there are no differences in audit requirements between WFOE s, FICE and JVs. Representative office audits If you are a representative office in China (expenses-based taxpayers), the following issues should be considered: Cash are bank statements and bank reconciliation correct? Foreign currency issues is the transaction rate entered correctly? Fixed assets purchasing has this been recorded into expenses? If not, has it been approved by the tax authority? Fixed asset disposal gain/loss is this recorded into expenses? Funds from the parent company are these consistent with the parent company s records? Interest income/expenses have they been identified in the expenses report correctly? Expatriate individual income tax for high level management, such as the chief representative, has the IIT calculation and pertinent rate been correctly assessed? Audit fees have the audit fees been accrued and separately entered? Are they listed in the expenses report? Rental expenses have the rental expenses been accrued and separately entered? Are they listed in the expenses report? Employer contributions to overseas social security plans if employees are involved in overseas social security plans, has these payment has been included into the expenses report? Expenses paid on behalf of the head office the local tax bureau may require such expenses to be recorded into the expenses report BT and CIT payments these tax payments should be excluded from expenses report Stamp duty is the RO subject to stamp duty? Unofficial invoices has the RO received unofficial invoices (non VAT) as part of its expenses? If so this can be subject to tax penalties Business licenses and related administrative matters the annual renewal of all licenses such as registration certificate, tax licenses and so on Local employees registered with FESCO and valid work permits for expatriate staff has all this been completed in accordance with the pertinent regulations? Tax items often queried by Chinese independent auditors Adjustments for foreign related payment income If the foreign company has paid overseas insurance for their expatriate employees, it should be noted that this is not tax deductible unless it is recorded as a salary payment and with IIT paid. Foreignsourced income should be provided for by providing evidence of foreign taxes paid with the relevant foreign documentation. Related party transactions and transfer pricing If the FIE had any transactions with related parties, then they must make sure that these were at arm s length and with adequate documentation to substantiate the charges/income, so that the results were not materially affected by related party transactions that were not in the ordinary course of business. Pay particular attention to transfer pricing issues. Tax officials reserve the right to adjust transfer prices, interest charged by related parties based on market prices or even based on the prescribed profit margin. Transfer pricing should not be used as a mechanism 4 China Briefing January/February 2010
to reduce the amount of profit retained in China. If this is abused and discovered, the tax bureau will regard it as tax evasion and the penalties and repercussions can be severe. Withholding obligations If the FIE made or accrued in its costs or expenses any payments, such as rental (including office and expatriate housing), royalty charges, interest, services or management fees for services performed in China by foreigners (individuals or organizations), pursuant to related contracts and agreement, the relevant withholding obligation should be provided for on an accrual basis. This means 10 percent withholding enterprise income tax and five percent business tax apply. These charges shall be accompanied by substantial evidence, otherwise they are not deductible. All the above debts in foreign currency also need to be registered with SAFE prior to approval for remittance. Input VAT The VAT invoice must be verified by the tax bureau within 90 days as from the invoicing date, otherwise it cannot be deducted. Furthermore, if you have any unusual loss of inventory, then the VAT input related to the inventory previously credited has to be reversed in the period when the loss is recognized. Export VAT Export VAT refunds for the year should be reconciled with the tax bureaus within three months of the end of the year. FIEs should register all export receivables of the previous year with the bureau. Failure to do so may result in the export sales being deemed as domestic transactions, subject to output VAT if the payment for export sales is not received and related documents are not presented within the deadline. Stamp Duty Although not a material issue with much cost, FIEs should not forget to pay stamp duty on all books, records and applicable contracts. Fines for non-compliance outweigh the dutiable value. General accounting treatments on significant audit areas Trade debtors Generally speaking, enterprises could provide reasonable bad debt according to ending balance of account receivable account. However, the tax authority has the power to adjust any unreasonable provided bad debt. Fixed assets All FIE fixed assets should be recorded at cost. All construction in progress items should be transferred into fixed assets when they are put into use with any interest expenses and associated exchange gain/loss also being capitalized. There are specific regulations on what should be capitalized, and you must follow these. Intangible and other assets Intangible assets are amortized on a straight-line basis over the beneficiary or investment period of not less than ten years (there is no set term for other deferred expenses). Intangible assets should be recognized and recorded at an objective value, i.e. for purchased assets at the purchase price, for self-built assets at cost except for research expenses. Pre-operating expenses Such expenses and exchange losses for FIEs during the start-up period can be charged to the profit and loss account in one lump sum during the first month after commencing operations. Reserve funds For WFOEs, not less than 10 percent of the after-tax profit should be appropriated to the general reserve fund. Appropriations to other funds should be made in accordance with the articles of association and a board resolution Mandatory company fund allocations Prior to the annual audit, and the subsequent settlement of taxes with the tax bureau, there are items that need to be calculated and presented in the accounts as mandatory fund dispersals. These include amounts to the company s enterprise expansion fund, the reserve fund and staff and workers welfare and bonus fund. China s Annual Audit Regulations By law, WFOEs need to specify the amount for the reserve fund in its articles of association. This must not be less than 10 percent of after-tax profits, and must be contributed to until a ceiling is reached, being the equivalent of 50 percent of the total registered capital in the company. Once this amount is achieved no further amounts need to be contributed to the reserve fund. The amounts for the other funds do not need to be specified an anomaly that means FIEs rarely contribute towards them. Special attention to inventories For both trading and manufacturing companies, inventories must form a significant proportion of total assets. Auditors will therefore pay close attention to the existence and valuation of such stocks. The inventories valuation can be clearly identified from the purchase invoices or cost calculation sheet. But auditors will also take care to confirm the existence of the inventory and how stocktaking is carried out. The following steps should be followed: Observe whether the stocks are neatly kept, whether bins are properly labeled, and whether large items are properly piled and marked Check that counting is systematic and that precautions are taken to ensure everything is counted and counted just once Pay attention to high value items Investigate whether discrepancies arise between the physical count and stock records Note any items that appear to be damaged, obsolete or slow moving, so as to ascertain whether adequate provisions for loss has been made Some FIEs may have missed the stockade at the end of the year; if so, roll-back procedures can also be carried out to check the stock movements in the intervening period and ensure the year-end balance For stock valuation, FIFO is recommended for China. For professional advice, information and assistance with these filings, please contact Dezan Shira & Associates at tax@dezshira.com. China Briefing January/February 2010 5
Corporate Tax Considerations [ By Sabrina Zhang, National Tax Partner, Dezan Shira & Associates ] Corporate tax considerations are an important part of any company s annual tax reconciliation and year-end account closings. Here we take a brief look at some important expenses and deductions enterprises can file for as well as some of the regulations for branch office CIT filing. Advertising expense and business promotional expenses Qualified advertising expense and business promotion expenses are allowed to be deductible of up to 15 percent of the sales (business) income of that year unless otherwise prescribed by the in-charge finance and tax departments of the State Council. Any excess amount is allowed to be carried forward and deductible in the following year. Business entertainment expenses For business entertainment expenses which is incurred by an enterprise and related to its production and business operation activities, only 60 percent of the incurred amount should be deductible but the maximum deduction amount shall not exceed 0.5 percent of the sales (business) income of the year. Donation Charitable donations incurred by an enterprise are allowed to be deductible up to 12 percent of the total annual accounting profit. Commercial insurance expenses Premiums for commercial insurance policies paid by the enterprise for its investors or employee are not deductible except for premiums for personal safety insurance paid by an enterprise pursuant to the state s relevant regulations for its workers conducting special types of production work and premiums paid for other commercial insurance policies that may be deductible pursuant to the rules prescribed by the in-charge finance and tax departments of the State Council. Sponsorship expenses Sponsorship expenses are not deductible if they are of a non-advertising nature and not relevant to business operation. Staff education expenses Expenditures for staff education that is incurred by an enterprise are allowed to be deducted up to 2.5 percent of total wages and salaries. Any excess amount is allowed to be carried forward to future years. Provisions Provisions are generally not deductible. Reserve fund These are deductible for special funds that are appropriate for use in protecting environment, pursuant to the relevant laws and administrative regulations. Once usage of the aforesaid special funds changes, it shall not be deductible. Management fees Management fees paid between enterprises, rental and royalty fees paid between business units, and interest paid between business unites of a non-bank enterprise are not deductible. Interest expense of debt from related party There are two articles in new CIT law that relate to interest expenses deduction for debt from related parties. They are summarized as follows: 1) Interest expenses on borrowing from non-financial enterprises by a nonfinancial enterprise, the excess part above the amount calculated by reference to the interest rate of similar loan with the same term as provided by financial institutions shall not be deductible 2) Interest expenses which exceed certain debt/equity ratio shall not be deducted while calculating taxable income. The ratio is 5:1 for financial enterprises; and 2:1 for other enterprise (Circular Caishui 2008 No. 121 defines the ratio) According to Circular No. 121: If supporting documents for related party transaction are not available or the effective CIT rate is above the tax rate of related party within territory of China, only the interest fulfilling the above mentioned criteria shall be deductible If the supporting documents for related party transaction are available or the effective CIT rate is not above the tax rate of related party within territory of China, then interest expenses can be deductible despite the ratio limitation Fixed assets Fixed asset qualification More than 12 month usage period, however no minimum value requirement compared to the previous tax law Residual value There is more flexibility on residual value as it can be determined based on the nature of the assets and conditions. New change of depreciation years Transportation facilities except aircraft, trains and vessels: four years; electronic equipment: three years. Accelerated depreciation If assets need to be updated frequently due to technology improvement, the depreciation period can be shorter (limited to 60 percent of the statutory minimum depreciation period). Which enterprises need to comply with branch CIT filing regulations? Resident enterprises that have branches located in different provinces, autonomous regions, or central government or administrated city need to comply with branch CIT filing regulations. 6 China Briefing January/February 2010
CHINA If a department has an independent manufacturing function and operating income and employee remuneration and assets can be separated from the management department, it can be deemed as a branch and perform the provisional branch CIT filing. Units that do not need to be included Third-tier branches that are supervised by second-tier branches Branches recognized as small and thin profit enterprises in the previous year New branches and de-registered branches Second-tier branches without standalone manufacturing capacities, no turn over tax and that perform auxiliary services Headquarters and branches are in locations with different CIT rates Headquarters shall calculate the total taxable income for the enterprise first, among which 50 percent shall be filed by the headquarters and 50 percent shall be allocated among the branches. Different CIT rates will then apply to the taxable income for headquarters and branches respectively. TAX CIT to be pre-paid by a branch at local level CIT to be pre-paid by a branch at local level shall be calculated using 50 percent of the CIT payable of the enterprise times the allocation ratio for the branch. Allocation ratio for branches Three factors are used in calculating allocation ratio for branch CIT provisional filing such as revenue, salary and assets. For the initial six months, the figure for three factors shall be generated from the year before last year. For example, to calculate the branch CIT filing amount for January to June 2009, the figure in year 2007 is used. While for last six months, the figures for three factors shall be generated from last year, i.e. 2008 in above sample. Three percentages apply to three factors respectively as 35 percent, 35 percent and 30 percent. The formula is as follows: Allocation ratio = total revenue of the branch / total revenue of all branches * 35% + total salary of the branch / total salary of all branches * 35% + total asset of the branch / total asset of all branches*30% Corporate Tax Considerations Should the headquarters be deemed as a virtual branch and be included in calculation of allocation ratio? In certain regions of China, headquarters are included in the calculation of the allocation ratio for branch CIT. Therefore, the total revenue, salary and assets amount not only include the branches but also figures from headquarters as it has been deemed as one virtual branch. However, this treatment depends on the view of the tax bureau in-charge of the headquarters, as in some regions, the headquarters is excluded and all branches mentioned in the formula does not include it. Annual tax filing The headquarters shall perform the annual tax filing (CIT reconciliation); branches are not allowed to perform CIT reconciliation. If there are any over-paid or under-paid taxes during the year, the headquarters shall deal with the tax refund or additional tax liabilities. Sabrina Zhang is the national tax partner for Dezan Shira & Associates, and has extensive experience in the fields of corporate structuring, tax planning and accounting issues related to foreigninvested enterprises. She advises international investors in China on tax matters across the country, managing a team of over 100 accountants and auditors within the firm. For professional advice and assistance with corporate income tax filing issues in China, please contact tax@dezshira.com or visit www.dezshira.com. China Briefing January/February 2010 7
The Annual Cooperative Examination The cooperative examination is a bureaucratic process that all foreign-invested enterprises in China must undertake on an annual basis to ensure all paperwork is up-to-date and valid. This business license review is a fairly straight-forward process and can be done via the internet, or by going to an office where officials from a total of seven different agencies come together temporarily for this process. These seven agencies include the Bureau of Foreign Trade and Economic Cooperation (BOFTEC), the Administration of Industry and Commerce (AIC), the Economic Committee, the Financial Bureau, the State Administration of Tax (SAT), the State Administration of Foreign Exchange (SAFE) and China Customs. The procedure for the annual cooperative examination for FIEs is as described below. Preparation for the annual cooperative examination Every company needs to apply for and obtain the annual cooperative examination documents from the same office of the Administration for Industry and Commerce from which they have obtained their original business license. They must also download the annual cooperative examination report form from the relevant provincial or municipal AIC web site. Companies must also select one of two options to apply for annual examination they can apply either through the internet or by taking their documentation directly to the authorities. Requirements for annual cooperative examination documents As we have mentioned, there are seven sets of documentation you need to bring together, one for each authority, as follows. Note that all photocopied documents need to be stamped with the enterprise s seal. Bureau of Foreign Trade and Economic Cooperation Original of annual cooperative examination report Original and photocopy of approval certificates of foreign invested enterprises Audit report issued by CPA firm, or photocopy of capital verification report for enterprises set up after July 1, 2005 For enterprises in encouraged industries, photocopy of encouraged project confirmation certificate For advanced technology enterprises and export enterprises, photocopies of certificates for these two kinds of enterprises Administration of Industry and Commerce Photocopy of annual cooperative examination report Audit report issued by CPA firm, or photocopy of capital verification report for enterprises set up after July 1, 2005 and annual financial report as above Duplicate of business license The Economic Committee Photocopy of the annual cooperative examination report The Financial Bureau Photocopy of the annual cooperative examination report Annual financial statement (full set) of foreign invested enterprises Audit report issued by CPA firm Photocopy of finance registration State Administration of Taxation Photocopy of the annual cooperative examination report Duplicate tax registration certificate for state and local tax Audit report issued by CPA firm and annual financial report Photocopy of duplicate business license Photocopy of capital verification report State Administration of Foreign Exchange Foreign currency registration certificate of foreign invested enterprises Audit report of foreign currency issued by CPA firm China Customs Photocopy of the annual cooperative examination report Audit report issued by CPA firm and annual financial report Original registration certificate for custom declaration Companies requiring assistance with these filings may contact any Dezan Shira & Associates nine national offices at china@dezshira.com for advice or visit www.dezshira.com. NEW FOR 2010 China Briefing s Technical Guide to Human Resources in China To preorder a copy, please contact sales@china-briefing.com ASIA BRIEFING 8 China Briefing January/February 2010
Individual Income Tax in China [ By the Corporate Accounting Services Division of Dezan Shira & Associates ] China has a multi-tiered system of tax liabilities for foreigners, which has led to some confusion, particularly over the socalled 90 or 183 days rule. For those sent to China by a foreign company, who have their salary paid elsewhere (probably in their home country), and spend more than 183 days of a calendar year in China (or 90 if they are from a country that does not have a double tax treaty with China), they need to pay IIT in China based on the number of days they effectively spent in the country. New-to-China expatriates with full time employment here need to make sure they are in compliance. The onus is on the individual to ensure this and fines can be levied and passports censured if this is not carried out. Newcomers need to obtain a work visa, residence permit and register for tax upon commencing or signing contracts. The employer should arrange this for the employee. This is a serious issue and only gets potentially worse every month it is ignored. At some point, when an individual s stay in China ends, they will have to reconcile with the authorities over their income. Immigration records, visa type and length of stay information are shared between the immigration authorities and the tax bureau. The Chinese government regards individuals as tax residents when they have stayed in China for more than five years without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days within a single calendar year. A tax resident is required to pay IIT on their worldwide income without limitation of source, meaning that income elsewhere related to property rentals or interests will also needs to be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities. Individuals in China with annual incomes in excess of RMB120,000 need to complete and submit an annual selfdeclaration of their income earned in 2009 by the end of March 2010. This Individual Income Tax Declaration Form needs to be completed and submitted to the local tax authority in addition to regular routine monthly tax filings by taxpayers with and income in excess of RMB120,00 or any of the other following conditions: income derived from two or more places inside the People s Republic of China; income derived partly or fully from sources outside the People s Republic of China; those who have received taxable income but not paid tax; as well as other conditions regulated by the State Council. This is a mandatory obligation for those who qualify. Regardless of if the individual has declared and paid the correct individual income tax on a monthly basis, they still must complete self-declaration of their 2009 income to the tax authorities. Information that needs to be given of for the declaration includes: name, ID type and number, profession, employer, place of residence, address in China, post code and telephone number, as well as tax data such as the annual amount of any different sourced incomes, taxes payable, taxes prepaid and withheld, foreign tax credit and taxes owed or overpaid. In addition, foreigners should declare their nationality and date of arrival in China. The office where the forms need to be filed is dependent on the situation of the individual making the declaration. Taxpayers employed within China need to file their declarations at the local tax authorities of the place where their employers are located. Taxpayers with two or more employers within China need to file their declaration at a fixed local tax authority in the place where one of the employers is located. Taxpayers with no employer in China, and whose annual income includes money from production or business operations by individual households engaged in industry and commerce, or money from contracting or leasing operations of enterprises or institutions, should file their declaration form at the local tax authorities in the place where one of these businesses are located. Taxpayers who have no employer in China, and whose annual income does not include any money from the aforementioned production or business operations, should file with the local tax authorities in their place of residence. Annual income includes: wages and salaries, income from production or business operation conducted by self employed industrial and commercial households, income from contracted or leased operation of enterprises or social service providers partly or wholly funded by state assets, remuneration for providing services, author s remuneration, royalties, interest dividends and bonuses, income from lease of property, income from transfer of property, incidental income and other income. Tax rates and liabilities The first RMB4,800 of an expatriate s earnings in China is tax free (there are benchmarks at local tax bureaus on what a reasonable salary is in certain industries and this could vary with position, educational background and nationality). Local authorities have the power to increase declared salaries should they determine that a salary is manifestly low or inadequate to the position. To determine if someone is deliberately reducing their salary figures to escape a higher IIT threshold, they may demand to see concrete proof of earnings elsewhere. China s IIT rates are high compared to many countries worldwide. Individuals earning between RMB5,000 and RMB20,000 per month pay 20 percent IIT; those earning between RMB20,001 and RMB40,000 pay 25 percent; those between RMB40,001 China Briefing January/February 2010 9
Individual Income Tax in China and RMB60.000 pay 30 percent; those between RMB60,001 and RMB80,000 pay 35 percent; those between RMB80,001 and RMB100,000 pay 40 percent; while those earning in excess of RMB100,000 per month pay 45 percent individual income tax. China is reasonable regarding non-taxable elements of an expatriate package, but attention should be paid to the structuring of the inclusive package. The key issue is not whether the company or the individual pays such expenses, but whether the full amount of any such allowance, as stated in the contract, is actually used. If an individual receives a housing allowance of RMB5,000 from their employer, but only RMB3,000 is used for rent, then the remaining RMB2,000 is taxable. Benefits taxable as part of package hardship allowances Yes housing at cost No free use of vehicle No expenses paid in cash Yes reasonable expense reimbursed No reasonable home leave allowance No reasonable education for dependents No It is important to note that income sourced externally from China may be tax exempt from IIT (note, this does not apply if your salary is part paid in China and part overseas, under such circumstances the complete salary must be declared). In addition, basic endowment insurance, government-regulated basic medical insurance, unemployment insurance and housing funds paid by the taxable individual s employer and the taxable individual himself may also be tax exempt. Issues of note for expatriates living in China Expatriates who are not usually residents of China, but have lived in China for at least one full year, and whose income has derived from sources within China are subjected to individual tax and have the legal responsibility to complete the annual tax return. However, an expatriate who holds the position of senior manager in a Chinese domestic enterprise is subject to individual income tax on China sourced income, unless his or her actual working period within China did not exceed 90 or 183 days, dependent upon whether or not their country of nationality has or does not have a double tax treaty with China. Regardless of tax treaty, all such personnel should also complete an annual self-declaration. Expatriates who have lived in China for more than one year, but no more than five years are required to report the salary or wages excluding income which has derived from sources outside China such as commercial or industrial income. The company is obligated to process monthly IIT filings on behalf of the expatriate employee. However, expatriates have the responsibility to complete the annual income tax self-declaration. Individuals who have paid tax promptly but who do not complete the annual selfdeclaration may face a personal tax audit by the tax bureau and a potential tax fines risk for late tax filing. You must get these forms completed. For assistance and advice on individual income tax matters for expatriate personnel in China, please contact Dezan Shira & Associates at tax@dezshira.com or visit www.dezshira.com. Double Tax Treaty Reporting Tightened In September 2009, the State Administration of Tax issued Circular 124 further regulating the tax administration for non-residents availing of the benefits provided by double tax treaty arrangements on their income in China. Foreign executives based in China for limited periods over a 12 month time frame currently may not have to declare taxable income in China if their stay is less than 183 or 90 days depending on their nationality. Circular 124 provides filing requirements to support such claims and have them pre-approved. The circular seems aimed at offshore companies in jurisdictions that have tax treaties with China and shielding individual income tax and to the tax treaty domicile. Filings requiring pre-approval with the SAT: 1) Dividends derived from the same equity investment in the same enterprise 2) Interest derived from the same debt and due from the same debtor 3) Royalties derived from granting the same right to the same individual or enterprise Treaty benefits and articles now requiring registration: 1) Permanent establishment and business profits 2) Independent individual services 3) Dependent individual services 4) Other articles, including dividends, interest, royalties and capital gains Documentation requirements to be presented to your local tax bureau as part of the prequalification process: 1) Applicable contracts, agreements and payment receipts 2) Tax registration certificate from the domicile in question, dated within the past 12 months 3) Similar details for any other involved domiciles 4) Shareholders residency status Documentation needs to be filed with the local responsible tax bureau for a preapproval process lasting up to 40 days, with a further 10 days if additional investigation be required. If no answer is provided by this time, the application shall be deemed as having been approved. However, should the applicant be asked to submit further documentation, this shall not be considered as part of the pre-approval time. Circular 124 also permits the random investigation of cases. The circular tightens considerably the application requirements and procedures for applying for tax treaty status and demands more disclosure. It should be noted that these requirements now also allow the SAT to look into movements of business into individuals or companies special vehicles or offshore company transactions. It is recommended to practice caution and seek professional advice when completing such documentation for the local tax authorities. 10 China Briefing January/February 2010
China Tax: Planning for 2010 Date Sector Tax Action March 31, 2010 Individuals with annual income in IIT Submit 2009 annual self filing IIT return excess of RMB120,000 May 31, 2010 All sectors CIT Submit 2009 annual EIT return May 31, 2010 All sectors meeting thresholds TP Complete preparation for 2009 TP documentation December 31, 2010 Financial institutions CIT Special deduction rules on doubtful debt provision stop from Jan. 1, 2011 December 31, 2010 Insurance companies CIT Special deduction rules on various reserves stop from Jan. 1, 2011 December 31, 2010 Cosmetics, pharmaceuticals, CIT Special deduction limits for advertising and promotional expenses stop beverage and tobacco industries from Jan. 1, 2011 December 31, 2010 All sectors eligible for incentives CIT Western Region development incentives stop from Jan. 1, 2011 December 31, 2010 Semiconductor manufacturing and CIT Reinvestment refund stop from Jan. 1, 2011 packaging enterprises December 31, 2012 All FIEs eligible for incentives CIT Grandfathering of old FEIT incentives run out from Jan. 1, 2013 December 31, 2013 Qualified high-tech outsourcing enterprises CIT and BT Tax incentives stop from Jan. 1, 2014 个人所得税纳税申报表 ( 适用于年所得 12 万元以上的纳税人申报 ) INDIVIDUAL INCOME TAX RETURN (For individuals with an annual income of over 120,000 Yuan) 所得年份 : 年填表日期 : 年月日金额单位 : 人民币元 ( 列至角分 ) Year of income incurred: date of filing: date month year amount in RMB Yuan 纳税人姓名 Tax payer s name 国籍 ( 地区 ) Nationality /region 身份证照类型 ID Type 身份证照号码 ID number 任职 受雇单位 Employer 任职受雇单位税务代码 Employer s Tax ID Code 任职受雇单位所属行业 Industry of Employer 职务 Title 职业 Profession 在华天数 Days of stay in China 境内有效联系地址 Address in China 境内有效联系地址邮编 Post code 联系电话 Tel number 此行由取得经营所得的纳税人填写 This line is to be filled by taxpayers with business income 经营单位纳税人识别号 Tax ID Code of the business 经营单位纳税人名称 Name of the business 所得项目 Categories of income 年所得额 Annual Income 境外境内 Income 合计 Income from from outside Total within China China 应纳税所得额 Taxable income 应纳税额 Tax payable 已缴 ( 扣 ) 税额 Tax pre-paid and withheld 抵扣税额 Tax credit 减免税额 Tax 应补税额 exempted or Tax owed deducted 应退税额 Tax refundable 备注 Notes 1 工资 薪金所得 Wages and salaries 2 个体工商户的生产 经营所得 Income from production or business operation conducted by self-employed industrial and commercial households 3 对企事业单位的承包经营 承租经营所得 Income from contracted or leased operation of enterprises or social service providers partly or wholly funded by state assets 4 劳务报酬所得 Remuneration for providing services 5 稿酬所得 Author s remuneration 6 特许权使用费所得 Royalties 7 利息 股息 红利所得 Interest, dividends and bonuses 8 财产租赁所得 Income from lease of property 9 财产转让所得 Income from transfer of property 其中 : 股票转让所得 Income from transfer of stocks 个人房屋转让所得 Income from transfer of personal estate 10 偶然所得 Incidental income 11 其他所得 Other income 合计 Total 我声明, 此纳税申报表是根据 中华人民共和国个人所得税法 及有关法律 法规的规定填报的, 我保证它是真实的 可靠的 完整的 Under penalties of perjury, I declare that this return has been filed according to THE INDIVIDUAL INCOME TAX LAW OF THE PEOPLE S REPUBLIC OF CHINA and other relevant laws and regulations, and to the best of my knowledge and belief. I guarantee the information provided is true, correct and complete. 纳税人 ( 签字 ) :Taxpayer s signature 代理人 ( 签章 ) :Preparer (Other than taxpayer) s firm 联系电话 :Phone number 税务机关受理人 ( 签字 ) : 税务机关受理时间 : 年月日受理申报税务机关名称 ( 盖章 ): Signature of responsible tax officer: Filing date: Time: Year/Month/Date Responsible tax offic China Briefing January/February 2010 11
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