Answers
Fundamentals Level Skills Module, Paper F6 (CHN) Taxation (China) Section B December 06 Answers and Marking Scheme (a) Mr Chen/Cupod Ltd Mr Chen Pay the individual income tax due. Cupod Ltd Pay a penalty ranging from 50% to three times the tax not withheld. (c) (d) Biz Ltd The tax bureau can assess the enterprise income tax due by Biz Ltd based on the deemed profit margin method. HHold Ltd Pay the value added tax (VAT) and enterprise income tax (EIT) or provide a guarantee for the tax and late payment surcharge on or before 5 December 05. Appeal to the city tax bureau (one senior level above the district tax bureau) within 60 days after payment of the tax and late payment surcharge. Appeal to the court if there is disagreement with the decision of the senior tax bureau. Hit-Tech Ltd/Soft Ltd (i) Hit-Tech Ltd will have to pay back the taxes underpaid plus a late payment surcharge of 0 05% per day. [Tutorial note: The tax evasion case is over the statute of limitation for penalty of five years, hence, there is no penalty.] (ii) The statute of limitation of three years (five years for special circumstances) for errors made by the tax authorities has expired. As a result, Soft Ltd does not need to pay the taxes underpaid. 0 (a) Golden Ltd Option A Vietnam subsidiary USD Profit before enterprise income tax (EIT) 00,000 Less: EIT in Vietnam at 5% (5,000) Profit after EIT/dividend to Golden Ltd 85,000 Less: 0% withholding tax on dividend (8,500) Dividend net of Vietnam taxes 76,500 Total Vietnam taxes paid,500 Maximum China EIT credit at 5% x USD00,000 5,000 Additional China EIT payable,500 Dividend net of Vietnam taxes (USD76,500) 459,000 Less: Additional China EIT payable (USD,500) (9,000) Net of tax dividend income 450,000 Tutorial note: Alternative method of calculation of 450,000: Income from investment in Vietnam (USD00,000) 600,000 China EIT payable at 5% (50,000) Net of tax dividend income 450,000
Option B Option C Chengdu subsidiary Profit before EIT 400,000 EIT at 5% (60,000) Dividend from Chengdu subsidiary 40,000 Suzhou subsidiary Profit before EIT 500,000 EIT at 5% (5,000) Dividend from Suzhou subsidiary 75,000 5 HKT Ltd (i) HKT Ltd has appointed an agent to carry out business in China including the appointment of an enterprise or individuals (the staff of BJT Ltd) to sign contracts on its behalf. So BJT Ltd will be considered as the establishment of HKT Ltd. Tutorial note: This definition is under the EIT Regulations. There are further classifications under treaties for a dependent agent and independent agent. (ii) The criteria to be used to decide if HKT Ltd is a China tax resident: The senior management responsible for HKT Ltd s daily production/business operations are mainly located in China and the senior management executes its responsibilities mainly from China. Strategic financial and human resources decisions are made or approved by organisations or personnel located in China. Major properties, accounting records, company stamps, board/shareholder s meeting minutes, etc are maintained in China. 50% or more of the board members with voting rights or senior management habitually reside in China. THREE only required, mark each, maximum 0 Huanglong Ltd (a) Land appreciation tax (LAT) on sales million million Plaza Selling price,00 Land use right and deed tax 06 Relocation and construction costs 50 Development costs 556 Maximum deduction of interest and administration expenses (0% x 556) 55 6 Business tax and surtaxes (,00 x 5 6%) 67 Additional deduction for property developers (556 x 0%) Total deductions for LAT (790) Land appreciation value 40 % of land appreciation (40/790) 5% LAT (40 x 40% 790 x 5%) 4 5
million million Plaza 77 Selling price of Plaza 77,050 Acquisition cost 800 No. of years of acquisition ( years) Deductible valuation (800 x ( + (5% x years))) 90 Business tax and surtaxes ((,050 800) x 5 6%) 4 Total deductions for LAT (94) Land appreciation value 6 % of land appreciation (6/94) 4% LAT (6 x 0%) 4 8 7 Profit before enterprise income tax million million Plaza Selling price,00 Cost of development including interest (06 + 50 + 8) 784 Business tax and surtaxes 67. LAT 4 5 (975 7) Profit before tax on Plaza 4 Plaza 77 Selling price,050 Acquisition cost and interest (800 + 5) 95 Business tax and surtaxes 4 LAT 4 8 (97 8) Profit before tax on Plaza 76 0 4 (a) Wat Ltd (i) Import of Watch-LX Customs duty: USD,000,000 x 6 x 5% 900,000 Base for calculating consumption tax (USD,000,000 x 6 + 900,000) ( 0%),65,000 Import consumption tax =,65,000 x 0% 4,75,000 Import VAT =,65,000 x 7% 4,06,50
(ii) Taxes on sale of watches Output VAT Watch-LX: 900 x 50,000 x 7% 7,650,000 Watch-LX deemed sales: x 50,000 x 7% 7,000 Watch-Nor: 40,000 x,000 x 7% 0,400,000 Watch-XT: 5,500 x 8,000 x 7% 6,80,000 44,897,000 Consumption tax Watch-XT:,500 x 8,000 x 0%,600,000 Kool Ltd (i) Cost of purchasing,000 ball-pens Supplier A 0,000 7 8,547 B 9,800 0 9,55 C 9,00 D 9,000 (ii) Input VAT claimable Supplier A 0,000 7 x 7%,45 B 9,800 0 x % 85 C nil D 9,000 x 7%,50 0 5 (a) Ms Liu Individual income tax (IIT) on share incentive Grant date Not taxable Exercise date Taxable income = 40,000 x ( 4 x 6 5) = 76,000 Find tax rate 76,000 =,000 5% IIT = ((76,000 ) x 5%,005) x 56,940 5 Disposal of stock (USD4 7 USD 4) x 6 x 0,000 x 0% 8,800 4 Mr Jiang Individual income tax (IIT) for 05 Monthly taxable salary of Mr Jiang Basic salary 0,000 Hardship allowance 0,000 Less: Employee s contribution to China social insurances (,800) Taxable salary each month 7,00 Less: Personal allowance (4,800),400 Tutorial note: Mr Jiang is entitled to the additional allowance of,00 (hence, a total of 4,800) since he is seconded overseas. 4
Monthly IIT =,400 x 5%,005 7,095 Total IIT for 05 (7,095 x ) 85,40 Less: African tax paid (60,500) IIT payable for 05 4,640 (c) Mr Waki Residence status 008: He is not a China tax resident since the number of days he spent outside China is more than 0 days one-off in the year. 0: He is a China tax resident since the number of days he spent outside China is not more than 0 days one-off in the year. 04: He is a China tax resident since the number of days he spent outside China is not more than 90 days cumulative in the year. (d) (i) Mr Wu Individual income tax (IIT) for 05 Monthly income taxable as salary = 0,000 + 0,000 40,000 Less: Personal allowance (,500) 6,500 Tutorial note: Since Mr Wu is general manager of WK Ltd, the director s fee is taxed as salary. Monthly IIT on salary = 6,500 x 0%,755 8,95 IIT on salary for 05: 8,95 x 98,40 Tax rate on bonus: 00,000 = 8, 0% IIT on bonus 00,000 x 0% 555 9,445 IIT on deemed dividend: 500,000 x 0% 00,000 Tutorial note: An individual shareholder who borrows from a company for over one year without repayment is deemed to receive dividend income equivalent to the amount of the loan. Total IIT of Mr Wu for 05 7,785 4 (ii) Ms Xie Individual income tax (IIT) for 05 Monthly IIT on director s fee: 0,000 x ( 0%) x 0%,000 5,00 IIT on director s fee for 05: 5,00 x 6,400 IIT on invention (taxed as royalties): 00,000 x ( 0%) x 0% 6,000 Total IIT of Ms Xie for 05 78,400 5 5
6 Beautiful Ltd (a) Enterprise income tax (EIT) for 05 Profit per the statement of profit or loss 78,47 () Inventory thrown away 0 () Depreciation of factory building 0 [Tutorial note: According to the State Administration of Taxation Announcement 04 No. 9, if the accounting depreciation period used is longer than the minimum tax depreciation period, the accounting deprecation should be used for tax purposes.] () Electricity charges accrued 0 (4) Interest for loan to pay supplier 0 (4) Interest for loan to construct factory premises (to be capitalised),4,000 (5) Deemed sales 00,000 (5) Entertainment expenses Total including deemed sales: 0,00 + 00,000 = 50,00 Deduction of entertainment expenses: the lower of 60% x 50,00 = 8,0 and % x (,54,600 + 00,000) = 564,08 Adjustment = 50,00 8,0,080 [Tutorial note: Deemed sales and deemed expenses of 00,000 should be made at the same time.] (6) Promotion expenses 0 Maximum deduction (,54,600 + 00,000) x 5% = 6,96,40, no adjustment is required (6) Announcement in newspaper (not classified as promotion and advertising expenses) 0 (7) Salaries accrued 0 [Tutorial note: State Administration of Taxation Announcement 05 No. 4 allowed the deduction of salaries accrued and paid before the annual EIT filing date from year 04 EIT filing onwards.] (7) Bonus accrued but not paid 00,000 (8) Staff union expenses Deductible (4,00,00 00,000) x % = 78,004 Adjustment = 99,00 78,004,96 (9) Accounting depreciation of chairs: 50 x 600 x 6 months/ years,500 Tax depreciation allowable: 50 x 600 (90,000) (0) Unrealised exchange loss 0 (0) Loss on disposal of A-shares 0 Total adjusted taxable income of 05,78,9 Tax loss brought forward (tax loss of 009 was expired by 04) (,800),56,9 EIT at 5% 564,098 4 The adjustment is valid because the statute of limitation for transfer pricing adjustments is ten years. 5 6