Taxes In China
Tax is the most important source of income for the Chinese treasury. It is also an important economic lever used by the state to increase its impact on its socio-economic development. The positive results of the tax system after the 1994 reform suggest that, for the first time in the world, China has built an effective tax system adapted to a market economy. The PRC’s existing tax system aims to open China to the outside world, contributing to the vigorous development of the national economy.
All taxes and fees are in China. Currently, the PRC has the following taxes and levies:
- corporate income tax in China is paid by legal entities and other organizations
- personal income tax is paid by individuals on all types of income received
- value-added tax is paid when goods, works, and services are sold in the PRC
- consumption tax is paid on the sale in the PRC of certain goods classified as excisable (alcoholic beverages, tobacco products, etc.)
- the real estate tax is paid by the owners of buildings, structures, and premises if the real estate is used for business
- land value gains tax is paid upon transfer of rights to use the land for construction
- tax on the use of urban land is paid by persons who have received the right to use urban land (land owned by the state)
- transport tax is paid by the owners or owners of vehicles and ships
- vehicle purchase tax is payable when purchasing vehicles
- tax on the transfer of rights is paid when acquiring ownership of buildings, structures, structures, as well as when obtaining the right to use the land for construction
- resource tax is paid for mining
- urban repair and construction tax is paid by VAT and consumption taxpayers to finance repairs and construction in cities
- environmental tax is paid by organizations that create environmental pollution
- tobacco leaf tax is paid by organizations purchasing tobacco leaf
- stamp duty is paid upon conclusion of contracts and execution of certain documents
- the levy for the occupation of agricultural land is paid upon the allocation of agricultural land for construction.
Moreover, in China, taxes include customs duty and tonnage duty. In addition to taxes, Chinese companies are required to pay several non-tax levies- among which, the most important are education levies (national surcharge for education and local surcharge for education).
Types of the tax rate in China
Currently, there are 25 types of taxes in China, which, depending on their nature and functions performed, can be combined into eight groups:
- Turnover taxes. This group includes three types of taxes: VAT, consumption tax (sales tax), and business tax. The collection of these taxes depends on the volume of trade or sales in the production, circulation, and services spheres.
- Income taxes in China. This group includes a tax on profits of domestic enterprises, enterprises with foreign investment, and foreign enterprises and individuals. Revenues from this tax group depend on the profit amount received by legal entities or on the income amount of an individual.
- Resource payments, including resource tax and land tax (payment for land use in cities and regions). These taxes are collected from users of natural resources and users of city and district lands. Resource payments are levied on the use of state-owned natural resources. Their goal is to equalize the incomes of taxpayers who use natural resources in different localities and conditions.
Targeted taxes and fees: Tax on the maintenance and construction of cities, tax on the use of agricultural land, tax on investments in fixed assets, and tax on the land sale.
Property taxes property tax, property tax, inheritance tax (not yet introduced).
- Taxes on transactions (actions). This group includes a tax on the use of motor vehicles and watercraft, stamp duty, property transfer tax, tax on the circulation of securities (not yet introduced). These taxes are levied on certain transactions (actions).
- Agricultural taxes. Tax on agriculture and the maintenance and breeding of livestock. Taxpayers are legal entities and/or individuals who receive income from farming or animal husbandry.
- Customs duties. They are imposed on goods imported/exported to/from the territory of China.
The government agencies charged with drafting tax laws and setting tax policy include the National Congress of the People and its Standing Committee, the Council of State, the Treasury Department, the State Tax Administration, the Council of State Tariffication and Classification Committee, and the General Directorate of Customs.
Tax laws are drafted by the National Public Congress, such as the PRC Personal Income Tax Law in China, or by the Standing Committee of Congress, such as the PRC Tax Administration and Collection Law.
Administrative decisions and rules in taxation (instructions) are developed by the State Council, for example, Instructions on the Application of the Tax Administration and Collection Act, Instructions on the Application of the Income Tax in China Act to Individuals, Temporary VAT Instructions.
Departmental rules in the field of taxation are developed:
- Ministry of Finance
- State Administration of Taxation
- Tariffication and Classification Committee under the State Council
- Main Customs Administration.
Preparation of tax laws and regulations takes place in 4 stages:
- drawing up a documented plan
- its consideration
- decision making (voting)
- publication (promulgation).
Moreover, the legislation of the PRC provides that legal acts can be adopted at the highest level and developed and adopted by the relevant local government bodies.
Distribution of tax revenues between central and local governments. Following the rules adopted by the State Council for the delineation of tax revenues between different levels of government, taxes are divided into central taxes (own), local taxes (own), and taxes that go to both the central and local budgets (regulating taxes).
- Central taxes are domestic consumption tax, customs duties, VAT, and consumption tax levied by customs.
- Local taxes. Income tax in China, payment for the use of land in cities and regions, tax for the use of agricultural land, tax on investments in fixed assets, tax on the sale of land, property tax, real estate tax, inheritance tax, tax on the use of vehicles and watercraft, property transfer tax, agricultural tax, and livestock maintenance and breeding tax.
Regulating China’s tax rate
VAT on turnover within the country: 75% central budget and 25% local budget.
The part of the tax that the railway department consolidates, banks, and insurance companies and an additional 3% of the tax paid by finance and insurance companies are credited to the central budget, the rest to the local budget.
China tax rate on corporate profits
The tax paid by state-owned enterprises, local banks, and non-bank financial institutions, consolidated by the railway department, various banks, and insurance companies, is credited to central budget revenues, the rest to local budget revenues.
China tax rate on the profits of enterprises with foreign investment and foreign enterprises
Tax paid by foreign banks goes to the central budget, tax from other entities goes to local budgets.
Goes from offshore oil production to the central budget, and tax from other facilities goes to local budgets.
Tax on the maintenance and construction of cities
Part of the tax, consolidated by the railway department, various banks, and insurance companies, is credited to the central budget revenues and the local budget revenues.
Stamp duty 88% to the central budget, 12% to local budgets.
Tax rate and taxation of foreign investments in China
Currently, enterprises with foreign investments, foreign enterprises, and foreign citizens pay the following types of taxes:
- VAT, consumption tax
- business tax
- income tax of enterprises with foreign investments and foreign companies
- income tax in China from individuals
- resource tax
- land sales tax
- property tax
- stamp duty
- motor vehicle and watercraft tax
- property transfer tax
- agricultural tax
- customs duties.
To attract foreign funds, foreign technologies, and know-how, the tax rate in China provides a large number of tax benefits for foreign individuals and legal entities.
Personal Income Tax in China
The collection of personal income tax is currently regulated by the Law of the People’s Republic of China On Personal Income Tax, as amended on August 31, 2018, and the Rules and Regulations for the Application of the Law on Personal Income Tax of the People’s Republic of China, as amended on December 18, 2018 (the latest amendments to these documents entered in force from 01.01.2019).
Payers taxes in China on personal income are the following individuals:
- Citizens of the PRC or foreign citizens permanently residing in the territory of the PRC for 183 days or more a year. These persons must pay personal income tax on income received in the PRC and from abroad. Foreign citizens residing in the PRC for 1 to 5 years are exempt from tax on income earned abroad. These incomes are subject to declaration and tax payment starting from the sixth year of residence in the PRC if the foreign citizen has not lost the status of a tax resident in the PRC during this year.
- Foreign citizens who are not tax residents of the PRC have been in the PRC for less than one year. These persons pay personal income tax on income received in the PRC.
Regardless of the place of actual payment, the income received in the territory of the PRC includes:
- income received as a result of the provision of labor services on the territory of the PRC following hiring, hiring, agreement, etc.
- income received as a result of renting property for use by a lessee in the PRC
- income received from the transfer (sale) of real estate, rights to use land or other property in the PRC
- income received from permission to use patent rights in the PRC
- income in the form of dividends, interest, and royalties received from companies, enterprises, other economic organizations, or individuals from the PRC.