China's Tax Administration Law was promulgated in September 1992 and became effective from January 1, 1993. Until then, Chinese domestic and foreign-invested enterprises were governed by different tax regulations and may have been subject to different tax administration treatment. The Tax Administration Law eradicates this inconsistency in that it applies to both domestic and foreign-invested enterprises.
Afterwards, circulars were issued to supplement, clarify and strengthen the tax administration and collection policies and procedures. Therefore it is important for tax-payers, particularly foreign investors and expatriate employees, to understand their responsibilities and obligations as well as the power and the rights of tax authorities in order to avoid a possible breach of regulations.
Tax administration mainly refers to the following areas of compliance:
In general, all entities carrying out business transactions in China should perform tax registration with local tax authorities within one month of the date of issue of business licences. Expatriate employees are usually also required to perform individual income tax registration.
Enterprises should set up accounting books and systems and report their financial and accounting policies to local tax authorities. These accounting books, financial statements and supporting documents should be kept for 10 years or 15 years for income tax purposes.
Enterprises are required to file tax returns with local tax authorities within prescribed deadlines. For example, quarterly provisional enterprise income tax returns should be filed within 15 days after the end of the quarter. Annual enterprise income tax returns together with the local CPA audit reports should be filed within four months after the end of the year; VAT and/or business tax returns should be filed usually on a monthly basis and within 10 days usually after the end of the month; and individual income tax (ITT) returns should be filed by individuals or their withholding agents within seven days after the end of the month. Invoices It is important for taxpayers to properly issue and collect prescribed Chinese invoices when transacting with others. Proper invoices shall be used as valid supporting documents for recording accounting books and calculating tax payable. Payment receipts are usually not accepted as proper supporting documents in China.
Generally, taxes are calculated and collected by tax authorities on either an actual or a deemed basis. Actual taxes are based on the actual business transaction records. This basis applies to those entities which have set up proper accounting systems and maintained complete and accurate accounting books and records.
Deemed basis applies to those enterprises which are not able to keep complete and accurate accounting records or whose business turnover cannot be ascertained accurately.
Tax authorities have the following power and rights to enforce tax collection and impose penalties if taxpayers or withholding agents have not complied with the relevant requirements:
-order taxpayers or withholding agents to remedy their acts and impose a penalty of Yn2,000-10,000
-impose a late payment surcharge of 0.2 per cent per day of the tax in arrears from the first day of the tax payment in default
-impose a penalty of up to five times the tax underpaid
-request taxpayers to provide accounting books, supporting vouchers and invoices within a prescribed deadline for their examination in order to ascertain their tax liabilities
-make adjustments on the reported taxable income or expenses if the income or expenses are considered unreasonable or inaccurate in cases such as related party transactions
-notify the financial institutions with which the taxpayers or withholding agents have opened accounts to withhold and remit the amount of tax from their accounts
-impound, seal up or sell by auction the commodities, goods or other properties of the taxpayers or withholding agents and useThe proceeds from the auction to make good the amount of tax payable, and
-notify the customs authorities to stop the taxpayers from leaving China.
The State Administration of Taxation (SAT) has recently issued several circulars concerning tax administration and collection, especially in respect of ITT. It has also issued a set of procedures to local tax authorities regarding the tax inspection on tax compliance by enterprises and individuals in order to collect more tax revenue and prevent tax evasion.
In addition, the SAT has issued tax administrative rules which set out the compliance requirements to be fulfilled by enterprises if there are related party transactions carried out by the enterprises. The SAT has also issued a number of circulars to strengthen IIT administration and collection.
Deemed income method is a measure adopted by local tax authorities to enforce the IIT collection of foreign expatriates working in China. Tax authorities would deem a tax-able income for LIT purpose in cases where:
-the reported monthly remuneration is unreasonably low
-only remuneration paid or borne by Chinese enterprises is reported, while remuneration paid or borne by non-Chinese enterprises is not reported
-a director of an FIE is involved in the daily management of the enterprise and only a director's fee or dividend is received and no salary is received for his services
-IIT filing is not performed.
In any one of the above situations, the tax authorities may impose a deemed income to levy the IIT liabilities based on factors such as the country of the expatriates, their profession and posts, the industry and the investment scale of their employers.
The Chinese tax authorities are taking more actions and adopting more sophisticated measures on tax administration and collection. The approach of the local tax authorities may change from passive to proactive, and involve putting more resources into tax investigation and collection. Foreign taxpayers therefore should be aware of their tax responsibilities and obligations in order to minimise their tax troubles in China.
Written by Alfred Choi, Tax Manager of' PwC in Shen: hen, and Oscar Lau, Tax Partner of PwC in Hong Kong and Shenhen. The above ij iforrnation is not intended to he comprehensive or, final.