TAX RATES AND ALLOWANCES
The following tax rates and allowances are to be used in answering the questions.
Individual income tax
Entrepreneurs who receive production or operation income derived from private industrial or commercial enterprises
Monthly personal allowance for a China local RMB 3,500
Additional allowance for expatriate employees RMB 1,300
Individual service income
Allowance each time for individual service income, income from manuscripts, royalties and rental of property
RMB 4,000 and below RMB 800
Over RMB 4,000 20%
Income from:
Manuscripts, royalties, interest, dividends, rental of property, transfer of property,
incidental income and other income 20%
Donations of individuals
Limited to: 30% of the taxable income; or
100% if the donation is made to certain funds approved by the government
VAT pilot programme for transportation and modern services
Note: The above rates are based on the pilot rules effective from 1 August 2013. The new rules effective from 1 January 2014 are not examinable in the 2014 exams.
(a) Company B is a limited liability company set up on 1 January 2013. Company B is engaged in the provision of information technology and data processing services. The company’s accountant has prepared the following tax computation for the year ended 31 December 2013:
Notes:
(1) The cost of services includes wages and salaries of RMB 2,900,000, of which RMB 500,000 relates to the accrued portion of a bonus due and payable to a member of senior management on the termination of his contract in 2017.
(2) Sales expenses include:
(3) Financial expenses include RMB 40,000 of interest paid on a shareholder’s loan. The interest rate on this loan is 5% p.a. which is the same as the market interest rate on loans on similar terms from banks.
(4) Administrative expenses include:
(5) Research and development (R&D) expenses include RMB 320,000 which has been registered with the tax bureau and agreed as qualifying for the tax incentives on R&D expenses.
(6) Other income and expenses comprise:
Company B
(i) Enterprise income tax (EIT) treatment of items
(1) The accrued termination bonus payable in 2017 of RMB 500,000 is not deductible in 2013. Hence the deductible wages and salaries are RMB 2,400,000.
(2) (i) The amount of entertainment expenses deductible is limited to 60% of the amount incurred, i.e. RMB 67,920 (113,200 x 60%); and no more than 0·5% of turnover, i.e. RMB 58,900 (11,780,000 x 0·5%). Hence, RMB 54,300 (113,200 – 58,900) is not deductible.
(ii) The amount of deductible advertising and promotion expenses is limited to 15% of turnover, i.e. RMB 1,767,000 (11,780,000 x 15%). The amount of RMB 100,000 brought forward from 2012 is also deductible within this limit. Hence, the total deductible in 2013 is RMB 910,300 (810,300 + 100,000).
(3) The interest expense is at the same market rate as from a bank, so the amount incurred is fully deductible and no adjustment is required.
(4) (i) Deductible staff welfare and benefits are limited to 14% of deductible wages and salaries, i.e. RMB 336,000 (2,400,000 x 14%). Hence, RMB 64,000 (400,000 – 336,000) is not deductible.
(ii) Deductible labour union fees are limited to 2% of deductible wages and salaries, i.e.
RMB 48,000 (2,400,000 x 2%). So the amount of RMB 40,000 incurred is fully deductible and no adjustment is required.
(iii) A penalty paid to a government authority is not deductible.
(iv) Goodwill on the acquisition of a business is not deductible until the sale of business or liquidation of the company.
(v) No adjustment is required where the depreciation period is longer than the minimum period, which for computers (electronic equipment) is three years.
(vi) A sponsorship fee to a local school is not deductible.
(5) In addition to the qualifying R&D expense of RMB 320,000, there is a further 50% deductible on qualifying R&D expenses, i.e. RMB 160,000 (320,000 x 50%).
(6) (i) A non-specific purpose financial subsidy is taxable. No adjustment is required.
(ii) The asset loss not covered by insurance compensation is deductible. No adjustment is required.
(iii) The maximum EIT credit on the US sourced income is RMB 125,000 (500,000 x 25%).
Hence, the USA tax paid of RMB 20,000 can be fully credited against the EIT to be payable.
Tutorial note:According to the State Administration of Taxation Announcement 2012 No. 15, if the depreciation period adopted for accounting purposes exceeds that of the taxation law, no adjustment is required for EIT.
(ii) EIT payable for 2013
(b) Company H is a Hong Kong company which has set up a representative office (RO) in China. The RO provides liaison services in China for Company H. The China tax authorities have assessed the tax position of the RO and concluded that the RO should pay tax on a cost-plus basis at a deemed profit rate of 15%. In 2013 the taxable costs of the RO are RMB 160,000.
Required:
Calculate the business tax (BT) and enterprise income tax (EIT) of the representative office (RO) for the year 2013.
Company H representative office (RO)
Business tax (BT) and enterprise income tax (EIT) for 2013
(c) Briefly explain the principle of ‘effective management’ used to determine whether an enterprise registered outside China can be considered as a China tax resident.
Principle of ‘effective management’
An enterprise registered outside China but with an effective management inside China can be considered as a China tax resident. The place of effective management means the place where the enterprise has the effective and overall power to control and manage the enterprise’s:
– business operation;
– employees;
– financial and accounting books; and
– assets.
(d) State any FOUR circumstances in which the tax authorities can assess an enterprise’s liability to enterprise income tax (EIT) using the deemed basis.
The tax authorities can assess an enterprise to enterprise income tax (EIT) on the deemed basis if:
– the taxpayer does not have to have accounting books according to the law;
– the taxpayer does not have accounting books even though it is required to do so under the law;
– the taxpayer has destroyed its accounting books;
– the taxpayer refuses to provide information for tax filing purposes;
– the taxpayer has accounting books but the cost, income and expenses are incomplete and it is not possible to assess the profits;
– the taxpayer has a tax obligation but does not file tax on the due date and tax has still not been paid after a request from the tax authorities; or
– the tax base is obviously low without reasons.
Ms Chen, a Chinese national, received the following income in 2013.
Income from her employment as a manager with Company X:
(1) A salary of RMB 10,000 per month for each of the 12 months of 2013. In addition, she was entitled to the following subsidies and allowances in 2013:
(a) A meal allowance of RMB 500 per month.
(b) Overtime income of RMB 1,000 per month.
(c) Reimbursement of business trip expenses in January 2013. The amount incurred was RMB 1,200 and the whole amount was supported with invoices.
(d) Employer’s mandatory contribution to social security of RMB 1,200.
(2) A year-end bonus of RMB 40,000 in December 2013.
Other income:
(3) She had an article published in a magazine in June and republished in July. The authorship fee was RMB 3,000 for each publication.
(4) In June, a private limited company paid her a dividend from which it withheld individual income tax (IIT). The net-of-tax dividend she received was RMB 40,000.
(5) In April 2013, she invested RMB 20,000 in A-shares and sold them for RMB 35,000 in August 2013.
(6) She has provided consultancy services to a Canadian company and received a gross service fee of USD20,000. Canadian tax of USD2,000 was withheld and deducted at source from this fee.
(7) Her uncle in France died in 2013 and she inherited an estate worth USD1,000,000.
(8) An advertising company used Ms Chen’s photo and image in an advertisement and paid her a fee of RMB 100,000. She decided to donate RMB 15,000 of this fee to an approved charitable organisation specifically for the earthquake in Sichuan. The donation was paid directly to the charity from the advertising company.
(9) She received net-of-tax interest from a private company of RMB 4,800. Individual income tax and business tax were withheld and deducted by the company before paying this interest.
Required:
(a) Calculate the individual income tax (IIT) payable by Ms Chen in respect of each of the items (1) to (9), clearly identifying any item(s) which are tax exempt.
Note: You should ignore the effect of business tax and surtaxes on business tax in respect of items (6) and (8) and surtaxes on business tax in respect of item (9).
(b) (i) State the penalty which will be levied on the publisher for not withholding IIT from the payment made to Ms Chen (item (3)).
(ii) Explain Ms Chen’s responsibilities for filing and paying the IIT on this fee.
Ms Chen
(a) Individual income tax (IIT)
(1) The business trip expenses reimbursed and the employer’s mandatory contribution to social security are exempt from IIT.
Therefore, the monthly taxable salary is RMB 11,500 (10,000 + 500 + 1,000).
Monthly IIT = (11,500 – 3,500) x 20% – 555 = RMB 1,045
(2) The applicable tax rate for the bonus is 10% (40,000 ÷ 12 = 3,333).
IIT on the bonus = 40,000 x 10% – 105 = RMB 3,895
(3) An article pubIIT = 20% x (6,000 – 20% x 6,000) x (1 – 30%) = RMB 672
(4) The gross amount of dividend is RMB 50,000 (40,000 ÷ (1 – 20%)).
IIT on dividend = 50,000 x 20% = RMB 10,000
(5) A gain on investing in A-shares is tax exempt.
(6) Consultancy fee of USD20,000 x 6 = RMB 120,000.
IIT = (120,000 – 20% x 120,000) x 40% – 7,000 = RMB 31,400
IIT after crediting foreign tax = 31,400 – (2,000 x 6) = RMB 19,400
(7) Income from an estate is tax exempt.
(8) The donation for the Sichuan earthquake is fully deductible against income.
IIT on royalty income = (100,000 – 15,000) x (1 – 20%) x 20% = RMB 13,600
(9) The gross interest income is RMB 6,400 (4,800 ÷ (1 – 5% – 20%).
IIT on interest = 6,400 x 20% = RMB 1,280
(b) (i) A withholding agent who does not properly withhold individual income tax (IIT) is subject to a penalty of from 50% to 300% of the IIT.
(ii) Where a withholding agent fails to withhold the required tax, the taxpayer still remains liable for the tax due and must file a return with the relevant tax authority.
Ms Chen can file the IIT return either in the next month after she received the income or during the annual self-assessment.
(a) Company T, an accountancy firm in Shanghai, is a value added tax (VAT) general taxpayer. Company T’s transactions for the month of November 2013 included the following:
(1) Provided book-keeping services to Client A and billed a fee of RMB 30,000 and outlays of RMB 1,000.
(2) Billed Client B RMB 40,000 inclusive of VAT for audit services provided.
(3) Sent a bill to Client Z on 1 November for RMB 100,000. As Client Z settled the bill before the end of November, Company T granted it an early payment discount of RMB 1,000.
(4) Provided consultancy services to a German client for a fee of RMB 80,000. These services qualified as an export of services.
(5) Engaged a law firm to provide legal advisory services and received a VAT invoice for fees of RMB 15,000.
(6) Paid a trademark fee to a global firm in the USA of RMB 50,000. VAT was withheld and paid by Company T.
(7) Bought computers for RMB 20,000 and obtained a VAT general invoice.
(8) Paid RMB 5,000 for the repair of the computers. The repair company was a small-scale taxpayer and issued a general invoice to Company T.
(9) Paid rent to its landlord of RMB 60,000. A business tax invoice was obtained.
(10) Paid a transportation fee of RMB 2,000 for picking up its staff from the metro station and bringing them to its office. A VAT invoice at 11% was obtained.
(11) Provided free-of-charge audit services to a charitable organisation. The market value of these services was RMB 35,000.
(12) Paid leasing charges of RMB 6,000 for a photocopying machine. A VAT invoice was obtained.
Except where stated otherwise, all amounts are exclusive of VAT.
Required:
(i) In respect of Company T’s transactions for November 2013, state, giving reasons, those transactions on which value added tax (VAT) will not be charged or for which a VAT credit will not be allowed.
(ii) Calculate the VAT payable by Company T for the month of November 2013 as a result of transactions (1) to (12).
Company T
(i) No value added tax (VAT) or no VAT credit items
The following transactions are either not chargeable to VAT or a credit for the VAT charged is not allowed:
– Item (4), the export of a service is exempt from VAT.
– Item (8), input VAT credit is not applicable to a general invoice issued by a small-scale taxpayer.
– Item (9), business tax not VAT applies to rent.
– Item (10), a VAT credit is not allowed on the transportation fee which relates to expenditure incurred for staff benefit.
– Item (11), a free of charge service for a charitable organisation is exempt from VAT.
(ii) VAT payable
(b) Company M is a production company manufacturing lighting products for exportation. The company’s transactions for December 2013 are as follows:
(1) Exported goods at a FOB (freight on board) price of RMB 200,000.
(2) Sold goods domestically in China for RMB 180,000.
(3) Imported materials at a CIF (cost including insurance and freight) value of RMB 12,000. The import customs duty rate was 10%.
(4) Purchased raw materials for RMB 160,000. A bulk purchase discount of RMB 10,000 was deducted directly in the VAT invoice obtained.
(5) Paid transportation costs of RMB 10,000. A VAT invoice at 11% was obtained.
Except where stated otherwise, all amounts are exclusive of VAT.
Required:
(i) Calculate the amount of irrecoverable input value added tax (VAT) on the exported goods.
Note: The export refund rate is 13%.
(ii) Calculate the VAT payable by Company M for the month of December 2013.
Company M
(i) Irrecoverable input value added tax (VAT) on exported goods
Export FOB value x (17% – refund rate) = 200,000 x (17% – 13%) = RMB 8,000
(ii) VAT payable for December 2013
(a) Company S sells cosmetics, its transactions in October 2013 were as follows:
(1) Imported 300 sets of cosmetics packs at a CIF (cost including insurance and freight) value of USD100 per set. The import customs duty rate was 10%.
(2) Purchased 1,000 pieces of lipstick at RMB 10 per piece from a manufacturing company, Company W.
(3) Purchased chemicals for the production of cosmetics packs from Company L for RMB 123,000.
(4) Sold 200 sets of the imported cosmetics packs at RMB 1,500 per set without further processing.
(5) Sold 600 pieces of lipstick at RMB 50 per piece without further processing.
(6) Sold 450 sets of self-produced cosmetics packs at RMB 1,000 per set.
All amounts are stated exclusive of VAT.
Required:
(i) Calculate the consumption tax (CT) paid by Company S on the importation of the cosmetics sets (item (1)).
(ii) State clearly whether the sales of goods in each of items (4), (5) and (6) are or are not subject to CT.
(iii) Calculate the CT payable by Company S on its sales for the month of October 2013.
Note: The consumption tax rate on cosmetics is 30%.
Company S
(i) Consumption tax (CT) on import of cosmetics sets
Tax base for CT = (USD100 x 300 x 6) x (1 + 10%) ÷ (1 – 30%) = RMB 282,857
CT is RMB 84,857 (282,857 x 30%).
(ii) Item (4) – not subject to consumption tax.
Item (5) – not subject to consumption tax.
Item (6) – subject to consumption tax.
Tutorial note: Consumption tax is levied on the production and sale of goods. The purchase and sale of cosmetics without further production or processing is not subject to consumption tax.
(iii) CT on sales for October 2013 is: 450 x 1,000 x 30% = RMB 135,000
(b) In July 1998, Company P acquired an office for self-use, comprising one floor in a multi-storey building, for RMB 3,000,000. In December 2013, Company P sold the office for RMB 20,000,000. The appraised value of the office was RMB 15,000,000.
The taxes payable on the sale of the property were: business tax (BT); city maintenance and construction tax and education levy of 10% on the BT; and stamp duty of 0·05% on the sales contract.
Required:
Calculate the land appreciation tax (LAT) payable by Company P on the sale of the office.
Company P
Land appreciation tax (LAT) on sale of office
(c) A retail shop, Shop R, sells air-conditioners to customers for RMB 2,000 each; at the same time Shop R charges a RMB 100 installation fee.
Required:
State, giving reasons, whether Shop R should pay business tax (BT) or value added tax (VAT) on the installation fee.
Shop R
This is a mixed sale, where a single transaction involves both the supply of goods which is subject to value added tax (VAT) and non-VATable services which on their own would be subject business tax (BT).
Mixed sales made by an entity principally engaged in the sale of goods are subject to VAT.
Therefore, Shop R should pay VAT on the installation fee.
(a) (i) Define the term ‘tax evasion’ as provided for in the Tax Collection and Administration Law.
(ii) State the statute of limitation on the recovery of taxes in the case of tax evasion.
(i) The term ‘tax evasion’ under the Tax Collection and Administration Law means ‘a taxpayer:
– forges, revises, conceals or destroys its account books or supporting vouchers for the accounts without official permission, or
– overstates the expenses or does not state or understates its income in its account books, or
– refuses to file tax returns despite notification by the tax authorities, or files fraudulent tax returns or refuses to pay or underpays the tax due.’
Tutorial note:The amended Criminal Law has amended the term and criminal penalty on ‘tax evasion’ in 2009. The State Council has made a proposal to the National People’s Congress to amend the Tax Collection and Administration Law to be consistent with the Criminal Law. The proposal includes revising the term ‘tax evasion’ to ‘avoidance of tax payment’ as ‘taxpayer using the means of deception and concealment for fraudulent tax declaration or non-declaration to avoid payment of taxes’.
(ii) There is no statute of limitation on the recovery of taxes in the case of tax evasion.
(b) During a tax audit of Company A, it was discovered that it had committed the following acts:
(1) Deducted expenses of RMB 250,000 which were not related to its business operations.
(2) Sold goods to a related company for RMB 500,000 when the open market selling price of the similar type of goods was RMB 2,000,000.
Required:
Explain whether either or both of the acts committed by Company A constitutes tax evasion, and if not, state how the issue will be classified.
Company A
– The deduction of expenses not related to its business would constitute the overstatement of expenses which is considered as tax evasion under the Tax Administration Law.
– The reporting of taxable income at an obviously low amount without reason would not constitute an act of tax evasion but a transaction between related parties not conducted at an arm’s length price would be challengeable under the transfer pricing rules.
(c) State the actions which the taxpayer can take if there is a dispute on the amount of tax assessed by the tax authorities and by when such action should be taken.
The taxpayer can appeal to the tax authority at one level higher than the original authority which made the decision.
The appeal should be made within 60 days from the date of receiving the decision of the tax authority.
The taxpayer should pay the tax assessed by the original authority before making the appeal.
The taxpayer can appeal to the People’s Court if he/she still disagrees with the decision of the tax administrative review.