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 operations income derived from private industrial or commercial operations
Allowance per annum RMB42,000
Monthly personal allowance for a China local RMB3,500
Additional allowance for expatriate employees RMB1,300
Allowance each time for individual service income, income from manuscripts, royalties and rental of property
RMB4,000 and below RMB800
Over RMB4,000 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
Note: The above rates are based on the pilot rules published by 30 September 2016. The new rules issued from 1 October 2016 onwards are not examinable in the 2017 exams.
(a) Belle Ltd is a company incorporated in the United Kingdom. Belle Ltd has a representative office (RO) in Shanghai. The tax authorities deem the RO to be providing consultancy services to its head office. The RO is taxed on a cost-plus basis using a deemed profit rate of 15%. The total costs incurred by the RO from 1 May to 31 December 2016 amounted to RMB6,000,000. The RO is a value added tax (VAT) general taxpayer.
Required:
Calculate the amount of value added tax (VAT) and enterprise income tax (EIT) payable by the representative office (RO) of Belle Ltd for the period from 1 May to 31 December 2016.
Note: Ignore local tax and surcharges.
Belle Ltd – Value added tax (VAT) and enterprise income tax (EIT) for 2016
(b) Cathie Ltd was set up in Shanghai to provide information technology (IT) services to customers in China and overseas. Cathie Ltd is a value added tax (VAT) general taxpayer. Its results for 2016 are summarised below:
Cathie Ltd – Value added tax (VAT) for 2016
(c) The total receipts of Dodi Canteen in December 2016 amounted to RMB180,000. Also in December 2016, Dodi Canteen purchased fixed assets for RMB200,000 (exclusive of value added tax (VAT)) and obtained a VAT special invoice at 17%.
Required:
Calculate the value added tax (VAT) payable or input VAT to be carried forward by Dodi Canteen in December 2016 if it is:
(i) a small-scale taxpayer; and
(ii) a VAT general taxpayer.
Dodi Canteen – Value added tax (VAT) for December 2016
(a) OBOR Ltd, a company with a head office in Shenzhen, has the following overseas investments:
– a subsidiary, SG Ltd, in Singapore;
– a subsidiary, INA Ltd, in Indonesia; and
– a branch in South Africa.
OBOR Ltd’s transactions relating to these investments in 2016 were as follows:
(1) Sold its shares in SG Ltd for USD950,000. The cost of this investment was USD150,000. Singaporean income tax at the rate of 10% was paid on the capital gain.
(2) INA Ltd had a profit of USD120,000 in 2016, on which Indonesian corporate income tax at the rate of 18% was paid. INA Ltd declared a dividend of USD80,000 to OBOR Ltd. Indonesian withholding tax of 5% was imposed on the dividend.
(3) The South African branch earned a taxable profit of USD740,000 in 2016, on which South African corporate income tax at the rate of 33% was paid.
Required:
Calculate the foreign tax credit and enterprise income tax (EIT) payable by OBOR Ltd on each of the transactions (1) to (3) in 2016.
OBOR Ltd– Enterprise income tax (EIT) for 2016
(b) Forry Ltd is a law firm in the Hong Kong Special Administrative Region. It had income from the following three China sources in 2016:
(1) Provided legal advisory services to a Suzhou client and charged a service fee of RMB200,000. Forry Ltd is considered to have a permanent establishment in China. The Suzhou tax authorities assessed a deemed profit rate of 30% on the service fee.
(2) Lent RMB1,000,000 to a Chinese company on 1 January 2016 at an interest rate of 6% per annum.
(3) Sold the equity investment in its Guangzhou subsidiary realising a profit of RMB5,000,000.
Required:
Calculate the Chinese enterprise income tax (EIT) payable by Forry Ltd on each of its China sources of income (1) to (3) in 2016.
Notes:
1. All amounts are stated inclusive of any China taxes.
2. Ignore value added tax (business tax) and surcharges.
3. No treaty incentives are available.
Forry Ltd – Enterprise income tax (EIT) for 2016
Elema Group has two companies in China:
– A Beijing subsidiary, BJ Co, which produces and sells furniture in China. Its enterprise income tax (EIT) rate is 25%.
– A Chengdu subsidiary, CD Co, which designs, researches and develops new products. It qualifies as a hi-tech company and has an EIT rate of 15%.
The tax manager of the Beijing subsidiary proposed the following tax schemes and these were adopted in 2008:
(1) CD Co to lend RMB10 million to BJ Co and charge an interest rate of 36% per annum. The interest rate on similar loans from financial institutions is 7% per annum.
(2) Overstating the expenses of BJ Co by RMB2 million.
The Beijing City Chaoyang District tax authority discovered these two tax schemes in 2016.
Required:
(a) Briefly state the definition of tax avoidance under the enterprise income tax law.
(b) State which of the two tax schemes is tax avoidance.
(c) State the consequences for BJ Co of the discovery of the two tax schemes by the tax authority in 2016. Note: ignore the effect of the thin capitalisation rules.
(d) State the statute of limitation for the collection of taxes in the case of:
(i) tax evasion; and
(ii) tax avoidance.
Elema Group
(a) Tax avoidance refers to acts carried out by a taxpayer to obtain a tax benefit (reduction, exemption or postponing the payment of tax) by using approaches which are legal but without reasonable commercial purposes [Article 47 of EIT Law and State Administration of Taxation Decree 2014 No. 32].
(b) Tax scheme (1) is tax avoidance.
(c) Scheme (1)
BJ Co will have to pay additional enterprise income tax (EIT) on the portion of interest expense (i.e. 29% per annum) over the arm’s length interest rate of 7%; and
pay interest on the EIT calculated from 1 June 2009 at the rate of the People’s Bank of China plus an additional five percentage points.
Scheme (2)
BJ Co will have to pay additional EIT on the overstated expenses;
a late payment surcharge at 0·05% per day from 1 June 2009; and
a penalty ranging from 50% to 500%.
(d) There is no statute of limitation for collecting the tax due as a result of tax evasion.
The statute of limitation for collecting tax due as a result of tax avoidance is ten years.
(a) Batty Ltd produces batteries. In June 2016, Batty Ltd sold batteries to two customers as follows:
– to Chinese customer A for RMB2,000,000 (exclusive of value added tax (VAT)); and
– to overseas customer B for RMB1,500,000 (exclusive of VAT).
The input VAT incurred for production in June 2016 was RMB455,000.
Required:
Calculate the consumption tax (CT) payable on Batty Ltd’s sales and the value added tax (VAT) refundable on exports in June 2016.
Notes:
1. The CT rate on batteries is 4%.
2. The VAT refund rate for batteries is 13%.
Batty Ltd – Consumption tax (CT) and value added tax (VAT) for June 2016
(b) Cosi Ltd imports skin care products and cosmetics and sells them via e-commerce to individual customers in China. Cosi Ltd is a value added tax (VAT) general taxpayer. Its transactions in July 2016 are summarised below:
Cosi Ltd
(i) Customs duty in July 2016
(ii) Consumption tax (CT) on eyeliners
CT payable (150,000 + 18,000) ÷ (1 – 30%) x 30% RMB72,000
(iii) The loss of eyeliners due to a thunderstorm is not an abnormal loss for the purposes of value added tax (VAT).
(iv) Value added tax (VAT) for July 2016
(a) Wang and Chen are both Chinese citizens. They plan to set up a coffee shop and are considering whether a partnership or a limited company will be the better option from a tax perspective.
The forecast results of the coffee shop in its first year of operation are as follows:
Wang – Individual income tax (IIT)
(b) Ms Xi is a UK citizen working for Olympic Ltd in Beijing. Her pay slip for December 2016 shows the following:
Ms Xi – Individual income tax (IIT) for December 2016
(c) Ms Wu, a Chinese citizen, had the following incomes before tax in 2016:
Ms Wu – Individual income tax (IIT) for 2016
Alitech Ltd, which was set up in Xi’an, produces and sells tablet computers and provides software services. It qualifies as a high and new technology enterprise.
Alitech Ltd’s accounting profit for the year ended 31 December 2016 was RMB4,860,000. The following items were booked in the accounts before arriving at the accounting profit:
(1) A donation of RMB600,000 to the China Red Cross.
(2) Interest on a loan of RMB2,000,000 borrowed from a non-bank financial institution, LoanShark Ltd, from 1 January 2016. The interest rate on the loan is 24% per annum. The prime rate of the People’s Bank of China is 6%.
(3) Lost a legal case for the infringement of copyright and paid compensation of RMB1,500,000 to the copyright owner and a penalty of RMB500,000 to the State Administration for Industry and Commerce.
(4) A warehouse was destroyed during a rainstorm. The cost of goods destroyed amounted to RMB540,000 and the compensation received from the insurance company was RMB521,000.
(5) Out-of-fashion tablets costing RMB376,000 were scrapped during the year.
(6) Qualifying research and development expenses incurred in the year of RMB460,000.
(7) A customer went into bankruptcy in 2016 and the amount due of RMB230,000 was treated as a bad debt. In addition, a special provision for doubtful debts of RMB100,000 was made in the accounts. All necessary documents have been filed with the tax bureau.
(8) Equipment bought in December 2014 for RMB6,000,000 is being depreciated for accounting purposes using the straight line method, with an economic life of five years and no residual value. For tax purposes, the company qualifies for the accelerated depreciation incentive and used the sum-of-the-years’-digits method in 2015.
(9) Received royalties from its Shanghai distributors of RMB170,000 and from its Singapore distributors of RMB180,000. The Singapore distributors deducted Singaporean withholding tax of 10% before remitting the royalties to Alitech Ltd.
(10) Salaries of qualified disabled employees employed in the year totalled RMB425,000.
(11) Used computers with a net book value of RMB50,000 (for both accounting and tax purposes) were donated to a school. The disposal was treated as an administrative expense.
(12) Ten new tablets were taken for their personal use by the shareholders of Alitech Ltd and recorded in the accounts by reducing the cost of sales. The cost of each tablet is RMB1,000 and the selling price is RMB4,000.
(13) Expenses of RMB201,000 were accrued as at 31 December 2016. Invoices were obtained for all of these expenses before settlement of the enterprise income tax (EIT).
(14) Interest income received included government treasury bond interest of RMB80,000 and bank interest of RMB91,500.
(15) A specific government subsidy of RMB214,000 was received from the Xi’an government in respect of a new project, Adda. The expenses incurred for project Adda in 2016 amounted to RMB123,000.
(16) Commercial insurances for employees of RMB128,000 and employer’s social insurance contributions of RMB285,000 were paid.
(17) Goodwill of RMB5,340,000 arising on the acquisition of a subsidiary in Hangzhou in 2015 is being amortised over a ten-year period for accounting purposes.
Required:
Calculate the enterprise income tax (EIT) payable by Alitech Ltd for the year 2016, assuming that Alitech Ltd has made all relevant applications and/or reports to the tax authorities.
Notes:
1. You should start your computation with the net profit figure of RMB4,860,000 and list all of the items referred to in notes (1) to (17) identifying any item(s) which do not require adjustment by the use of zero (0).
2. Ignore value added tax on any deemed sales or abnormal losses.
3. Ignore adjustments to the accounting profit.
Alitech Ltd – Enterprise income tax (EIT) for 2016
