TAX RATES AND ALLOWANCES
The following tax rates and allowances are to be used in answering the questions.
Enterprise income tax
Deduction limits on certain expenses
Individual income tax
Entrepreneurs who receive production or operations income derived from private industrial or commercial operations
Allowance per annum RMB42,000
Employment income
Monthly personal allowance for a China local RMB3,500
Additional allowance for expatriate employees RMB1,300
Individual service income
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 2015. The new rules issued from 1 October 2015 onwards are not examinable in the 2016 exams.
Taip Ltd is a foreign investment enterprise which has been a qualified software enterprise for enterprise income tax (EIT) since its inception in 2010. Taip Ltd produces software products in Mainland China and exports these products to associated companies in the Hong Kong Special Administrative Region for further sale to European customers. Taip Ltd’s total costs, profits/(losses) and applicable tax rates are summarised below:
Taip Ltd
(a) In addition to the cost plus method, the following four methods can be used for transfer pricing adjustments:
– Comparable uncontrolled price method
– Resale price method
– Transactional net profit method
– Profit split method
(b) Additional enterprise income tax (EIT) payable for the years 2010 to 2014
Trinity Ltd is a production and trading company which sells cosmetics. In 2015 Trinity Ltd carried out the following transactions (except where stated otherwise, the amounts are exclusive of value added tax (VAT)):
(1) Imported 10,000 cosmetic packs from France at a cost including freight and insurance (CIF) of USD100,000. The French supplier granted Trinity Ltd an early settlement discount of 2%. Trinity Ltd sold 8,000 of the imported cosmetic packs to a sole distribution agent, Beast Co, for RMB2,350,000. Trinity Ltd granted Beast Co an early settlement discount of RMB50,000.
(2) Purchased lipsticks from a manufacturer for RMB400,000. The manufacturer paid consumption tax on the production and sale of the lipsticks. The lipsticks were exported to a Vietnam customer for USD300,000.
(3) Purchased chemicals for RMB85,000 for use in the production of face powder. The total turnover from the sale of the face powder in 2015 was RMB250,000. The unsold inventory of face powder at 31 December 2015 had a cost of RMB150,000.
(4) Purchased 1,000 eyeliners for RMB10,000. All these eyeliners were given to customers as free gifts. The retail price of each eyeliner is RMB30 (VAT inclusive).
Required:
Calculate the following amounts payable by Trinity Ltd for 2015:
(a) The customs duty and consumption tax on the importation of the cosmetic packs.
Notes:
1. The customs duty rate on cosmetics is 6·5%.
2. The consumption tax rate on cosmetics is 30%.
(b) The export value added tax (VAT) refundable on the lipsticks.
Note: The VAT refund rate for lipsticks is 13%.
(c) The consumption tax on the production and sale of the face powder.
(d) The total output VAT and total input/import VAT credit as a result of transactions (1) to (4). State zero (0) for any transaction(s) which do not have a VAT impact.
Trinity Ltd
(a) Cosmetic packs
Customs duty = (USD100,000 x 6·5% x 6) = RMB39,000
Composite value for consumption tax = ((100,000 x 6 + 39,000) ÷ (1 – 30%)) = RMB912,857
Consumption tax on importation = (912,857 x 30%) = RMB273,857
(b) Lipsticks
VAT refundable on export = (400,000 x 13%) = RMB52,000
(c) Face powder
Consumption tax on production and sale = (250,000 x 30%) = RMB75,000
(d) Total output value added tax (VAT) and input/import VAT for 2015
(a) State ANY TWO major differences between a direct tax and an indirect tax.
Differences between direct and indirect taxes
– A direct tax is usually levied on income or wealth of a person while an indirect tax is usually levied on the consumption of goods and services.
– The payer of a direct tax bears the tax directly and it is more difficult to shift the tax burden to another person.
– A direct tax is usually simpler to administer whereas an indirect tax is usually more complicated to administer.
– A direct tax is usually progressive whereas an indirect tax is usually regressive.
(b) State two direct taxes and two indirect taxes levied in China.
Direct taxes:
– Individual income tax
– Enterprise income tax
Indirect taxes (any TWO):
– Value added tax
– Business tax
– Consumption tax
(c) In January 2014 Tee Ltd received approval from the local tax bureau on a tax exemption application. The amount of tax which was exempt for 2014 amounted to RMB5 million. In December 2015 the tax bureau found that it had made a wrong decision.
Required:
State, with reason(s), whether the tax bureau can require Tee Ltd to pay back the amount of tax previously exempt.
The tax bureau can recover the tax wrongly exempt in 2014.
The tax bureau can recover any taxes under-collected as a result of a wrong decision made within three years; and for under-collected amounts over RMB100,000 the time limit is extended to five years.
(d) State whether the tax authorities can impose each of the following administrative actions on taxpayers:
(i) imprisonment;
(ii) stop a tax refund on exports;
(iii) stop providing VAT special invoices;
(iv) force the closure of the business of the taxpayer.
Note: You are not required to give any reasons.
(i) No. [Imprisonment is a criminal penalty and can only be decided by a court]
(ii) Yes.
(iii) Yes.
(iv) No. [This is the authority of the State Administration for Industry and Commerce]
(e) Briefly explain the method the tax bureau will normally use to impose enterprise income tax on a company which has lost all of its accounting records due to a fire.
The tax bureau can assess the enterprise income tax on a deemed basis by reference to the tax burden of other taxpayers involved in the same or similar industries with a similar scale of operations and a similar level of revenue.
(a) Design Ltd provides computer design services to overseas clients. The company’s accountant has informed the chief executive officer that there are three alternative value added tax (VAT) policies which Design Ltd can choose to adopt:
(1) Taxable
(2) Zero rated
(3) VAT exempt
The following items from Design Ltd’s budget for 2016 are relevant to its VAT position:
Design Ltd
(i) Value added tax (VAT) payable/refundable for the year 2016
(ii) Gross profit for the year 2016
(b) State ONE major reason for the tax reform of merging business tax into value added tax.
Major reasons for the merger of business tax and value added tax (VAT) are:
– Reduce the tax burden by eliminating double taxation.
– Encourage capital (fixed assets) investment by service industries.
(a) Mrs Li had the following sources of income in the year 2015:
(1) She won a prize of RMB876,000 from the Sports Lottery.
(2) She received an insurance compensation of RMB60,000 from a medical and life policy. She had paid a premium of RMB40,000 for this policy.
(3) She placed RMB150,000 on a time deposit account with a bank for six months and received interest at the rate of 6% per annum.
(4) She received a villa from her husband as part of their divorce settlement. The villa had cost RMB5,000,000 and is currently valued at RMB9,500,000.
(5) She had invested in SH Petro, an A-share listed company, in 2010 and in October 2015 received a dividend of RMB5,000 from this company.
(6) She sold the shares in her personal company to a foreign investor and received RMB8,000,000 for agreeing not to compete in the same business for three years.
Required:
Calculate the individual income tax (IIT) payable by Mrs Li on each of her items of income (1) to (6) for 2015. Clearly identify any item(s) which are not taxable as either ‘tax exempt’ or ‘not subject to IIT’.
Note: Ignore value added tax and business tax.
Mrs Li – Individual income tax (IIT) for 2015
(1) Sports lottery prize: (876,000 x 20%) = RMB175,200
Tutorial note: A prize of RMB10,000 or less is exempt from IIT.
(2) Insurance compensation: exempt from IIT. [Article 4, IIT Law]
(3) Interest on time deposit with a bank: temporarily exempt from IIT.
(4) Villa received from a divorce: not subject to IIT. [Tax notice Guo Shui Fa (2009) No. 121]
(5) Dividend from a listed company on shares held for over one year: temporarily exempt from IIT. [Tax notice Cai Shui (2015) No. 101]
(6) Non-competition payment: (8,000,000 x 20%) = RMB1,600,000
Tutorial note: Taxed as incidental income according to tax notice Caishui (2007) No. 102.
(b) Ms Wu is an expatriate working and living in Guangzhou. Her remuneration package for 2015 is as follows:
Ms Wu – IIT on employment income for 2015
(c) Mr Huang is a China tax resident who has to file an annual individual income tax (IIT) return for 2015. His income and IIT withholding status for 2015 are as follows:
(a) GFH Ltd, a manufacturing company set up in Xi’an, produces and sells integrated circuits to an overseas associated company. It has not applied for the tax incentives for integrated circuits enterprises. GFH Ltd’s statement of profit or loss for the year ended 31 December 2015 is as follows:
Enterprise income tax (EIT) for 2015
(b) The company’s accountant has proposed that GFH Ltd should apply for the following enterprise income tax (EIT) incentives for the year 2015:
(1) a qualified integrated circuit enterprise; and
(2) an encouraged industry under the Central and Western catalogue.
Required:
State the preferential treatments available under each of these two enterprise income tax (EIT) incentives.
Preferential treatments available
(1) Qualified integrated circuit enterprise: a two-year exemption and three-year half rate of EIT starting from the first profit making year.
(2) Encouraged industry under the Central and Western catalogue: 15% tax rate until the end of 2020.