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
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) Lizz Ltd borrowed RMB8,000,000 for a period of one year from 1 May 2016 to 30 April 2017, from a foreign bank with headquarters in the United Kingdom. Interest is charged at the rate of 12% per annum net of China withholding tax (enterprise income tax (EIT)) and value added tax (VAT).
Required:
Calculate the value added tax (VAT) and withholding tax (enterprise income tax (EIT)) to be withheld from the interest payable to the foreign bank and the total gross interest cost for Lizz Ltd.
Note: There is no tax treaty reduced rate available for interest income.
Lizz Ltd – Interest payable to foreign bank
(b) Wawa Ltd is a Chinese tax resident enterprise. The foreign incomes and foreign taxes paid by Wawa Ltd in 2016 are summarised below:
Wawa Ltd – Enterprise income tax (EIT) on foreign income for 2016
(c) FFF Insurance Co Ltd is an insurance company registered in the United States, which has registered a branch in Shanghai.
Required:
State and briefly explain whether FFF Insurance Co Ltd is a China tax resident enterprise or a non-resident enterprise.
FFF Insurance Co Ltd is a non-resident enterprise.
It is registered outside China with a place of management outside China.
(a) Chen joined U-Chat Ltd as their chief financial officer on 1 May 2016. U-Chat Ltd is the subsidiary of U-Connect which is a company listed on the New York Stock Exchange. The following information relates to Chen’s entitlements and transactions in relation to his employee’s stock option scheme:
Chen – Individual income tax (IIT)
(b) Ms Huang, a Chinese citizen, is employed by Egg Ltd. For the year from 1 January 2016 to 31 December 2016, she was seconded to the Hong Kong Special Administrative Region (HK). All of her payroll costs during this secondment were borne by Egg Ltd. Details of Ms Huang’s payroll for the month of December 2016 are as follows:
Ms Huang – Individual income tax (IIT)
(i) IIT withheld by Egg Ltd
(a) Wee Ltd is considering the following two business models for the production of kitchen utensils for export.
Wee Ltd – Value added tax (VAT)
(b) Scarce Ltd purchases and exports copper alloys from China to Japan. It purchased copper alloys at a cost of RMB200,000 and obtained a value added tax (VAT) special invoice with input VAT of RMB34,000.
In September 2016, Scarce Ltd exported the copper alloys for the export price of USD60,000 on a cost including freight and insurance (CIF) basis. The insurance and freight costs paid by Scarce Ltd for the shipment of the alloys from China to Japan were USD3,000.
Required:
(i) Calculate the amount of export customs duty payable on the copper alloys.
Note: The export customs duty rate of copper alloys is 30%.
(ii) Calculate the amount of export value added tax (VAT) refund due to Scarce Ltd on the export of the copper alloys.
Note: The export VAT refund rate is 9%.
Scarce Ltd – Customs duty and value added tax (VAT)
(c) Koo Ltd had the following transactions in August 2016:
(1) Imported 50 luxury watches at a cost of USD2,000 each, on a cost including freight and insurance (CIF) basis, from Switzerland.
(2) Paid transportation costs totalling RMB3,000 to deliver the watches after landing at the port to its warehouse.
(3) On arrival at the port, two watches were found to be damaged. The Swiss supplier replaced these with two new watches free of charge and sent the new watches to China by courier. Koo Ltd was allowed to keep the two damaged watches.
Required:
Calculate the amount of customs duty and consumption tax (CT) payable by Koo Ltd on each of the transactions of importation of the 50 watches and the two replacement watches.
Notes:
1. The customs duty rate on watches is 15%.
2. The consumption tax (CT) rate for luxury watches is 60%.
Koo Ltd – Customs duty and consumption tax (CT)
(a) GY Ltd is a property developer. The information below relates to a residential property recently developed by GY Ltd. The development was started on 1 July 2016 and completely sold in January 2017.
GY Ltd – Land appreciation tax (LAT)
(b) The following transactions relate to the transfer or alienation of real estate by various entities/persons:
(1) The local government transferred a land use right to AK Ltd for RMB18 million in 2012.
(2) AK Ltd contributed the land use right as registered capital of AGL Ltd in 2014, when the land use right was valued at RMB25 million.
(3) AGL Ltd used the land to develop standard residential property units, which it sold in 2014. The land appreciation rate was 15%.
(4) In December 2016, Mr Wu gave a unit of the property to his son as a marriage gift when the property was valued at RMB8 million. Mr Wu had bought the unit of property from the developer for RMB4 million in 2014.
(5) Min Ltd acquired ten units of the property from the developer in 2014 as staff dormitories and pledged them to the bank to get a mortgage loan.
(6) In 2016 Mrs Xie sold a unit of the property for RMB5 million. She had bought the property from the developer for RMB3 million in 2014 for use as accommodation for her family.
(7) In 2020 Kur Ltd sold a unit of the property for RMB6 million, which it had bought from the developer for RMB3·3 million in 2014.
(8) Lill Ltd acquired two units of the property from the developer in 2014. Lill Ltd was merged by absorption by Lar Ltd, a manufacturing company, in 2016 and hence, the title of the property was transferred to Lar Ltd.
Required:
State whether each of the above transactions is ‘taxable’, ‘exempt’ or ‘not subject to’ land appreciation tax (LAT).
Note: You are not required to give reasons for your answers.
Liability to land appreciation tax (LAT)
(1) Not subject to LAT
(2) Taxable
(3) Exempt from LAT [standard residential property with land appreciation of less than 20%]
(4) Not subject to LAT
(5) Not subject to LAT
(6) Exempt from LAT [sale of residential property by an individual is temporarily tax exempt]
(7) Taxable
(8) Not subject to LAT [neither Lill Ltd nor Lar Ltd are engaged in the real estate industry, so the merger is temporarily not taxable]
(a) Lei started selling handicrafts via e-commerce on 1 January 2016. His sales are around RMB35,000 each month but to date he has not set up any formal structure for his handicrafts business and has not paid any taxes.
Required:
State, with reason, whether Lei should be tax registered.
Tax registration
As an individual, Lei cannot be tax registered even though he is carrying out business transactions as this is outside the scope of tax registration under the Tax Collection and Administrative Law.
(b) Lei is considering the following three options for running his business. The business’s forecast results for 2017 under each option is as follows:
(i) Individual income tax (IIT)
(c) Lei decided to operate his business in the form of a limited company, EE Ltd. EE Ltd is registered as a value added tax (VAT) general taxpayer and in 2017 made the following payments:
(1) USD100,000 for the importation of smart phones, purchased from Alima Ltd, a US company.
(2) A royalty of RMB100,000 (net of all China taxes) for the use of a patent licensed to it by Cal plc, a UK company.
Required:
State, with reasons, whether EE Ltd will be a withholding agent in respect of the payments made to Alima Ltd and Cal plc, and if so, in respect of which taxes.
Note: Calculations of the taxes are not required.
EE Ltd – Obligations as a withholding agent
The payment to Alima Ltd is for a sale of goods, the profit on which is not sourced from China. EE Ltd will not be a withholding agent in respect of this payment.
The payment to Cal plc is a payment to a non-resident enterprise in respect of China sourced income (a royalty). Therefore, EE Ltd is a withholding agent in respect of this payment.
EE Ltd has an obligation to withhold both enterprise income tax (EIT) (withholding tax) at 10% and value added tax (VAT) at 6%.
(d) Mr Liu, a Chinese citizen, earned the following gross director’s fees in the year 2016:
Mr Liu – Individual income tax (IIT)
(a) Biocat Ltd is a high and new technology enterprise. The company’s statement of profit or loss for the year ended 31 December 2016 is as follows:
Except where stated otherwise, the following items are all included in the financial statement figures:
Enterprise income tax (EIT) for 2016
(b) Biocat Ltd invested in a subsidiary, Silvercat Ltd, in 2016. Silvercat Ltd is expected to make a loss in 2017.
Required:
State, with reason, whether it will be possible to offset Silvercat Ltd’s 2017 loss against Biocat Ltd’s 2017 profit for enterprise income tax (EIT) purposes.
The loss of Silvercat Ltd cannot be offset against (deducted from) the profit of Biocat Ltd because there is no consolidated tax filing available for a parent and subsidiary in China.