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 2017. The new rules issued from 1 October 2017 onwards are not examinable in the 2018 exams.
(a) (i) Ms Zheng has citizenship and family in China. She was seconded to work in Singapore and has not returned to China since 2012. She receives her salary in Singapore.
(ii) Mr Liu is a UK citizen and is employed by a UK employer. He was seconded to China from 1 January 2017. He stayed in China for 60 days in 2017. His salary was paid in the UK.
(iii) Miss Xu is a UK citizen and is not domiciled in China. She started working in China from 1 January 2012 and has not left China since. She receives interest income from a bank in the UK in 2017.
Required:
State, with reasons, whether the income mentioned for each of the above persons is taxable in China in the year 2017.
(i) Ms Zheng has China domicile and is subject to China individual income tax (IIT) on her worldwide income. Her overseas salaries income is taxable.
(ii) Mr Liu does not have China domicile and stayed in China for no more than 90 days in the calendar year (or 183 days under tax treaty) and his income is not borne or paid by any China entities. His salary is tax exempt in China.
(iii) Miss Xu does not have China domicile and she has stayed in China for five consecutive years (2012 to 2016). She is subject to worldwide tax from the sixth year onwards if she resides in China for the full 2017 year. Her interest income is taxable in China.
(b) Mr Ou is a Chinese citizen who retired in 2016. During a sight-seeing visit to Malaysia in August 2017, he received winnings from a Malaysian lottery of USD200. He paid Malaysian tax of USD30 on his winnings. He filed an annual individual income tax (IIT) return, for the tax year 2017, in China, and paid the tax due before the deadline in 2018.
Required:
(i) State the FOUR circumstances in which individual income tax (IIT) annual self-filing is required. Note: No marks will be given for stating ‘other’.
(ii) State the date by which Mr Ou would have been required to submit an annual IIT return for the year 2017.
(iii) Calculate the IIT payable by Mr Ou for the year 2017.
Mr Ou
(i) Circumstances in which individual income tax (IIT) annual self-filing is required:
An individual who derives
– annual income of over RMB120,000; or
– wages and salaries from two or more sources in China; or
– overseas income; or
– taxable income but with no withholding agent.
(ii) 31 March 2018.
(iii)IIT on lottery income (USD200 x 6 x 20%)
Less: Foreign tax credit (USD30 x 6)
IIT payable
(a) During a tax audit in October 2017, Horse Ltd was challenged by the district tax bureau on the following issues:
– Under-withholding of individual income tax (IIT) on employees’ salaries of RMB100,000 for the year 2015; and
– Underpaying enterprise income tax (EIT) of RMB150,000 for the year 2016 through using fraudulent invoices.
The tax notice required Horse Ltd to settle the above amounts by 31 October 2017.
Required:
(i) Calculate the penalty range on the under-withholding of individual income tax (IIT).
(ii) Calculate the penalty range on underpayment of enterprise income tax (EIT).
(iii) Calculate the late payment surcharge on EIT if Horse Ltd settled the EIT on 31 October 2017.
Horse Ltd
(i) The penalty on under-withholding of individual income tax (IIT) ranges from 50% to three times the outstanding tax under-withheld (i.e. RMB50,000 to RMB300,000).
(ii) The penalty on tax evasion ranges from 50% to five times the tax evaded (i.e. RMB75,000 to RMB750,000).
(iii) The late payment surcharge at 0·05% per day counting from 1 June 2017 to 31 October 2017 (30 + 31 + 31 + 30 + 31 days), i.e. RMB150,000 x 0·05% x 153 days = RMB11,475.
(b) Horse Ltd paid the taxes, penalty and late payment surcharge on 31 October 2017. Due to other non-compliance issues, the company was downgraded to Grade D by the district state tax bureau in July 2018 and ceased to receive export value added tax (VAT) refunds from July 2018. In August 2018, Horse Ltd decided to appeal against the tax audit results, referred to in part (a) above, and the downgrading.
Required:
(i) State, with reasons, whether in August 2018, Horse Ltd can appeal against the tax audit results referred to in part (a) above.
(ii) State, with reasons, whether Horse Ltd can appeal against its downgrading by the tax bureau in August 2018 and explain which bureau the appeal should be submitted to.
Horse Ltd
(i) Horse Ltd cannot appeal against the tax audit results. This is because an appeal should be submitted within 60 days of paying the tax, penalty and late payment surcharge. Since the amount was paid on 31 October 2017, the appeal would need to have been made no later than 31 December 2017. As it is now August 2018, it is too late.
(ii) Horse Ltd could appeal against the tax administrative decision of downgrading in August 2018 since it is within 60 days of the decision. It could appeal to the city level state tax bureau.
(c) State any THREE circumstances in which the tax authorities can assess the enterprise income tax (EIT) of a resident taxpayer on the deemed basis.
The circumstances in which the tax authorities can assess the enterprise income tax (EIT) of a resident taxpayer on the deemed basis:
– The taxpayer does not need to keep accounting records under the law.
– The taxpayer should keep accounting records but has not.
– The taxpayer destroys the accounting records without approval.
– The taxpayer refuses to provide tax information.
– The taxpayer has kept accounting books but the information on costs and vouchers on income and expenses are incomplete and cannot be audited.
– The taxpayer is liable to tax but has not filed their tax return on time and, after being requested to by the tax authorities, the taxpayer still has not filed their tax return on time.
– The tax base included in the tax return filed is obviously low and without legitimate reason.
(a) GH Ltd is a construction company set up in Shanghai and pays enterprise income tax (EIT) at 25%. XY Ltd is its holding company and is based in the Cayman Islands. The average amount of net equity of GH Ltd was RMB4,000,000 in 2017. The manager of GH Ltd proposes that XY Ltd provides a loan of RMB10,000,000 to GH Ltd, on which GH Ltd pays interest to XY Ltd at a rate of 20% per annum (inclusive of all China taxes). Hence, the interest will reduce the taxable profit of GH Ltd.
Required:
(i) Calculate the value added tax (VAT) and enterprise income tax (EIT) (withholding tax) on the annual interest income payable to XY Ltd.
Note: You should ignore surtaxes on VAT.
(ii) Calculate the interest deductible by GH Ltd in 2017 according to the thin capitalisation rules if the market interest rate is 7% per annum.
GH Ltd/XY Ltd
(i)
(b) Lont Pte Ltd is a Singapore company which carried out the following transactions in 2017:
(1) Sold goods to its Chinese customers for RMB5,500,000 and earned a profit of RMB520,000.
(2) Received a royalty from a Chinese company, Tstar Ltd, of RMB700,000.
(3) Sold shares held in a Beijing company for RMB8,000,000 and made a gain of RMB4,800,000.
(4) Received a fee of RMB260,000 (tax inclusive) on the provision of services in China. Lont Pte Ltd has created a permanent establishment in China for the provision of these services. The China tax authorities assessed a deemed profit rate of 30% on the service fee.
(5) Leased an aircraft, without a crew, to an airlines company in China at a rent of RMB3,300,000. The depreciation of the aircraft amounts to RMB2,700,000.
Note: Each of the above items is an isolated transaction.
Required:
Calculate the enterprise income tax (EIT) for each of the above items of income (1) to (5) received by Lont Pte Ltd in 2017. Indicate by the use of a zero (0) any item which is not subject to EIT.
Note: You should ignore value added tax (VAT) and ignore tax treaty reduction.
Lont Pte Ltd
(a) KT Ltd manufactures and sells gadgets via the internet. KT Ltd is a value added tax (VAT) general taxpayer. It carried out the following transactions in March 2018.
(1) Purchased raw materials for RMB600,000, excluding VAT of RMB102,000, as shown on the VAT special invoice. 70% of the materials were used in production and 30% remained in stock in the warehouse.
(2) Paid a transportation fee of RMB10,000, excluding VAT of RMB1,100, as shown on the VAT special invoice.
(3) Paid rent to the landlord of RMB25,000, excluding VAT of RMB1,250 as shown on the VAT ordinary invoice issued by the landlord.
(4) Purchased canned food and soft drinks for the staff canteen for RMB8,000, excluding VAT of RMB1,360, as shown on the VAT special invoice.
(5) Purchased new machinery for RMB800,000, excluding VAT of RMB136,000, as shown on the VAT special invoice. It is expected the machinery can be used for a period of five years.
(6) The normal price of gadgets is RMB44 for each piece. KT Ltd offered a promotion campaign where customers can receive a coupon worth RMB5 which can be used against the purchase of each gadget. The coupon cannot be exchanged for cash. In addition, customers who register as KT Club members can receive one gadget free of charge. The above prices are VAT inclusive.
The following table shows the number of gadgets sold to or received free of charge by customers in March 2018:
KT Ltd
(i) Input value added tax (VAT)
(ii) Output VAT
(b) Explain the differences in VAT treatment between ‘exempt’ and ‘zero rated’ supplies.
Under the value added tax (VAT) exemption, there is no taxable supply, no output VAT on sales, and input VAT is not recoverable or refundable.
Under zero rated, there is a taxable supply, output VAT on sales is at 0% and input VAT can be recoverable or refundable.
(a) Wonder Ltd is the subsidiary of a group with its parent company listed on the New York Stock Exchange. The human resources manager is not sure how to calculate the individual income tax (IIT) liability for each of the following persons:
(1) Mr Wang is an independent non-executive director who received a director’s fee of RMB40,000 in January 2018. He donated RMB1,800 of this to the China Red Cross.
(2) Ms Xie is the managing director and general manager of Wonder Ltd. She received salary of RMB80,000 and a director’s fee of RMB50,000 in January 2018.
(3) Mr Yao, the head of the marketing department, received a salary of RMB70,000 in January 2018 and an annual bonus of RMB1,000,000 due to his excellent work performance.
(4) Ms Zhang is the chief financial officer who joined the company in 2015. She was granted 10,000 share options in the company on 2 January 2018 when the market price was USD20 per share. The share option agreement allows Ms Zhang to exercise these options at USD1 per share. She exercised 3,000 share options on 28 January 2018 when the market price was USD19 per share. She sold 2,000 shares on 31 January 2018 when the market price was USD28 per share.
Required:
Calculate the individual income tax (IIT) liability for each of the above persons. Indicate by the use of zero (0) any transaction which is not taxable or tax exempt.
Note: Ignore value added tax (VAT) and surtaxes on VAT.
Wonder Ltd – Individual income tax (IIT)
(b) Ms Ma is a UK citizen. She started working in Beijing in January 2017. Her payslip for the month of December 2017 showed the following items:
Ms Ma – Individual income tax (IIT) in December 2017
Moon Ltd’s accounting profit before tax for the year 2017 is RMB620,000 and its turnover is RMB12,300,000. Except where stated otherwise, the following items have been included when computing the accounting profit before tax:
(1) Entertainment expenses of RMB120,000 incurred in 2017.
(2) Marketing and promotion expenses of RMB1,000,000 incurred in 2017. Excess marketing expenses brought forward from 2016, and not deducted in arriving at the accounting profit for the year 2017, are RMB350,000.
(3) Research and development (R&D) expenses of RMB160,000. Moon Ltd qualified as a small-medium sized technology enterprise and can enjoy the additional tax incentive on R&D expenses.
(4) Handicapped employees’ salaries of RMB200,000.
(5) Qualified work safety equipment at a cost of RMB150,000.
(6) A fine of RMB17,800 issued by the trademark bureau for infringement of a trademark.
(7) Staff welfare expenses of RMB461,000. Total salaries incurred were RMB4,000,000.
(8) The cost of lost inventory of RMB450,000, due to the warehouse being destroyed in a fire during the year, and insurance compensation received of RMB430,000.
(9) A special provision for doubtful debts of RMB121,000.
(10) A bad debt written off of RMB32,000 as the debtor declared bankruptcy.
(11) A specific purpose government subsidy received of RMB350,000 and related costs incurred of RMB310,000.
(12) A general purpose government subsidy received of RMB428,000.
(13) An amount owed by Moon Ltd of RMB4,000 written off to income as the creditor ceased trading.
(14) Interest income on treasury bonds of RMB8,000.
(15) Bank interest income of RMB16,500.
(16) A value added tax (VAT) refund on export of goods for RMB768,000.
(17) Dividend income from a Vietnam subsidiary of RMB90,000 (gross dividend of RMB100,000, Vietnam tax paid RMB10,000).
(18) Dividend income from a China subsidiary of RMB30,000 (profit before tax of the China subsidiary was RMB40,000 and enterprise income tax (EIT) paid of RMB10,000).
(19) Profit on the sale of A-shares of RMB60,500.
(20) A donation paid to the China Red Cross for RMB100,000.
Required:
Calculate the enterprise income tax (EIT) payable by Moon Ltd for the year 2017, assuming that Moon Ltd has made all relevant applications and reports to the tax authorities.
Notes:
1. You should start your computation with the profit before tax figure of RMB620,000 and list all of the items (1) to (20) as referred to in the question, identifying any item which does not require adjustment for tax purposes by the use of zero (0).
2. You are not required to make adjustments for any of the above items for accounting purposes.
Moon Ltd – Enterprise income tax (EIT) for 2017
