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 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 A is a foreign investment enterprise set up in China, which manufactures and sells solar power equipment. The only shareholder of Company A is Solar Ltd, a company incorporated in the British Virgin Islands (BVI). The following is a summary of Company A’s income statement for 2013.
Notes:
Company A
(i) Enterprise Income Tax (EIT) Treatment
(1) A down payment for sales in 2014 should not be treated as income in the current year but as an advanced receipt. The amount of turnover should be reduced by RMB 10,000.
(2) The amount should be recognised as sales in 2013. No adjustment is required. 1
(3) Normal wastage is deductible. No adjustment is required. 1
(4) Interest on a shareholder’s loan at a rate lower than the market rate is deductible. No adjustment is required.
(5) An unrealised foreign exchange loss is deductible. No adjustment is required. 1
(6) Compensation to a customer is deductible. No adjustment is required.
(7) 60% of the amount incurred is RMB 6,000 (RMB 10,000 x 60%) but the deductible amount is capped at the limit of entertainment expenses of RMB 9,200 (RMB 1,840,000 x 0.5%).The excess amount brought forward from last year is not deductible. An amount of RMB 4,000 (RMB 10,000 – 6,000) should be added to taxable profit.
(8) The deduction limit for advertising expenses is RMB 276,000 (RMB 1,840,000 x 15%). The amount exceeding the deduction limit brought forward can also be deducted in the current year within the limit. The extra amount deductible is RMB 216,000 (RMB 276,000 – 60,000).
(9) The foreign tax withheld is not deductible but should be treated as a foreign tax credit. The amount of RMB 800 should be added to profit and credited against the enterprise income tax (EIT) payable.
(10) Interest income from national bonds is tax exempt.
(11) A dividend paid to a shareholder is not deductible and the amount of RMB 100,000 should be added to taxable profit.
(ii) Enterprise income tax (EIT) payable for 2013
(b) An overseas company, P Ltd, provided management services to a China customer for a gross service fee of RMB 100,000. P Ltd is considered as having a China permanent establishment by the tax bureau, which has assessed a deemed profit rate of 50% on the service fee earned by P Ltd.
Required:
(i) Calculate the business tax and enterprise income tax (EIT) payable by P Ltd on the service fee.
(ii) State the circumstances in which the tax authorities can assess the taxable profit of a non-resident enterprise on a deemed basis.
P Ltd
(i) Business tax (BT) and enterprise income tax (EIT) payable
(c) (i) State the FOUR types of tax exempt income for enterprise income tax (EIT) purposes.
(ii) Briefly explain the tax treatment of expenses incurred to earn non-taxable income and tax exempt income.
(i) The following types of income are exempt:
– Interest on national bonds
– Income from equity investments such as dividends and bonuses (profit) between qualified resident enterprises
– Income received by the China establishment of a non-resident enterprise from equity investments such as dividends and bonuses (profit) from a resident enterprise, where the income is effectively connected with the China establishment
– Donations received by a qualifying non-profit making organisation
(ii) Expenses incurred in relation to non-taxable income are not deductible but expenses incurred in relation to tax exempt income are deductible.
(d) Company Cap demolished its old factory building and constructed a new one in 2013. The following information relates to these transactions in 2013:
(1) The cost of the old factory building was RMB 400,000 and its net book value as at 1 January 2013 (for both accounting and taxation purposes) was RMB 60,000. The old factory was demolished on 1 January 2013.
(2) Materials were transferred from inventory for the construction of the new factory. The cost of these materials was RMB 90,000 and their selling price was RMB 100,000.
(3) To finance the construction of the new factory, a loan of RMB 500,000 was borrowed from 1 January 2013 at an interest rate of 8% per annum. The loan was repaid on 31 December 2013.
(4) A construction company was engaged to build the new factory with a contract sum of RMB 700,000.
(5) The new factory building was completed on 15 November 2013 and started operations from 16 November 2013.
(6) Company Cap adopted an economic life for the new factory building of 20 years and a residual value of 10%, for both tax and accounting purposes.
Required:
(i) Calculate the cost base of the new factory building for depreciation purposes.
(ii) Calculate the amount of depreciation on the new factory building for 2013.
Company Cap
(i) Cost base of new factory building
(ii) Depreciation for 2013
(a) Mr Chen, a Chinese national, was hired by an IT company in 2012. His employer has proposed the following two alternative remuneration packages both with a total of RMB 300,000 to him for 2013:
Plan 1: A salary of RMB 17,500 each month for 12 months and an annual bonus of RMB 90,000.
Plan 2: A salary of RMB 5,000 each month for 12 months, a special award in June of RMB 120,000 and an annual bonus in December of RMB 120,000.
Required:
Calculate the total individual income tax (IIT) payable by Mr Chen for the year 2013 in respect of each of the two plans.
(a) Mr Chen – Individual income tax (IIT) for 2013
Plan 1:
IIT each month = (17,500 – 3,500) x 25% – 1,005 = RMB 2,495
For bonus, find tax rate: 90,000 ÷ 12 = 7,500 which is 20%
IIT on bonus = 90,000 x 20% – 555 = RMB 17,445
Total IIT for the year = (2,495 x 12) + 17,445 = RMB 47,385
Plan 2
IIT each month except for June = (5,000 – 3,500) x 3% = RMB 45
IIT for June = [(120,000 + 5000) – 3,500] x 45% – 13,505 = RMB 41,170
For bonus, find tax rate: 120,000 ÷ 12 = 10,000 which is 25%
IIT on bonus = 120,000 x 25% – 1,005 = RMB 28,995
Total IIT for the year = (45 x 11) + 41,170 + 28,995 = RMB 70,660
Tutorial note: Only one bonus can apply the special method to calculate IIT. Another bonus payment will be added together with the salary of that month and taxed accordingly.
(b) Ms Li, a Chinese national, earned the following income in 2013.
(1) Coupons for RMB 200 which were given as a result of her bulk buying when she bought groceries from a supermarket for RMB 1,500. She used the coupons to purchase groceries in the next month.
(2) Won a lottery prize of a smart phone with a value of RMB 3,000 from a supermarket. The supermarket has agreed to bear the individual income tax (IIT) payable by the winners.
(3) Received bank deposit interest of RMB 2,000.
(4) Lent Company W RMB 100,000 for a year at an interest rate of 15% per annum.
(5) Wrote a long article for the newspaper, PP Daily, which was published on three days from 1 to 3 February and received a fee of RMB 1,500 for each day.
(6) As the independent non-executive director of a listed company, received a director’s fee of RMB 10,000 each month, i.e. a total of RMB 120,000 for the year.
(7) Received employment income from two separate employments as follows:
– from a retail shop for the period 1 to 15 April, a salary of RMB 2,800; and
– from a restaurant for the period 16 April to 30 April, a salary of RMB 2,500.
Neither the retail shop nor the restaurant withheld any IIT for her.
Required:
Calculate the individual income tax (IIT) payable by Ms Li for 2013 in respect of each of the items of income (1) to (7). State clearly any item(s) which are ‘exempt from IIT’ or ‘not subject to IIT’.
Ms Li – Individual income tax (IIT) for 2013
(1) Coupons from a supermarket for bulk buying are not subject to IIT
(2) IIT on the lottery prize of a smart phone: 3,000÷ (1 – 20%) x 20% = RMB 750
(3) Bank deposit interest is temporarily exempt from IIT
(4) Interest income = 100,000 x 15% = RMB 15,000
IIT on interest = 5,000 x 20% = RMB 3,000
(5) Published in PP Daily for three days is treated as one income for IIT purposes.
IIT = (1,500 x 3) x (1 – 20%) x (1 – 30%) x 20% = RMB 504
(6) A director’s fee is taxed as service income and the payments received each month are considered as received on one occasion.
IIT each month = 10,000 x (1 – 20%) x 20% = RMB 1,600
IIT for whole year = 1,600 x 12 = RMB 19,200
(7) Salary for the whole month of April = (2,800+ 2,500) = RMB 5,300
IIT for the whole month = (5,300 – 3,500) x 10% - 105= RMB 75
(c) (i) Mr Zhang has a China domicile. In 2013, he was seconded to Hong Kong to work and earned a salary from this Hong Kong employment. After his secondment, he will return to China.
Required:
State, giving reasons, whether Mr Zhang will be taxable in China on the salary from his Hong Kong secondment.
(ii) Ms Robin is a model working in the Hong Kong Special Administrative Region. Her Hong Kong employer sent her to China for a fashion show for five days in 2013. She earned a salary from her work at the fashion show. Except for this fashion show, Ms Robin did not spend any time in China in 2013.
Required:
State, giving reasons, whether Ms Robin will be taxable in China in 2013.
(i) Mr Zhang
Mr Zhang is a China tax resident. He is subject to IIT on income sourced from China and outside China (i.e. worldwide tax) including income earned in Hong Kong.
(ii) Ms Robin
Ms Robin is a non-resident. She is taxable on China-sourced income. Since her stay in China was less than an aggregate of 90 days (or 183 days in any 12 month period under the Avoidance of Double Taxation Arrangement with the HKSAR), her employment income will be exempt from China IIT.
(d) Mr Wang is a China tax resident. In 2013, Mr Wang’s only income was employment income of RMB150,000 and his employer withheld the correct amount of individual income tax for him.
Required:
(i) State whether Mr Wang is required to submit an annual individual income tax (IIT) return.
(ii) State the tax filing deadline for the annual IIT return for the year 2013.
Mr Wang
(i) Mr Wang is required to submit an annual IIT return as his income exceeds RMB 120,000.
(ii) The filing deadline for the annual IIT return is 31 March 2014.
(a) Electronic Ltd is a newly set up retail company selling computer accessories. Electronic Ltd’s finance manager prepared the following budget for 2013:
(1) Sales of goods to individual customers at a value added tax (VAT) inclusive price of RMB 780,000.
(2) Purchases of goods from a VAT general taxpayer at a VAT exclusive price of RMB 600,000.
Required:
(i) Calculate the value added tax (VAT) payable by and the gross profit of Electronic Ltd for 2013, if it is a VAT general taxpayer.
(ii) Calculate the VAT payable by and the gross profit of Electronic Ltd for 2013 if it is a small-scale taxpayer.
Electronic Ltd
(i) Value added tax (VAT) payable as a general taxpayer
(ii) VAT payable as a small scale taxpayer
VAT payable = (780,000 ÷ 1·03 x 3%) = RMB 22,718
Gross profit if Electronic Ltd is a small scale taxpayer
(b) Clothy Ltd is a factory producing garments for export, it does not have any domestic sales in China. The costs of production of the garments sold by Clothy Ltd in 2013 comprised:
(1) Raw materials of RMB 200,000 purchased for which special value added tax (VAT) invoices were received.
(2) Wages and salaries of RMB 50,000.
(3) Overhead costs for water, electricity, transportation, etc with a total input VAT of RMB 10,000, all of which are supported by valid VAT invoices.
Clothy Ltd had two options for the export of all of the garments produced in 2013:
(i) To export them itself, directly to an overseas customer for a price of RMB 400,000; or
(ii) To sell the garments to a Chinese trading company for a price of RMB 360,000 and the trading company will then export the garments to the overseas customer at a price of RMB 400,000.
The VAT refund rate for garments is 16%.
Required:
(i) Calculate the export value added tax (VAT) refundable to Clothy Ltd for the direct export of the garments.
(i) Calculate the export value added tax (VAT) refundable to Clothy Ltd for the direct export of the garments.
Clothy Ltd
(i) Value added tax (VAT) refundable to Clothy Ltd for direct export
(c) Toyly Ltd had the following transactions in 2013:
(1) Sold goods for cash-on-delivery in August and the customer paid in September.
(2) Sold goods on credit terms of 30 days after delivery. The goods were delivered in February.
(3) Sent goods on consignment to the consignee in March. The consignee sold the goods in May and passed a statement of the sale to Toyly Ltd also in May.
(4) Sent goods to a branch in another province for sale in November. The branch sold the goods in December.
(5) Received money from Customer X and issued a VAT invoice for the goods in June, but did not deliver the goods until July.
Required:
In the case of each of the transactions (1) to (5), state the month in which Toyly Ltd’s value added tax (VAT) liability will crystallise.
Toyly Ltd
Month VAT liability crystallises:
(1) August
(2) March (30 days after delivery in February which is March)
(3) May
(4) November
(5) June
(d) Softko Ltd, a software development company, is a value added tax (VAT) general taxpayer. Softko Ltd had the following transactions in October 2013. All amounts are exclusive of VAT unless stated otherwise.
(1) Paid a software fee of USD2,000 to an overseas supplier. VAT was withheld and paid to the tax bureau.
(2) Purchased ten computers as fixed assets for RMB 100,000. A special VAT invoice was obtained. The computers are used for both taxable and tax exempt services and are used around 20% of the time to provide VAT exempt services.
(3) Paid a software house, which is a small-scale taxpayer, a gross amount of RMB 30,000 inclusive of VAT. A special VAT invoice issued via the tax bureau was obtained.
(4) Hired a coach for transporting its staff from the metro-station to the office for RMB 50,000. A special VAT invoice was obtained.
(5) Acquired a mainframe computer for RMB 40,000, specifically for the development of some software for an overseas customer. A special VAT invoice was obtained. Softko Ltd has applied for VAT exemption on the export of the software overseas.
Required:
Calculate the input value added tax (VAT) of Softko Ltd for the month of October 2013. Clearly identify any item(s) for which input VAT is not creditable and state the reason.
Softko Ltd
Input value added tax (VAT) for October 2013
(1) VAT withheld = 2,000 x 6 x 6% = RMB 720
(2) VAT on fixed assets = 100,000 x 17% = RMB 17,000
(3) Input VAT from small scale taxpayer = 30,000 ÷1·03 x 3% = RMB 874
(4) VAT in relation to staff welfare is not creditable
(5) VAT on assets specifically for providing tax exempt services is not creditable
Tutorial note on item (2): No adjustment is needed for fixed assets partially used for the provision of VAT exempt services.
(a) The following transactions were undertaken by the persons indicated in 2013:
(1) A university set up by the local government received tuition fees of RMB 170,000 from students studying for bachelor degrees.
(2) A property developer sold used computers for RMB 20,000.
(3) A factory received rent of RMB 48,000 from sub-leasing an unused area.
(4) A trading company received bank interest income of RMB 10,000.
(5) A trading company received interest income of RMB 38,000 from lending to another company.
(6) A construction company provided construction services for RMB 500,000.
(7) The government transferred a land use right to a property developer for RMB 26,000,000.
(8) A company used a trademark valued at RMB 320,000 as a capital contribution to another company.
(9) A hotel charged a customer a total fee of RMB 1,300, of which RMB 100 was for the soft drinks from the refrigerator.
(10) A son received a villa valued at RMB 2,000,000 from his father’s estate.
(11) A property management company received a total of RMB 24,000 from tenants, of which RMB 12,000 was for the allocation of electricity and water costs to the tenants and RMB 8,000 was for the salaries of the guards.
Required:
In each of the cases (1) to (11), calculate the business tax payable where relevant, and where not relevant, state clearly whether the transaction is ‘subject to VAT instead of business tax’ or ‘exempt from business tax’ or ‘not subject to business tax’.
Note: Marks will not be given for stating ‘not taxable’.
Business tax (BT) payable
(1) Exempt from BT [education services provided by qualified schools are exempt from BT]
(2) Subject to VAT instead of BT
(3) BT on rental: 48,000 x 5% = RMB 2,400
(4) Exempt from BT
(5) BT on interest from another company: 38,000 x 5% = RMB 1,900
(6) BT on construction services = 500,000 x 3% = RMB 15,000
(7) Not subject to BT [transfer of land use right by government is not subject to BT but the transfer of which by other entities is subject to BT]
(8) Not subject to BT
(9) BT is based on the total fee: 1,300 x 5% = RMB 65
(10) Exempt from BT
(11) BT on receipts from tenants: (24,000 – 12,000) x 5% = RMB 600
Tutorial note: Per notice CaiShui [2003] No. 16, the allocation of electricity and water charges paid on behalf of the tenants can be deducted from the BT base but the allowed deductions do not include the salaries of the guards.
(b) Cosmet Ltd, produces and sells cosmetics. Currently, Cosmet Ltd makes three standard types of goods with selling prices and costs as follows. All amounts are stated exclusive of value added tax (VAT).
Cosmet Ltd – Consumption tax (CT) payable
(1) CT for rouge and lipstick sets: 100 x 4,200 x 30% = RMB 126,000
(2) CT for hand cream and lipstick sets: 50 x 1,000 x 30% = RMB 15,000
Tutorial note: The hand cream is also taxable as it is sold in a set.
(3) CT on gifts: 100 x 40 x 30% = RMB 1,200
(4) Not subject to CT [further sale of purchased goods].
(a) State the FIVE methods which the tax authorities can use to carry out a special tax adjustment (transfer pricing adjustment) where a transaction is not conducted at arm’s length.
The five special tax adjustment methods are:
(1) Comparable uncontrolled price method
(2) Resale price method
(3) Cost plus method
(4) Transaction net margin method
(5) Profit split method
(b) Company D underpaid its enterprise income tax (EIT) for the year 2012 by RMB 230,000 because it overstated its deductible expenses by using fraudulent invoices for its annual tax filing. The tax bureau discovered the overstatement of expenses and considered it as an act of tax evasion and imposed a penalty on Company D. Company D settled the underpaid tax on 31 July 2013.
Required:
(i) Calculate the amount of late payment surcharge which Company D would have had to pay when it settled the underpaid tax on 31 July 2013.
(ii) State the range of penalties which the tax bureau could have imposed on Company D.
Company D
(i) Late payment surcharge
The due date for the enterprise income tax (EIT) for 2012 would have been 31 May 2013. The late payment surcharge will be calculated for 61 days (June: 30 days, July: 31 days) The surcharge due is therefore: 230,000 x 0.05% x 61 days = RMB 7,015.
(ii) The penalties which the tax bureau can impose in the case of an act of tax evasion range from 50% to 5 times the tax understated.
(c) The accountant of Company E wrongly typed income of RMB 10,000 as RMB 100,000 in the company’s tax return for February 2008 and as a result Company E overpaid its business tax by RMB 4,500.
Required:
State, giving reasons, whether Company E can obtain a refund of the business tax overpaid from the tax bureau in 2014.
Company E
Company E cannot get a tax refund from the tax bureau as a taxpayer can only get a refund of tax overpaid if they discover this is the case within three years.