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
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 2015. The new rules issued from 1 October 2015 onwards are not examinable in the 2016 exams.
(a) Mr Chen is an employee of Cupod Ltd.
During a recent tax audit, Cupod Ltd was found not withholding any individual income tax (IIT) for Mr Chen and Mr Chen has not paid any IIT himself.
Required:
State the tax consequences for each of Mr Chen and Cupod Ltd based on the Tax Collection and Administrative Law.
Mr Chen/Cupod Ltd
Mr Chen Pay the individual income tax due.
Cupod Ltd Pay a penalty ranging from 50% to three times the tax not withheld.
(b) Biz Ltd is a property developer selling villas in Yunnan. All Biz Ltd’s accounting books and records were destroyed during an earthquake. Based on the land bureau’s records, the turnover of Biz Ltd was RMB523,420,803 in 2015.
Required:
State the most appropriate method by which the tax bureau can assess Biz Ltd’s enterprise income tax for 2015.
Note: No mark will be given for stating ‘other method’.
Biz Ltd
The tax bureau can assess the enterprise income tax due by Biz Ltd based on the deemed profit margin method.
(c) HHold Ltd, which sells household products, is a value added tax (VAT) general taxpayer. In November 2016, the tax bureau discovered that HHold Ltd had not reported sales of RMB380,750 for 2014. The district tax bureau required HHold Ltd to pay VAT and enterprise income tax on these unreported sales plus a late payment surcharge on 15 December 2016.
Required:
State the actions HHold Ltd can take if it disagrees with the decision of the district tax bureau.
HHold Ltd
Pay the value added tax (VAT) and enterprise income tax (EIT) or provide a guarantee for the tax and late payment surcharge on or before 15 December 2015.
Appeal to the city tax bureau (one senior level above the district tax bureau) within 60 days after payment of the tax and late payment surcharge.
Appeal to the court if there is disagreement with the decision of the senior tax bureau.
(d) Hit-Tech Ltd submitted an application for classification as a high and advanced technology company for 2008. In the application, Hit-Tech Ltd overstated the number of university graduates it employed in order to obtain the tax incentive of paying enterprise income tax (EIT) at the rate of 15% for 2008.
Soft Ltd, a quality inspection company set up in Chongqing, submitted an application for the Central and Western tax incentive. All the information submitted in the application was genuine. Soft Ltd obtained the tax incentive of paying EIT at the rate of 15% for 2008.
In 2015, the tax authorities discovered that the tax incentives given to Hit-Tech Ltd and Soft Ltd were both wrongly granted.
Required:
(i) State the tax consequences for Hit-Tech Ltd of the tax authorities’ discovery.
(ii) State, with reasons, whether Soft Ltd will need to pay back the wrongly granted tax incentive.
Hit-Tech Ltd/Soft Ltd
(i) Hit-Tech Ltd will have to pay back the taxes underpaid plus a late payment surcharge of 0·05% per day.
[Tutorial note: The tax evasion case is over the statute of limitation for penalty of five years, hence, there is no penalty.]
(ii) The statute of limitation of three years (five years for special circumstances) for errors made by the tax authorities has expired. As a result, Soft Ltd does not need to pay the taxes underpaid.
(a) Golden Ltd, an investment company in Shanghai, is considering three alternative investment options:
(1) Option A: Setting up a subsidiary in Vietnam. The profit before enterprise income tax (EIT) in Vietnam will be USD100,000 in 2016. The equivalent EIT rate in Vietnam is 15% and the dividend withholding tax rate in Vietnam is 10%.
(2) Option B: Setting up a subsidiary in Chengdu, China. The profit before EIT will be RMB400,000 in 2016. The applicable EIT rate is 15% since the Chengdu company can enjoy tax incentives.
(3) Option C: Setting up a subsidiary in Suzhou, China. The profit before EIT will be RMB500,000 in 2016. The applicable EIT rate for the Suzhou company is 25%.
Under all three options, all of the after-tax profits will be declared and paid to Golden Ltd as a dividend. Golden Ltd pays EIT at 25%.
Required:
Calculate Golden Ltd’s net of enterprise income tax income from the dividend receivable under each of the three options.
Golden Ltd
Option A Vietnam subsidiary
Option B Chengdu subsidiary
Option C Suzhou subsidiary
(b) HKT Ltd is a trading company set up in the Hong Kong Special Administrative Region by a Beijing company, BJT Ltd. BJT Ltd exports goods from China to HKT Ltd for resale to customers in Europe. The purchase and sale contracts between HKT Ltd and the European customers are negotiated and concluded by staff of BJT Ltd in Beijing by using the letterhead of HKT Ltd.
Required:
(i) State, with reasons, whether HKT Ltd has an establishment in China.
(ii) State ANY THREE criteria which will be used to decide whether HKT Ltd is a China tax resident.
HKT Ltd
(i) HKT Ltd has appointed an agent to carry out business in China including the appointment of an enterprise or individuals (the staff of BJT Ltd) to sign contracts on its behalf. So BJT Ltd will be considered as the establishment of HKT Ltd.
Tutorial note: This definition is under the EIT Regulations. There are further classifications under treaties for a dependent agent and independent agent.
(ii) The criteria to be used to decide if HKT Ltd is a China tax resident:
– The senior management responsible for HKT Ltd’s daily production/business operations are mainly located in China and the senior management executes its responsibilities mainly from China.
– Strategic financial and human resources decisions are made or approved by organisations or personnel located in China.
– Major properties, accounting records, company stamps, board/shareholder’s meeting minutes, etc are maintained in China.
– 50% or more of the board members with voting rights or senior management habitually reside in China.
Huanglong Ltd sold two shopping malls in Guangzhou on 1 January 2016, Plaza 111 and Plaza 77.
Plaza 111:
Huanglong Ltd started the development of Plaza 111 on 1 July 2014 and completed the development in December 2015. The costs and expenses incurred are summarised below:
Plaza 111 was sold for RMB1,200 million on 1 January 2016.
Plaza 77:
Plaza 77 was first put into use on 1 January 2000. Huanglong Ltd acquired Plaza 77 as an existing shopping mall from another property developer on 1 January 2013. The costs and expenses incurred are summarised below:
Huanglong Ltd
(a) Land appreciation tax (LAT) on sales
(b) Profit before enterprise income tax
(a) Wat Ltd sells three types of watch in China. The company’s results for 2015 are summarised below:
(1) Watch-LX: Imported 1,000 watches at a total cost of USD3,000,000 from overseas. 900 watches were sold to consumers at RMB50,000 each. Wat Ltd’s shareholder took two watches for his personal use. 98 watches remained as inventory on 31 December 2015.
(2) Watch-Nor: Produced and sold 40,000 watches to a wholesaler at RMB3,000 each.
(3) Watch-XT: Sold a total of 5,500 watches at RMB18,000 each to consumers via e-commerce, of which 3,500 were self-produced watches and 2,000 were purchased from a third party factory.
All of the above prices are exclusive of value added tax (VAT).
Required:
(i) Calculate the customs duty, consumption tax and value added tax (VAT) on the import of Watch-LX.
Notes:
1. The customs duty rate for watches is 5%.
2. A watch with an imported price or selling price over RMB10,000 is considered as a luxury watch for consumption tax purposes. The consumption tax rate on luxury watches is 20%.
(ii) Calculate the consumption tax and the output VAT payable by Wat Ltd on the sale (including deemed sale) of watches for 2015.
Wat Ltd
(i) Import of Watch-LX
(ii) Taxes on sale of watches
(b) Kool Ltd is a value added tax (VAT) general taxpayer which buys and sells stationery. Kool Ltd has received the following quotes from suppliers for the purchase of 1,000 ball-pens.
Kool Ltd
(i) Cost of purchasing 1,000 ball-pens
(ii) Input VAT claimable
(a) Ms Liu joined a US listed company, Pancake Group, on 1 January 2005. She was granted 100,000 stock options to buy the shares of Pancake at RMB1·50 each on 1 January 2014. She exercised 40,000 of these options on 30 June 2015.
The market prices of Pancake Group shares were USD0·80 each on 1 January 2014 and USD1·40 each on 30 June 2015.
Ms Liu sold 30,000 shares on 31 December 2015 at USD4·70 each.
Required:
Calculate the individual income tax (IIT) payable by Ms Liu in relation to the share incentive scheme options/shares of the Pancake Group on the grant date, the exercise date and the disposal of the shares. State ‘not taxable’ or ‘tax exempt’ where appropriate.
Ms Liu – Individual income tax (IIT) on share incentive
(b) Mr Jiang is employed by AF Ltd. He was seconded to work for AF Ltd in Africa for one year from 1 January to 31 December 2015. His remuneration package for 2015 is summarised below:
Mr Jiang – Individual income tax (IIT) for 2015
Tutorial note: Mr Jiang is entitled to the additional allowance of RMB1,300 (hence, a total of RMB4,800) since he is seconded overseas.
(c) Mr Waki is a UK citizen. He has been working for a company in Beijing since 1 January 2008, but his family members are still in the UK, hence, not China domiciled. The number of days Mr Waki spent outside China in each of the years 2008 to 2014 are summarised below:
Mr Waki – Residence status
2008: He is not a China tax resident since the number of days he spent outside China is more than 30 days one-off in the year.
2012: He is a China tax resident since the number of days he spent outside China is not more than 30 days one-off in the year.
2014: He is a China tax resident since the number of days he spent outside China is not more than 90 days cumulative in the year.
(d) Mr Wu is a China citizen. He is one of the shareholders of WK Ltd and also the chairman of the board of directors and the general manager of WK Ltd. In 2015, Mr Wu received the following income from WK Ltd:
– a salary of RMB20,000 each month;
– a director’s fee of RMB20,000 each month; and
– an annual bonus of RMB100,000 paid in May 2015.
Mr Wu borrowed RMB500,000 from WK Ltd in 2012 and has not repaid the loan since then.
Ms Xie is a foreigner and an independent non-executive director of WK Ltd. She receives a director’s fee of RMB30,000 each month from WK Ltd. She invented a robot and sold the technology to WK Ltd for RMB100,000 in 2015.
Required:
(i) Calculate the individual income tax (IIT) payable by Mr Wu for 2015.
(ii) Calculate the individual income tax (IIT) payable by Ms Xie for 2015.
Note: Ignore value added tax and business tax.
(i) Mr Wu – Individual income tax (IIT) for 2015
Tutorial note: Since Mr Wu is general manager of WK Ltd, the director’s fee is taxed as salary.
(ii) Ms Xie – Individual income tax (IIT) for 2015
(a) Beautiful Ltd was set up in 2008 in Suzhou. The company’s statement of profit or loss for the year ended 31 December 2015 is as follows:
The following information is relevant to the items charged/credited in the above statement of profit or loss:
(1) Inventory costing RMB53,800 was thrown away in 2015 because it had been bitten by mice due to poor management of the warehouse. The cost of this inventory was included in the cost of sales.
(2) Depreciation of the factory building of RMB480,000 was included in factory overheads. The cost of the factory building was RMB19,200,000 and the depreciation period of 40 years with a zero residual value was used to calculate the accounting depreciation.
(3) Electricity charges of RMB102,210 for December 2015 were accrued in 2015. These charges were paid in February 2016.
(4) Financial expenses included:
– interest of RMB213,000 on a loan to pay an overseas supplier; and
– interest of RMB1,234,000 on a loan to construct a new factory premises. The new factory will be put into use in June 2016.
(5) Products costing RMB200,000 were taken from inventory as gifts to customers. The normal selling price of these products was RMB300,000. Value added tax (VAT) was properly accounted for on these gifts. No adjustments were made in the accounts for these gifts. In addition to these gifts, the other entertainment expenses incurred in 2015 were RMB230,200.
(6) Marketing expenses included:
– RMB650,000 paid to a television station for a promotion campaign for a new product; and
– RMB32,000 paid to a newspaper for an announcement of the closure of the company’s branch in Changzhou.
(7) The total salaries paid in 2015 were RMB14,100,200. The salaries accrued for December 2015 and paid in January 2016 were RMB891,000. A staff special bonus of RMB200,000 also accrued in 2015 was paid in July 2016.
(8) Staff union expenses of RMB399,200 were incurred in 2015 and supported by a tax invoice.
(9) Beautiful Ltd acquired 150 chairs for its office in June 2015 at a cost of RMB600 each. For accounting purposes the chairs have an economic life of two years and no scrap value. Beautiful Ltd qualifies for the accelerated depreciation incentive for tax purposes for these chairs.
(10) Other costs and expenses include:
– an unrealised exchange loss of RMB96,000 due to devaluation of the Renminbi; and
– a loss on the disposal of A-shares of RMB204,230.
Beautiful Ltd’s tax profits/(losses) for previous years are as follows:
Enterprise income tax (EIT) for 2015
(b) Beautiful Ltd has paid a royalty of RMB3,800,000 each year since 2008 to its overseas associated company for the use of a trademark. In 2015, the tax authorities challenged this related party transaction and requested a retrospective tax adjustment for each of the years from 2008 onwards.
Required:
State, with reasons, whether the retrospective transfer price adjustment proposed by the tax authorities is valid.
The adjustment is valid because the statute of limitation for transfer pricing adjustments is ten years.