Tax & Accounting

Paying Foreign Employees in China: Individual Income Tax

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By Dezan Shira & Associates
Editors: Steven Elsinga and Zhou Qian

For foreigners working in China, determining the applicability of individual income tax to one’s situation involves decoding a set of intersecting criteria and rules. Following this, you will need to calculate your precise liability and any applicable deductions. Lastly, consulting with a China taxation specialist can help optimize one’s overall income to achieve the most profitable package for you or your employees.

China’s Individual Income Tax Law recognizes 11 different categories of income, with a host of different deductions, tax rates, and exceptions applying to each of them. As our focus here lies with foreign employees, this article will only address the tax treatment of employment income, including salaries, bonuses, stock options, and allowances. Continue reading…

How to Apply for VAT General Taxpayer Status in China

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By Dezan Shira & Associates

With the completion of China’s value-added tax (VAT) reform last year, VAT has almost completely replaced business tax to become the country’s main principal tax. Expanding VAT to all industries is part of the government’s campaign to streamline China’s complex tax system, encourage the growth of the services industry, and reduce corporate tax burdens.

According to the Ministry of Finance, from May 2016 to June 2017 the VAT reform had already saved companies over RMB 850 billion (about US$127.96 billion) in taxes.

Acquiring VAT general taxpayer status is essential for companies to benefit from the VAT reform’s tax reductions. VAT general taxpayer status allows companies to claim VAT credit and refunds and to issue VAT fapiao – a de facto requirement for doing business in China.

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Why is China’s Tax System so Complex?

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By Alexander Chipman Koty

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China’s tax system can be bewildering for foreign investors unaccustomed to its intricacies and idiosyncrasies. Despite recent efforts to streamline the tax system, the World Bank ranked China 131 out of 190 jurisdictions for ease of paying taxes in 2017 – down from 127 in 2016.

Several factors contribute to China’s financial complexity, from ambiguous value-added tax (VAT) rate application to the country’s unique fapiao invoice system. Given the challenges presented by China’s tax system, identifying the areas where foreign businesses are most vulnerable to irregularities can help ensure compliance and avoid triggering an audit.

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How China’s VAT System Skews Financial Reporting

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By Chet Scheltema

Foreign investors reviewing Chinese financials may find themselves at a loss to ascertain the standard for booking revenue and expenses. Confounded, they may simply conclude that local accountants are engaged in cash-based accounting.

International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) dictate revenue and expense recognition standards. While often complex, the core principle requires matching completed work with corresponding revenue in a way consistent with the business arrangement of the parties.

Chinese GAAP is much the same: it’s accrual-based accounting, not cash-based. But here’s the challenge. The onerous demands of China’s value-added tax (VAT) system may mean that practical VAT system considerations dominate the ordering of business transactions, and deprioritize GAAP financial reporting standards.

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Internal Control for Day-to-Day Operations in China

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By Dezan Shira & Associates
Editor: Alexander Chipman Koty

The core principles of internal control do not vary significantly between countries. Indeed, China’s legislative framework for internal control largely mirrors the corresponding legislation in the US. In practice, however, the issues that arise in day-to-day business in China present a unique business environment for implementing internal control.

Specific legal features particular to China, such as company chops, require internal control systems that might not be needed in most Western countries. Meanwhile, other issues requiring internal control encountered when doing business in China – including corruption, labor disputes, language barriers, and cultural misunderstandings may be more common than in many foreign investors’ home countries.

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China Deepens VAT Reform to Combat Financial Complexity

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By Moliang Jiang 

China announced plans to deepen its value-added-tax (VAT) reform again on August 18 this year at a State Council executive meeting chaired by Premier Li Keqiang. The government’s newest move sets out to enhance the non-standardized tax rate structure, simplify the tax compliance system, and push forward VAT legislation.

China’s VAT reform has been a continuous development that resolved to replace Business Tax (BT) with VAT, reduce corporate tax burdens, and increase the weight of the service sector in China’s economy. China first piloted the VAT reform in Shanghai in 2012, and later expanded it to other municipalities and various industries.

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Export Tax Rebates in China

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By Gidon Gautel

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Any exporting enterprise in China should be well versed in its tax rebate policy. The government began to implement the policy in April 1985 as a way to enhance the country’s competitiveness in foreign markets by eliminating double taxation on exported goods. Export tax rebates refer to refunds of indirect taxes paid by exporting enterprises in the production and distribution process.

China underwent significant VAT reform in 2016 when it initiated the national changeover from Business Tax (BT) to VAT. The VAT tax reform mainly covered services; Intangible assets and immovable properties, meaning that VAT tax refunds for exports have not experienced significant upheaval. However, this is still an area exporters should familiarize themselves with.

Whilst a useful channel for recovering the costs of input taxes paid, not all goods are subject to tax refunds upon being exported. Additionally, businesses must register for, and keep tax authorities updated on their exports eligible for VAT tax refunds.

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Internal Control Review: Audit and Evaluation in China

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By Dezan Shira & Associates
Editor: Zhou Qian

Whenever foreign investors want to figure out whether internal control exists and is sufficient in their Chinese subsidiaries, an internal control review (ICR) might be the best and very first step to achieve that. In contrast to an annual statutory audit, which mainly focuses on maintaining reliable financial reporting, the ICR cares more about the specific management process.

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Dezan Shira & Associates

Meet the firm behind our content. Dezan Shira & Associates have been servicing foreign investors in China, India and the ASEAN region since 1992. Click here to visit their professional services website and discover how they can help your business succeed in Asia.

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