Tax & Accounting

Withholding Tax in China

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By Dezan Shira & Associates
Editor: Jake Liddle

In China, withholding tax (WHT) is levied on the income of foreign enterprises that do not have a physical establishment in China but provide services to China-based businesses. Any China-derived income arising from such a transaction between an overseas entity and a Chinese business is withheld by the China-based client, deducted from the gross income amount, and taxed by the Chinese tax authorities at a flat concessionary rate of 10 percent.

Thus, it is the responsibility of the China-based client to ensure the transfer of tax onto the tax bureau. If they fail to do so, or do not pass on the correct or relevant amount from an invoice, the local tax bureau will take up repayment with the China-based client, and not the overseas entity.

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China Plans to Cut Corporate and Personal Tax Rates

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By Dezan Shira & Associates
Editor: Jake Liddle

Last week, China’s Premier Li Keqiang announced that the government plans to cut corporate and personal tax rates. Li announced these plans as a part of the publication of the annual Government Work Report.

To cut corporate taxes, the government plans to simplify China’s four-tier VAT system to three tiers and introduce several other tax breaks. To cut personal tax rates, the government plans to offer new deductions and reform individual income tax (IIT) brackets.

These reforms will produce tax savings of RMB 350 billion (US$50.7 billion) this year, following the claimed RMB 570 (US$83 billion) cuts made last year affecting every sector, along with the full implementation of the country’s business tax to VAT reform in May 2016.

The statement came following complaints from enterprises of growing tax burdens amidst a slowing economy.

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Revisiting Tax Incentives for R&D Activities in China

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By Dezan Shira & Associates
Editor: Tongyu Zhang

Upgrading science and technology innovation is a critical component of China’s 13th Five Year Plan covering the years 2016-2020, as the Chinese government aims to upgrade its tech capabilities. As part of this effort, on December 27, 2016, the Ministry of Finance (MOF), General Administration of Customs (GAC), and State Administration of Taxation (SAT) issued a joint notice (Cai Guan Shui [2016] No.70) to standardize the duty-free import process of scientific and technological research equipment by scientific research institutions, technology development institutions, and schools.

Meanwhile, since being published in 2015, the two notices regarding deduction of R&D expenses (Cai Shui [2015] No. 119 and SAT announcement [2015] No. 97) were implemented in 2016. Therefore, now is a particularly relevant time to consider R&D related tax incentive policies for foreign-invested enterprises (FIEs) to review for effective tax planning.

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Cracking Down on Pollutants: Comprehending China’s New Environmental Protection Tax Law

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By Weining Hu

In December 2016, the National People’s Congress promulgated China’s first Environmental Protection Tax Law (the EPT Law), replacing the existing Pollutant Discharge Fees (PDF) system in a bid to strengthen the enforcement of environmental regulations. The EPT Law provides guidelines for levying taxes on entities that emit air and water pollutants, solid wastes, as well as noise pollution, and will come into effect on January 1, 2018.  Major contents of the EPT Law, such as taxable items, tax rates, and specification of taxpayers are largely consistent with the existing PDF system. However, changes concerned with tax incentives and administrating authorities significantly differ from the existing law. Given the EPT Law’s impact on China’s tax system, enterprises producing contaminants, as well as taxpayers and new market entrants need to understand the new developments in order to better prepare for future compliance requirements.

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The BEPS Action Plan in China and Hong Kong: Impact Assessment for Foreign Enterprises

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By Jake Liddle

In October 2016, Hong Kong’s government issued a consultation paper for implementing measures to counter base erosion and profit shifting (BEPS) in the region.

BEPS refers to tax planning strategies that exploit discrepancies in tax laws in order to shift profits to jurisdictions where there are lower tax rates, often tax havens. While some methods are illegal, many are not, and can disrupt domestic market competition and undermine taxation systems. Because of their reliance on income tax, BEPS is particularly relevant to developing countries. The Organization for Economic Co-operation and Development (OECD) and G20 countries have formed an ‘inclusive framework’, which implicates over 100 jurisdictions to cooperatively implement the OECD/G20 BEPS package, a tool that provides governments with the means to tackle BEPS on domestic and international levels.

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Case Study: Capital Increases and IIT Calculation During Equity Transfers in China

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By: James Zheng
Editor: Jake Liddle

Equity transfers are a common component of the mergers and acquisitions process. Taxation of equity transfers are often a complex issue; if entities have incorrectly calculated their tax obligations, then they risk being reprimanded by tax authorities. In this article, a case study will provide a scenario exploring several issues that hinder clear tax declaration when executing an equity transfer.

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Understanding China’s VAT Accounting Guidelines

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By Dezan Shira & Associates
Editor: Tongyu Zhang

On December 3, 2016, China’s Ministry of Finance (MOF) issued regulations on accounting treatment of Value-added tax (VAT), which immediately came into force from the date of issuance. The latest regulations are presented as guidelines for companies to handle accounting adjustments in advance of the annual reporting deadline. The regulations modify the sub-items under the “tax payable” category, clarify the presentation method of these items in financial statements, and standardize the accounting handling methods for VAT-related businesses. Note that transactions concluded during the period from May 1, 2016 to the effective date of the regulations, whose assets and liabilities are affected, shall be adjusted according to the new regulations. The regulations will prevail if inconsistent with the national unified accounting system.

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An Overview of China’s VAT Reform

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By Dezan Shira & Associates
Editor: Alexander Chipman Koty

Hailed as China’s most significant tax reform in over two decades, the value-added tax (VAT) was comprehensively implemented as the country’s only indirect tax in 2016, effectively replacing the business tax (BT) that previously applied to a number of industries. The reform is part of Beijing’s efforts to restructure the Chinese economy from one driven by labor-intensive manufacturing to one that is service-oriented by easing the tax burden on service industries, which have historically paid a disproportionate share.

In 2015, services made up more than half of China’s GDP for the first time, and are growing at a faster rate than any other sector of the economy. The Chinese government envisions the VAT reform to further propel growth in services and consumption as the country pivots away from the low value-added industries. The broader introduction of the VAT is also designed to encourage low-end manufacturers to upgrade their technology and capabilities, and to invest in research and development in order to move up the value chain.

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