How to solve a riddle like China taxation
"China is kind of like a country with 10,000 taxes," says Kwok, holder of CICPA with the Association of International Accountants.
Under China's current tax system, there are 25 types of taxes that - according to their nature and function - can be divided into eight categories (see table).
Moreover, these 25 types of taxes are also classified into three categories based on who collects them: central, local and shared - with the last split by both the central and local government.
Kwok says the tax system itself is not complicated. What makes it complex is the way people interpret the system. In fact, he adds, the mainland Chinese hardly have a proper channel to obtain correct information about the tax system.
Each official has his own interpretation, Kwok adds. "If you ask 10 officials, then you'll find that you've got 10 different versions. What makes matters worse is that different regions have their own interpretation of the same tax."
Thus, China's tax system is like a riddle that can never be solved.
So what piece of advice can Kwok give potential investors on the mainland?
"Be smart, always stay alert, try to understand your competitor, never hesitate to ask, and try to make things as clear as you can," he says.
Kwok will elaborate on China's taxation system on July 22 at the "Seminar on Principle of Accounting and Taxation Practice in PRC", organised by Classified Post and Kornerstone.
Three main topics will be brought out for discussion during the seminar: China's accounting development and regulatory framework; enterprise accounting system covering liabilities, equities, profit and loss, and other accounting issues; and the country's taxation system.
In the first topic, Kwok will introduce accounting standard-setting process, structure and reporting; cases of financial fraud and due diligence; and audit reports. He will also compare the difference between mainland and Hong Kong regulatory frameworks and the difference between Chinese GAAP and IFRS.
Several Chinese taxes are introduced in the third topic. To give a clear picture of the tax system in China, Kwok will also talk about the structure of Chinese tax law and regulations, tax administrative system as well as the new tax administration and collection method. What's more, tax investigation case studies on cross-border transactions will also be discussed during the seminar.
In the past, foreign investment enterprises (FIEs) in China were entitled to some tax benefits as well as preferential treatment.
Some 20 to 30 years ago, when China was first opening up its door to foreign investment, mainland authorities wanted to give FIEs preferential treatment to attract international investors.
However, this practice incurred a lot of grievances and complaints among domestic enterprises as China's economy grew rapidly over the past two decades.
Before the new law was enacted, the income taxes of FIEs and domestic enterprises were levied at different rates.
The income tax rate for domestic enterprises was 25 per cent while that for FIEs was 15 per cent to 24 per cent, depending on factors such as location and industry.
Some domestic enterprises reportedly disguised themselves as foreign-owned enterprises to dodge taxes.
After the enactment of the Enterprise Income Tax Law in January 1, 2008, the tax rate for both FIEs and domestic enterprises was pegged at 25 per cent.
The new law levels the playing field for FIEs and domestic enterprises, and it has been generally viewed as a major milestone for tax reform in China.
FIEs have ceased to enjoy preferential taxation rates and were treated the same way as domestic enterprises.
Furthermore, many of the tax incentives FIEs enjoyed before the new law was adopted were eliminated.
Preferential tax treatment is offered to industries in high-tech, software, integrated circuit, service-outsourcing industries and those related to environmental protection to encourage energy conservation and emission reduction, and the development of a renewable economy.
Similar treatment is also available to the infrastructure and cultural industries.
Eight categories of mainland taxes by function
- Turnover: value-added, consumption and business
- Income: enterprise and individual
- Resource: urban and township land use
- Special purposes: city maintenance, construction and farmland occupation
- Property: house property and urban real estate
- Behaviour: vehicle and vessel usage, stamp, deed, and banquet
- Agricultural: including animal husbandry
- Custom duties
Seminar on Principle of Accounting and Taxation Practice in PRC
Date July 22 (Friday)
Venue 15/F, Hip Shing Hong Centre,55 Des Voeux Road Central, Central
Fee HK$890/HK$590 (by July 9)
Enquiries Classified Post: (852) 2680 8234 Kornerstone: (852) 2116 3328