China Tax & Investment Consultants Ltd

TAX LEVY AND ADMINISTRATION

Legal authority

The PRC Tax Levy and Administration Law and its Detailed Implementation Regulations

Tax registration

Every foreign investment enterprise (FIE) shall apply for a tax registration at both the national tax office and local tax office.

Types of tax registration:-

National income registration and local income tax registration. Both registrations are mandatory and the registration application must be submitted within 30 days of obtaining the business license from the local office of "State Administration of Industry and Commerce" at the city level or above;
Value added tax registration - General taxpayer who sells goods or imports goods into the PRC, or provides taxable services shall apply for a VAT registration certificate.
VAT export rebate registration - VAT taxpayers applying for tax rebate on the VAT paid for the inputs in the manufacture of export goods shall apply for a VAT export rebate registration;
Temporary tax registration - Non-residents having the obligation to pay tax may apply for a temporary tax registration through its appointed tax agent or the withholding entity to do so.
Tax withholding registration - Entity or individuals who has an obligation to withhold tax and pay it to the tax authority shall apply for a tax withholding registration.

Withholding obligations

Individual income tax - Under the PRC Individual Income Tax Law (The IIT Law) and the PRC Tax Collection and Administration Law, the employee is required to pay the tax each month while the employer or the entity at which the employee performs duty is obliged to withhold payment by making deductions from the payroll and pay it over to the local tax bureau. Failure to comply with the withholding obligation will be subject to fines and in serious cases, invite criminal consequences.
Social security contributions - Social security is a staff cost, which includes payments for unemployment, retirement, personal injury, and medical insurances. Both the local employee and the employing entity as the paying unit must make prescribed contribution to the pool of social security funds. The social security is computed by reference to the employee's average wages, as announced by the provincial offices of the Ministry of Labor and Social Security. The social security regulations specify that the employing entity are under an obligation to withhold a certain sum from the payroll of the employees and pay it over to local tax office who collect the payments for social security funds.
License fee and royalty - Non-residents foreign enterprises or nationals receiving license fee or royalty arising from the use of intellectual property rights inside China are subject to PRC income taxes. The resident company or enterprises are required to withhold and pay the tax on behalf of the non-residents.
Legal responsibility - The withholding entity has the obligation to comply with the requirement under the PRC Tax Levy and Administration Law. Non-compliance shall invite administrative punishment or in serious cases criminal consequences.

Non-arm's length transfer pricing

Under article 24 of the PRC Tax Levy and Administration Law, the tax authority has the power to make adjustment to the transaction prices fixed between related parties which are different from that fixed between independent third parties.


What are related parties?	Related parties are the companies, enterprises, and other economic entities that have direct or indirect controlling relationship in finance, operation, purchase and sales; Direct or indirectly owned or controlled by a third party; There exist other economic benefits between the parties	Article 36 of the Detailed Rules
What methods are used to make the adjustment?	By reference to similar activities conducted independently between unrelated parties; By reference to the re-sell price to a unrelated party; Cost plus a certain percentage; Other reasonable methods.	Article 38
Other transactions subject to adjustment by the tax authorities	Interest payment between related parties; Provision of services between related parties; Transfer of property, and use of property between related parties	Article 39, 40, and 41

Legal liability for breach

There are two kinds of legal liability depending on which institutions impose the punishment for breaching the tax law. If the PRC tax authority imposes the penalty under the PRC Tax Levy and Administration Law, that will be an administrative liability. If the amount is large and that the case is brought to the People's Court under the PRC Criminal Law, that is criminal liability.

Administrative punishment

The tax authority shall impose a fine of not exceeding RMB2,000 or a fine between RMB2001 and RMB10,000 for serious breaches, and order the taxpayer to put things right within a specified period of time in respect of the following non-compliance: -
Failure to apply for tax registration, amending, or canceling the tax registration within the statutory time; failure to keep books of accounts and information; failure to submit reports of financial statement, accounting policies and treatment. Article 37 of the PRC Tax Levy and Administration Law refers.

The tax authority shall order withholding entity or agent who fails to set up accounting records, keeps tax withheld and pays tax to put things right within a specified period. If the tax withholding agent does not make the correction within the specified period, the tax authority shall impose a fine of not exceeding RMB2,000 and a fine between RMB2001 and RMB5,000 for serious breaches. Article 39 refers.

Tax evasion

What is it?

Article 201 of the PRC Criminal Law provides that any individual or entity who by means of farcified accounting records or hiding accounting information from the tax authorities, understates its income or overstates its expenses, or refuses to submit a correct tax declaration as ordered by the tax authority, or refuses to pay tax or pays a lesser amount of tax, is considered to have evaded tax.

Consequences of tax evasion

PRC Criminal Law	Offences	Punishment on conviction
Article 202	If the amount is tax evaded is between RMB10,000 and RMB100,000 and the amount of tax evaded is between 10% and 30% of the taxable income, or the taxpayer has previously been subject to penalty by the tax authority for more than twice,	the taxpayer will be subject to a sentence of not exceeding 3 years and a fine between 100% and 500% of the tax evaded. The above-mentioned punishment shall apply to those who have the tax withholding obligations under the tax law.
Article 203	Any individual or entity who unlawfully transfers property and put it beyond the reach of the tax authority in respect of tax amount between RMB10,000 and RMB100,000,	A sentence of not exceeding 3 years and a fine equal to the amount between 100% and 500% of the said tax due.
Article 204	Any individual or entity who by means of cheating the tax authority, unlawfully obtains a VAT export rebate to the extent of a relatively large amount,	A sentence of not exceeding 5 years and a fine equal to the amount between 100% and 500% of the said export rebate.
Article 205	Any individual or entity by means of issuing VAT invoice for a fictitious transaction, unlawfully obtains VAT export rebates or VAT input tax credits.	A sentence of not exceeding 3 years and a fine between RMB20,000 and RMB200,000.
Article 206	Any individual or entity issues forged VAT invoices or re-sells forged VAT invoices.	A sentence of not exceeding 3 years and a fine between RMB20,000 and RMB200,000.
Article 207	Any individual or entity unlawfully sells VAT invoices.	A sentence not exceeding 3 years and a fine between RMB20,000 and RMB200,000.
Article 208	Any individual or entity unlawfully purchases VAT special invoices or forged VAT special invoices.	A sentence not exceeding 5 years and a fine between RMB20,000 and RMB200,000.

All of the sentences shall be increased to more than 3 years if the revenue loss to the tax authority is greater than the above-mentioned amount.

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