Taxation in China

Under the current tax system in China, there are 26 types of taxes, which, according to their nature and function, can be divided into the following 8 categories:

• Turnover taxes. This includes three kinds of taxes, namely, Value-Added Tax, Consumption Tax and Business Tax. The levy of these taxes are normally based on the volume of turnover or sales of the taxpayers in the manufacturing, circulation or service sectors.
• Income taxes. This includes Enterprise Income Tax (effective prior to 2008, applicable to such domestic enterprises as state-owned enterprises, collectively owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises) and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals. Please note that the new Enterprise Income Tax Law of the People's Republic of China has replaced the above two enterprise taxes as of 1 January 2008.

The enterprise income tax shall be levied at the rate of 25%. 15% tax rate is a concession rate for high-tech companies.[11]

• Resource taxes. This consists of Resource Tax and Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources.
• Taxes for special purposes. These taxes are City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, and Vehicle Acquisition Tax. These taxes are levied on specific items for special regulative purposes.
• Property taxes. This encompasses House Property Tax, Urban Real Estate Tax, and Inheritance Tax (not yet levied). China is preparing to roll out a new property tax. Two of China’s largest cities, Chongqing and Shanghai have trialed property taxes between 0.4% and 1.2% since 2011, mainly targeting second homes, luxury properties, and purchases by non-residents. The new tax is expected to cover a much wider range of properties.[12]
• Behavioural taxes. This includes Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax (not yet levied), Slaughter Tax and Banquet Tax. These taxes are levied on specified behaviour.
• Agricultural taxes. Taxes belonging to this category are Agriculture Tax (including Agricultural Specialty Tax) and Animal Husbandry Tax which are levied on the enterprises, units and/or individuals receiving income from agriculture and animal husbandry activities.
• Customs duties. Customs duties are imposed on the goods and articles imported into and exported out of the territory of the People's Republic of China, including Excise Tax.

Compared with other forms of distribution, taxation has the characteristics of compulsory, gratuitous and fixed, which are customarily called the "three characteristics" of taxation.

Taxation is divided into national tax and local tax. Local taxes are further divided into: resource tax, personal income tax, individual incidental income tax, land value-added tax, urban maintenance and construction tax, vehicle and vessel use tax, property tax, slaughter tax, urban land use tax, fixed asset investment direction adjustment tax, enterprise income tax, stamp duty, etc.

Taxes are mainly used for national defense and military construction, national civil servants' salary payment, road traffic and urban infrastructure construction, scientific research, medical and health epidemic prevention, culture and education, disaster relief, environmental protection and other fields.

The functions and roles of taxation are the concrete manifestation of the essence of taxation functions. Generally speaking, taxation has several important basic functions as follows:

Tax law, that is, the legal system of taxation, is the general name of the legal norms that adjust tax relations and is an important part of the national law. It is a legal code based on the Constitution, which adjusts the relationship between the state and members of the society in terms of rights and obligations in taxation, maintains the social and economic order and taxation order, protects the national interests and the legitimate rights and interests of taxpayers, and is a rule of conduct for the state taxation authorities and all tax units and individuals to collect taxes according to the law. Tax laws can be classified in different ways according to their legislative purposes, taxation objects, rights and interests, scope of application and functional roles. Generally, tax laws are divided into two categories: substantive tax laws and procedural tax laws according to the different functions of tax laws. Tax legal relationship is reflected as the relationship between state tax collection and taxpayers' benefit distribution. In general, tax legal relations, like other legal relations, are composed of three aspects: subject, object and content. The elements of tax law are the basic elements of the taxation system, which are reflected in the various basic laws enacted by the state. They mainly include taxpayers, tax objects, tax items, tax rates, tax deductions and exemptions, tax links, tax deadlines and violations. Among them, taxpayers, tax objects and tax rates are the basic factors of a taxation system or a basic composition of taxation. The Law of the People's Republic of China on Tax Collection and Administration stipulates that taxpayers must apply for tax declaration at taxation authorities within the prescribed declaration period. By virtue of the power granted by the state power, the tax authorities collect taxes from taxpayers in the name of the state power. If a taxpayer steals tax, owes tax, cheats tax or resists tax, the tax authorities shall recover the tax, late payment and impose fines according to the law, and those who violate the criminal law shall also be criminally punished by the judicial authorities. Tax evasion is a taxpayer's intentional violation of the tax law by deception, concealment and other means (such as forgery, alteration, concealment, unauthorized destruction of books and bookkeeping vouchers, false tax declaration, etc.) to not pay or underpay the tax due. Tax arrears is the act that the taxpayer fails to pay tax on time and defaults on the tax payment beyond the approved tax payment period by the taxation authority. Tax fraud is the act of taxpayers or personnel cheating the state export tax refund by false export declaration or other deceptive means. In China, export tax refund is to refund or exempt the VAT and consumption tax paid or payable by the taxpayer for the exported goods in the domestic production and circulation links. Export tax refund is an international practice. Tax resistance is the refusal of a taxpayer to pay tax by violence or threat. Those who gather a crowd, threaten or besiege taxation authorities and beat taxation cadres, and refuse to pay taxes, are tax resisters.[13]

State organs that have the authority to formulate tax laws or tax policy include the National People's Congress and its Standing Committee, the State Council, the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs.

Tax laws are enacted by the National People's Congress, e.g., the Individual Income Tax Law of the People's Republic of China; or enacted by the Standing Committee of the National People's Congress, e.g., the Tax Collection and Administration Law of the People's Republic of China.

The administrative regulations and rules concerning taxation are formulated by the State Council, e.g., the Detailed Rules for the Implementation of the Tax Collection and Administration Law of the People' s Republic of China, the Detailed Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China, the Provisional Regulations of the People's Republic of China on Value Added Tax.

The departmental rules concerning taxation are formulated by the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs, e.g., the Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value Added Tax, the Provisional Measures for Voluntary Reporting of the Individual Income Tax.

The formulation of tax laws follow four steps: drafting, examination, voting and promulgation. The four steps for the formulation of tax administrative regulations and rules are: planning, drafting, verification and promulgation. The four steps mentioned above take place in accordance with laws, regulations and rules.

Besides, the laws of China stipulates that within the framework of the national tax laws and regulations, some local tax regulations and rules may be formulated by the People's Congress at the provincial level and its Standing Committee, the People's Congress of minority nationality autonomous prefectures and the People's Government at provincial level.

The following table summarises up the current tax laws, regulations and rules and relevant legislation in China.

25 Dec. 1993, by Ministry of Finance

25 Dec. 1993, by Ministry of Finance

25 Dec. 1993, by Ministry of Finance

Depending on the form of tax, taxpayers in China are required to file tax returns periodically or annually. Filing tax returns often entails giving detailed information about taxpayers’ income, expenses, deductions, and credits. The information provided is used by the tax authorities to assess the taxpayer's compliance with tax laws and regulations and to calculate the taxpayer's tax due. Taxpayers in China are subject to stringent filing and payment deadlines that must be met in order to avoid penalties and enforcement measures.

There are 14 kinds of taxes currently applicable to the enterprises with foreign investment, foreign enterprises and/or foreigners, namely: Value Added Tax, Consumption Tax, Business Tax, Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, Individual Income Tax, Resource Tax, Land Appreciation Tax, Urban Real Estate Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Slaughter Tax, Agriculture Tax, and Customs Duties.

Hong Kong, Macau and Taiwan and overseas Chinese and the enterprises with their investment are taxed in reference to the taxation on foreigners, enterprises with foreign investment and/or foreign enterprises. In an effort to encourage inward flow of funds, technology and information, China provides numerous preferential treatments in foreign taxation, and has successively concluded tax treaties with 60 countries (by July 1999): Japan, the US, France, UK, Belgium, Germany, Malaysia, Norway, Denmark, Singapore, Finland, Canada, Sweden, New Zealand, Thailand, Italy, the Netherlands, Poland, Australia, Bulgaria, Pakistan, Kuwait, Switzerland, Cyprus, Spain, Romania, Austria, Brazil, Mongolia, Hungary, Malta, the UAE, Luxembourg, South Korea, Russia, Papua New Guinea, India, Mauritius, Croatia, Belarus, Slovenia, Israel, Vietnam, Turkey, Ukraine, Armenia, Jamaica, Iceland, Lithuania, Latvia, Uzbekistan, Bangladesh, Yugoslavia, Sudan, Macedonia, Egypt, Portugal, Estonia, and Laos, 51 of which have been in force.

Chinese government will implement a new package of tax-and-fee policies to support enterprises, as illustrated in Report on the Work of the Government in 2022. The Chinese government will continue to take temporary steps and institutional measures and apply policies for both tax reductions and refunds.[23]

The State Administration of Taxation said that tax reduction and fee reduction are the fairest, most direct and most effective measures to help enterprises relieve their difficulties. In 2022, Chinese economic development is facing the triple pressure of demand contraction, supply shock, and weakening expectations. The Party Central Committee and the State Council have deployed and implemented a new package of tax-and-fee supporting policies, which include both phased measures and institutional arrangements. There are deferred tax rebate measures; there are generally applicable burden reduction policies and special assistance measures in specific fields; there are continuous arrangements and new deployments; there are policies uniformly implemented by the central government, and there are local autonomous implementations in accordance with the law.

On the basis of 2021, it is expected that year 2022's tax rebate will be about 2.5 trillion Chinese yuan, which will be the largest scale in history, exceeding the general expectations of the society before. Manufacturing is the foundation of the real economy and national competitiveness, and the main players in the small, medium and micro market are the key to ensuring people's livelihood and stabilizing employment. The tax and fee reduction policies implemented in recent years, regardless of the scale or magnitude, are the main beneficiary groups and industries for small, medium and micro market entities and the manufacturing industry. In 2022, the new package of tax-and-fee policies will continue to focus on this key point, maintain the continuity and stability of the policy, and show the characteristics of annual intensification, step-by-step expansion, and gradual progress. Scope of application, a series of policies, such as phased exemption of small-scale taxpayers' value-added tax, and increased income tax reduction for small and low-profit enterprises, will help manufacturing enterprises to go into battle lightly and develop better, and support small, medium and micro market players to overcome difficulties and continue to development and play an important supporting role.

Affected by uncertain factors such as the international environment, many companies are currently facing difficulties such as shortage of funds. In 2022, China has made great efforts to improve the VAT credit and refund system, and implemented large-scale tax refunds for the remaining tax credits. Priority is given to small and micro enterprises. The existing tax credits for small and micro enterprises will be refunded in one go before the end of June, and the incremental tax credits will be sufficient. The Chinese government focuses on supporting the manufacturing industry, and comprehensively solve the problem of tax refunds for industries such as manufacturing, scientific research and technical services, ecological and environmental protection, electricity and gas, and transportation.

In 2022, China will further increase the implementation of the super-deduction policy for R&D expenses, increase the super-deduction ratio of technology-based SMEs from 75% to 100%, implement tax incentives for enterprises investing in basic research, improve the accelerated depreciation of equipment and appliances, and the income tax for high-tech enterprises. Preferential policies and other policies to encourage enterprises to increase investment in research and development, cultivate and strengthen innovation momentum, and better promote high-quality development.

Statistics from the State Administration of Taxation show that in 2021, the country will add a total of 1,008.8 billion yuan in new tax cuts, and a total of 164.7 billion yuan in new fee reductions. From the perspective of different entities, the tax incentives for helping small and micro enterprises have continued to increase. In 2021, the tax incentives to support the development of small and micro enterprises will add 295.1 billion yuan in tax reduction, accounting for 29.3% of the new tax reduction nationwide. The "double" deduction of R&D expenses is beneficial to encourage innovation. In the whole year, 320,000 enterprises enjoyed the super deduction policy in advance, with a tax reduction of 333.3 billion yuan. Enterprises can enjoy more policy dividends earlier and more conveniently. The VAT retained tax refund system was optimized to support the real economy, continued to implement the incremental value-added tax retained tax refund policy, and processed 132.2 billion yuan in tax refunds for the manufacturing industry throughout the year, benefiting 31,000 enterprises. Among them, advanced manufacturing enterprises will fully refund the incremental value-added tax credits on a monthly basis, with an additional tax refund of 16.8 billion yuan in the whole year. The phased tax relief measures were implemented precisely to relieve difficulties. The reduction, refund and delay of tax of coal power and heating enterprises was 27.1 billion yuan, benefiting about 4,800 coal power and heating enterprises. The tax payment for small, medium and micro enterprises in the manufacturing industry was delayed and this fee exceeds 210 billion yuan.

In 2021, the macro tax burden, that is, the proportion of tax revenue in the national general public budget revenue to GDP, was 15.1%, a decrease of 0.1 percentage points from 2020 and a decrease of 3 percentage points from 2015 (18.1%). The income tax burden of key tax source enterprises operation for per 100 yuan decreased by 3.8% compared with 2020, and the cumulative decrease compared with 2015 was 21.7%. Thanks to various policies such as tax reduction and fee reduction, in 2021, the sales revenue of national enterprises increased by 21.1% year-on-year, 30.4% higher than that in 2019, and an average increase of 14.2% in the two years, maintaining a relatively rapid growth overall. The amount of equipment purchased by manufacturing enterprises across the country increased by 24.6% year-on-year, with an average increase of 14.3% in the two years.[24]

To combat tax evasion and other forms of tax avoidance, China has implemented the General Anti-Avoidance of Tax Evasion Regulations (GAAR). The GAAR was introduced for the first time in China in 2008 in the PRC Enterprise Income Tax Law and has subsequently undergone numerous updates and revisions. GAAR's foundational objective is to prevent taxpayers from employing aggressive tax planning techniques to reduce or eliminate their tax obligations. Any tax avoidance arrangement by an enterprise in China is subject to the General Anti-Avoidance Rule, which attempts to guarantee that the arrangement serves legitimate commercial goals and not solely to achieve tax benefits. Investigating whether the company's intention for the tax arrangement is reasonable and legal, as opposed to an illegal attempt to acquire tax benefits, is the goal. Tax authorities can disregard or recharacterize transactions that they deem to be artificial or to lack economic substance under the Chinese GAAR regulations. If a GAAR investigation is to be initiated, the local tax authorities must first obtain approval from the State Administration of Taxation. The request must be elevated through the several higher level tax authorities, which are above the local tax authority, in order to receive this approval. Taxpayers subject to the GAAR provisions in China must provide sufficient documentation to back up the commercial purpose of their transactions, transaction documentation, communications between the taxpayer and parties involved in the transaction, and documentation that can demonstrate that the arrangement has a non-tax avoidance purpose. The tax authorities in China must inform the taxpayer in writing of any challenges made to a transaction under the GAAR provisions and state their justifications.[25]

The "Five Year Rule" in China refers to the tax regulations controlling the taxation of foreign citizens who stay in China for at least 183 days in a tax year and who do not leave the country for longer than thirty days in a row or 90 days cumulatively in any of the five years preceding. The five-year period restarts if a person spends the required amount of time outside of the country. To break the five-year period, an expatriate must stay less than 90 days within China for any one-year period following the sixth year if he or she has already been in China for five full consecutive years. The "Five Year Rule" clearly states that foreign nationals are subject to Chinese Individual Income Tax on their worldwide income after five years of continuous citizenship in China. According to this regulation, foreign nationals who have lived in China for less than five years are solely taxed on their income earned within China.[26]

As of 2007, a paper reported that about two-thirds of tax revenue was spent at the local level and that "the ratio of central revenue to total tax revenues reached a low of 22 per cent in 1993, before rising to the 50 per cent level following the 1994 tax reform".[27]^: 46

Companies operating in China are required to use tax software from either Baiwang or Aisino (subsidiary of China Aerospace Science and Industry Corporation), highly sophisticated malware has been found in products from both vendors.[28][29] Both sets of malware allowed for the theft of corporate secrets and other industrial espionage.[30]

• State Administration of Taxation
• General Administration of Customs
• Ministry of Finance
• List of Chinese administrative divisions by tax revenues
• Tax-Sharing Reform of China in 1994

• An Overview of China's Tax System. 10-27-2007. State Administration of Taxation.
• Tax System of the People's Republic of China. Beijing Local Taxation Bureau.

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• Denis V. Kadochnikov (2019) Fiscal decentralization and regional budgets’ changing roles: a comparative case study of Russia and China, Area Development and Policy, DOI: 10.1080/23792949.2019.1705171

• The Economist. China's tax system. April 12, 2007.