An Overview of Chinese Tax Systems in China
Understanding the Chinese tax system is a delicate mix between industry knowledge, national & local procedure, relationship management and cultural understanding.
To give Business owners and International Tax Consultants a better understanding of the new Chinese tax focus.
Eddy Young, Director and Head of Tax for China and Hong Kong at TCS Hong Kong, likes to start each seminar with a lesson in language and geography to help highlight cultural differences, the vast size of China and the key regions that outline the old and current factors that formulate New Chinese Tax regulations.
Heading: Tax Structural Enhancement
Even though tax law is governed from Beijing, China has 22 provinces, 5 autonomous regions and 4 municipal cities; underlining the fact that there is no one China Tax strategy. Eddy emphasises that the ‘Guanxi’ risk management tool (a networks of influential relationships that facilitate business dealings) is becoming less pertinent in the tax infrastructures as tax revenue becomes more based on intuitive targets as new legislation moves away from a blanket coverage system some of the key point are:
- National regulation but local enforcement
- Interpretation varies from location to location
- Lack of regulatory details and transparency
- Mind the “Cultural Shock”
The new structural changes incur new legal ramifications making the system more sophisticated, giving governing bodies more flexibility to better deter Tax Avoidance. The Chinese authorities now have more ground to challenge paper work, business structure and processes. Some of the focal areas are:
- Increased Scrutiny On Non Residents
New anti-avoidance rules that scrutinise company structure and activity, these leave businesses that haven’t been re-evaluated in the last 5 years open to risk.
- Expanded Jurisdictions
Effective of June 2013 fresh rules targeting areas such as Human Resource Management were implemented; now the authorities can challenge HR reporting systems of inbound secondment staff. Demanding registration completed by the home company along with evidence of processes as proof to comply with effective management regulations, leaving many open to new areas of risk.
- Tax Audit
With the introduction of the latest system which is designed to be more intuitive there has effectively been an 8% tax rate drop. This has encouraged a tougher stance on non-compliance and the authorities are challenging tax activity more aggressively.
There is also no statute of limitation for non-compliance.
Globally there is now greater disclosure of international activity. The Chinese Government have signed double taxation treaties with over 100 countries and is part of tax exchange programs with multiple countries.
- Era of Transformation
The old tax regimes helped to develop Beijing and Shanghai to world renowned business centres. The new administrations are using the same ideas to encourage development in new areas and specific industries.
Heading: Tax Development Trends
One major development is the move from Business Tax (BT) and the phasing in of Value Added Tax (VAT) this became effective on August 1 2013 for all transportation and modern services sectors. This regulation will be national from 2015
Sub Heading: Regional Strategies
Cities such as Beijing and Shanghai were founded on tax incentive programmes. Now they have reached their current milestone governance has shifted the focus to developing service industries, high-value outsourcing, new hi-tech and environmental protection projects in these locations.
Sub Heading: Southern China
Guangdong province is not often talked about in terms of business development opportunities. The modernized regulations use the methodologies that propelled Beijing and Shanghai into the international business spotlight in way of new wave investment, by offering special fiscal incentives into 3 main areas:
- Qianhai in Shenzhen
- Hengqin in Zhuhai
- Nansha in Guangzhou
Specifically, these regions are subject to a reduced corporate Income Tax (CIT) of 15% and rebates of individual income tax for qualified talents.
Heading: Hong Kong: Offshore holding
Hong Kong has long been recognised as an effective gateway for investing into China for reasons including an investment friendly environment, simple tax system and proximity to China. With the recent change of taxation rules in China, Hong Kong’s strategic position as a preferred jurisdiction of choice for multinational enterprises investing into China is further solidified. Some of the key factors are:
- Territorial tax system.
- No income tax on foreign dividends.
- No capital gains tax.
- No dividends/Interest withholding.
- No foreign exchange control.
- An evolving treaty network.
- Proximity to China, One country Two Systems
- Easier to obtain Beneficial Owner (BO) status under HK/China DTA under Circular 165.
Heading: Key Points to Take Away
What puts my company at risk?
- China operations that have been set up for years without regular review.
- Many inter-company transactions without adequate documentation.
- Insufficient in-house resources to keep updated on the latest tax regulations and compliance requirements.
- Full reliance on local team to ensure compliance.
- Not sure or updated of local compliance status.
- Non resident deriving income from China.
- There has been a tightening of taxation of non-resident in China.
- Aggressive tax revenue targets and tax audit with the burden of proof on the taxpayers
- Less negotiable interest and penalties provisions.
- An increased focus on anti-avoidance including transfer pricing.
- New regional opportunities across China.
- Redefined supply chain model in Hong Kong and China.
China is moving from low-end manufacturing to High-Tec, high value, environmental friendly manufacturing.
Hong Kong has a wider role in Chinese business development and offers many tax benefits.
- International mobilization can trigger corporate exposures, be proactive and transparent.