Overview of the Chinese Tax System
Short History
The current Chinese tax system has been around since 1980 with the enactment of the Chinese-Foreign Equity Joint Venture Income Tax Law (EJV Law) and the Foreign Enterprise Income Tax Law (FEIT Law) in 1981. These developments occurred as part of the liberalization of China’s economy following the events of 1979. As the name suggests the EJV Tax Law applied to foreign invested enterprises (FIEs) that had a Chinese domestic enterprise as an equity partner. The history of political upheaval prior to Deng’s reforms had severely limited technological advances in China so the EJV Law aimed to promote the influx of technologically advanced FDI by granting tax reductions and exemptions to Chinese-foreign joint ventures (JVs) which utilized advanced technology. Furthermore, tax refunds were allowed for any reinvestment of profits obtained by the JV back into the JV. The FEIT Law applied to other foreign invested enterprises and contained similar incentives as the EJV Law but was not as generous. It is important to emphasis that China’s tax system initially distinguished between domestic enterprises and foreign enterprises. The goal of China’s economic policy since 1979 was the controlled encouragement of foreign investment and the government identified tax concessions as one of the primary methods of achieving this goal.
In 1991 the Chinese government unified the tax treatment of foreign enterprises by enacting the Income Tax Law of People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises (“Unified Tax Law”). The Unified Tax Law applied a 33 per cent flat rate of tax to foreign enterprises. However, generous concessions still remained and the tax rate applicable to FIE’s was contingent upon various circumstances, including whether the enterprise was located in a special economic zone, whether profit was reinvested in the business for the purpose of capital increase and the specific industry in which the business operated. It should be noted that domestic enterprises were still taxed under a separate regime.
Enterprise Income Tax Law
In 2008 China implemented significant reforms to the taxation of companies. In line with a growing recognition that the generous tax incentives previously afforded FIEs were no longer necessary in China’s improved investment climate, China enacted the Enterprise Income Tax Law, the central focus of which was the unification of the corporate tax rate for domestic enterprises and FIEs at 25 per cent. To a large extent the EITL eliminated many of the privileges that FIEs enjoyed under the previous system, although it does still contain tax incentives, such as a discounted tax rate for High New Technology Enterprises and Venture Capital Enterprises. However, these incentives apply to both FIE’s and domestic enterprises.
Today, China’s taxes can be placed into the following categories:
- Income Taxes (Enterprise Income Tax and Individual Income Tax).
- Turnover Taxes (VAT, Business Tax and Consumption Tax
- Resource Taxes;
- Property Taxes;
- Behaviour Taxes; and
- Special Purposes Taxes
Tax Policy and Administration
China’s tax administration adopts a very devolved system of tax collection. China has been referred to having a “tax contract” administration system because tax revenue is shared between different levels of governments in accordance with contracts between the different levels of the tax administration system. Such a system places considerable discretion in local authorities. The State Administration of Taxation (SAT) is the highest tax authority in China (and is the equivalent of the IRS in the United States). The primary responsibilities of the SAT are drafting tax laws, consulting to the State Council on tax policy, formulating implementation procedures of supervising the local tax bureaus. SAT also oversees (in combination with the respective local government) to operation of the local tax bureaus (which exist at a provincial, municipal and county level). It is these tax bureau’s that most taxpayers will have an interaction with and accordingly most decisions that affect taxpayers are made at such a level. There is often a wide disparity in the practices of particular tax bureau. This ultimately requires taxpayers to obtain very local, specific tax advice and can cause problems if you merely rely upon the national legislation.
[...] indication by the SAT that it intends to pursue greater transparency and accountability in China’s tax administration process. Perhaps, like the Taxpayers Charter of Rights and Obligations that were issued last year, these [...]