The Current Tax System

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2 The Current Tax System

TAX CATEGORIES AND REVENUE

TAX LEGISLATION

TAXATION ON FOREIGN INVESTMENT

Under China's current tax system, 29 types of taxes are levied, 16 of which are clearly applicable to enterprises with foreign investment, foreign enterprises, or foreigners. The fundamental laws and regulations governing taxation are formulated by the National People's Congress (NPC) and its Standing Committee, and the State Council.

TAX CATEGORIES AND REVENUE

The 29 types of taxes can be grouped, according to their nature and function, into seven main categories.

Category 1: Turnover Taxes

  • Types: Value-Added Tax, Consumption Tax, Business Tax, and Customs Duty.
  • Application: These taxes are levied on the manufacturing, circulation, or service sectors. The levies are based on the volume of turnover or sales, or on the import/export value (or quantity) of goods.

Category 2: Income Taxes

  • Types: Enterprise Income Tax, Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, and Individual Income Tax.
  • Application: Levies are based on the profits earned by producers or dealers, or on the income earned by individuals.

Category 3: Resource Taxes

  • Types: Resource Tax, and Urban and Township Land Use Tax.
  • Application: These taxes are applicable to those engaged in natural resource exploitation, or to those who utilize urban and township land. They reflect the principle that the utilization of state-owned natural resources is chargeable, and are aimed at adjusting the different profits earned by taxpayers with varying access to natural resources.

Category 4: Property Taxes

  • Types: House Property Tax, Urban Real Estate Tax, and Inheritance Tax (to be enacted).

Category 5: Taxes for Special Purposes

  • Types: City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, Vehicle Acquisition Tax, Fuel Tax, and Social Security Tax.
  • Application: These taxes are levied on specified items for special regulatory purposes.

Category 6: Behavior Taxes

  • Types: Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Vessel Tonnage Tax, Stamp Tax, Deed Tax, Securities Exchange Tax, Slaughter Tax, and Banquet Tax.
  • Application: These taxes are levied on specified behavior.

Category 7: Agricultural and Animal Husbandry Taxes

  • Types: Agriculture Tax (including Agricultural Speciality Tax), and Animal Husbandry Tax.
  • Application: These taxes are levied on enterprises, units and/or individuals receiving income from agricultural and animal husbandry activities.

Taxes Being Phased Out

The administration of the Banquet Tax has been decentralized. Local governments now decide whether or not to levy this tax based on local conditions. In some areas, it is no longer levied.

The Fixed Asset Investment Orientation Regulation Tax has been suspended since 2000.

The Slaughter Tax, Agriculture Tax, and Animal Husbandry Tax is to be abolished gradually as tax reforms progress. The levy of the Slaughter Tax and Animal Husbandry Tax has already been stopped, while the Agriculture Tax is no longer levied in most areas of China.

Taxes Awaiting Legislation

Although they have already been formulated, the Fuel Tax, Social Security Tax, Inheritance Tax, and Securities Exchange Tax have yet to be enacted for levying.

Non-Tax Revenue

Non-tax revenue collected by the tax department under state-uniform rules comes from three sources: the Educational Surcharge, Mining District Use Fee, and Cultural Construction Fee.

Furthermore, the People's Government can rule at the provincial level that the tax department collect the Social Security Fee (which currently covers basic pensions, basic medical insurance, unemployment insurance, and work injury insurance).

Revenue Breakdown

In 2003, tax revenue collected by tax organizations, financial organizations, and the Customs Administration totaled 2,001.73 billion yuan, accounting for 92.2% of total fiscal revenue and for 17.1% of GDP.

VAT contributed 806.82 billion yuan, Consumption Tax 121.08 billion yuan, Business Tax 286.89 billion yuan, Enterprise Income Tax 304.76 billion yuan, Individual Income Tax 141.73 billion yuan, Agriculture Tax 42.66 billion yuan, and Customs Duty 92.31 billion yuan.

The Central Government received 1,160.40 billion yuan, or 58.0% of total tax revenue; the local government received 841.33 billion yuan, or 42.0%.

According to the primary statistics, in 2004, total tax revenue reached 2,414.19 billion yuan, accounting for 91.6% of total fiscal revenue and for 17.7% of GDP.

TAX LEGISLATION

Governing Principles

When formulating tax legislation and tax policy, China stresses the centralization of tax authority and the uniformity of tax policy. For the time being, the main state organs that have the authority to formulate tax laws or tax are the NPC and its Standing Committee, the State Council, the Ministry of Finance, the State Administration of Taxation (SAT), the General Administration of Customs, and the Tariff and Classification Committee of the State Council.

The fundamental framework is upheld by tax laws, which are formulated by the NPC (e.g., the Individual Income Tax Law of the People's Republic of China), or by the Standing Committee of the NPC (e.g., the Tax Collection and Administration Law of the People's Republic of China).

Formulating Bodies

The administrative regulations and rules governing taxation are formulated by the State Council in accordance with relevant laws (e.g., the Detailed Rules for the Implementation of the Tax Collection and Administration Law of the People's Republic of China), or under the authorization of the NPC and its Standing Committee (e.g., the Provisional Regulations of the People's Republic of China on Value-Added Tax).

Departmental rules governing taxation are formulated by the Ministry of Finance, the SAT, the General Administration of Customs, and the Tariff and Classification Committee of the State Council in accordance with relevant laws and administrative rules (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 Self-Reporting of Individual Income Tax). Some important rules (e.g., the Measures for Taxing Shipping Income of Foreign Companies) are promulgated only after the State Council has approved them.

Formulation Process

For tax laws, formulation follows four steps: drafting, examination, voting, and promulgation. For tax administrative regulations and rules, formulation follows another four steps: planning, drafting, verification, and promulgation. All these steps take place in accordance with the country's prevailing laws, regulations, and rules.

Local Governments and SARs

The laws of China stipulate that some local tax regulations and rules can be formulated by the NPC and its Standing Committee in provinces, autonomous regions, and municipalities directly under the State Council, and in some large cities, with due consideration to the practical needs and conditions prevailing in these jurisdictions, as long as they do not contravene national tax laws, tax regulations, or tax rules. The People's Government of provinces, autonomous regions, and municipalities directly under the State Council, and in some large cities, may formulate tax rules in accordance with tax laws and regulations, or with the local rules and regulations of their provinces, autonomous regions, and municipalities directly under the State Council.

A separate tax system is implemented in the Hong Kong and Macao Special Administrative Regions (SARs); the Central Government does not levy taxes in these two regions.

Summary of Legislative Milestones

Table 2.1 summarizes the issuance and implementation of current tax laws, rules and regulations, and relevant legislation in China.

Table 2.1 Current tax legislation in China
Legislation Date of Issue; Issued By Effective Date
Note:
Provisions on criminal responsibility in the Tax Administration and Collection Law, the Supplementary Rules of the Standing Committee of the NPC of the People's Republic of China on the Penalty for Tax Evasion and Refusal to Pay Taxes, and the Resolutions of the Standing Committee of the NPC of the People's Republic of China on the Penalty for False Issuance, Forgery, and/or Illegal Sales of VAT Invoices have been integrated into the Criminal Law of the People's Republic of China.
1. Provisional Regulations of the People's Republic of China on Value-Added Tax
Detailed Rules for its Implementation
Dec 13, 1993; State Council
Dec 25, 1993; Ministry of Finance
Jan 1, 1994
Jan 1, 1994
2. Provisional Regulations of the People's Republic of China on Consumption Tax
Detailed Rules for its Implementation
Dec 13, 1993; State Council
Dec 25, 1993; Ministry of Finance
Jan 1, 1994
Jan 1, 1994
3. Provisional Regulations of the People's Republic of China on Business Tax
Detailed Rules for its Implementation
Dec 13, 1993; State Council
Dec 25, 1993; Ministry of Finance
Jan 1, 1994
Jan 1, 1994
4. Provisional Regulations of the People's Republic of China on Enterprise Income Tax
Detailed Rules for its Implementation
Dec 13, 1993; State Council
Feb 4, 1994; Ministry of Finance
Jan 1, 1994
Jan 1, 1994
5. Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises
Detailed Rules for its Implementation
Apr 9, 1991; at the Fourth Session of the 7th NPC
Jun 30, 1991; State Council
Jul 1, 1991
Jul 1, 1991
6. Individual Income Tax Law of the People's Republic of China
Regulations for its Implementation
The Implementation Measures for Levying Individual Income Tax on Savings Interest Income
Sep 10, 1980; passed at the Third Session of the 5th NPC; revised for the first time at the Fourth Session of the 8th NPC on Oct 31, 1993; revised for the second time at the Eleventh Session of the Standing Committee of the 9th NPC on Aug 30, 1999
Jan 28, 1994; State Council
Sep 30, 1999; State Council
Sep 10, 1980
Jan 28, 1994
Sep 30, 1999
7. Provisional Regulations of the People's Republic of China on Resource Tax
Detailed Rules for its Implementation
Dec 25, 1993; State Council
Dec 30, 1993; Ministry of Finance
Jan 1, 1994
Jan 1, 1994
8. Provisional Regulations of the People's Republic of China on City and Township Land Use Tax
Detailed Rules for its Implementation
Sep 27, 1988; State Council
To be made by the People's Government at provincial level
Nov 1, 1998
9. Provisional Regulations of the People's Republic of China on House Property Tax
Detailed Rules for its Implementation
Sep 15, 1986; State Council
To be made by the People's Government at provincial level
Oct 1, 1986
10. Provisional Regulations Governing Urban Real Estate TaxAug 8, 1951; Central People's Government Administration CouncilAug 8, 1951
11. Inheritance TaxTo be legislated 
12. Provisional Regulations of the People's Republic of China on City Maintenance and Construction Tax
Detailed Rules for its Implementation
Feb 8, 1985; State Council
To be made by the People's Government at provincial level
Jan 1, 1985
13. Provisional Regulations of the People's Republic of China on Farmland Occupation Tax
Detailed Rules for its Implementation
Apr 1, 1987; State Council
To be made by the People's Government at provincial level
Apr 1, 1987
14. Provisional Regulations of the People's Republic of China on Fixed Assets Investment Orientation Regulation Tax
Detailed Rules for its Implementation
Apr 16, 1991; State Council
Jun 18, 1991; SAT
1991; Levy suspended since 2000
15. Provisional Regulations of the People's Republic of China on Land Appreciation Tax
Detailed Rules for Its Implementation
Dec 13, 1993; State Council
Jan 27, 1995; Ministry of Finance
Jan 1, 1994
Jan 27, 1995
16. Provisional Regulations of the People's Republic of China on Vehicle Acquisition TaxOct 22, 2000; State CouncilJan 1, 2001
17. Fuel TaxTo be enacted 
18. Social Security TaxTo be enacted 
19. Provisional Regulations of the People's Republic of China on Vehicle and Vessel Usage Tax
Detailed Rules for its Implementation
Sep 15, 1986; State Council
To be made by the People's Government at provincial level
Oct 1, 1986
20. Provisional Regulations on Vehicle and Vessel Usage License Plate TaxSep 20, 1951; Central Government Administration CouncilSep 20, 1951
21. Provisional Measures on Vessel Tonnage TaxSep 16, 1952; approved by the Fiscal Committee of the Central Government Administration Council; promulgated on Sep 29, 1952, by the Customs Administration; revised by the Ministry of Foreign Trade and Economic Cooperation on Nov 30, 1954 and Aug 2, 1974, upon approval by the Fiscal Committee of the Central Government Administration Council and the State CouncilSep 29, 1952
22. Provisional Regulations of the People's Republic of China on Stamp Tax
Detailed Rules for its Implementation
Aug 6, 1988; State Council
Sep 29, 1988; Ministry of Finance
Oct 1, 1988
Oct 1, 1988
23. Provisional Regulations Governing Deed Tax
Detailed Rules for its Implementation
Jul 7, 1997; State Council
Oct 28, 1997; Ministry of Finance
Oct 1, 1997
Oct 1, 1997
24. Securities Exchange TaxTo be legislated 
25. Provisional Regulations on Slaughter Tax (administered by the local governments)Dec 19, 1950; Central Government Administration Council 
26. Provisional Regulations of the People's Republic of China on Banquet Tax (administered by the local governments)Sep 22, 1988; State CouncilLevy determined by local government at provincial level
27. Provisional Regulations of the People's Republic of China on Agriculture TaxJun 3, 1958; the 96th Session of the Standing Committee of the 1st NPC (the Second and Third Sessions of the 10th NPC approved the reduction of the rate from 2004 until it reached zero in 2006)Jun 3, 1958
28. Rules of the State Council on Levying Agriculture Tax on Agricultural Specialties
Measures for its Implementation
Jan 30, 1994; State Council
To be made by the People's Government at provincial level (the Second Session of the 10th NPC approved the levy on tobacco products only from 2004)
Jan 30, 1958
29. Animal Husbandry Tax (no national legislation)If levied, rules should be made by the provincial governments concerned (the Third Session of the 10th NPC approved its exemption from 2005 
30. Regulations of the People's Republic of China on Import and Export Customs DutyNov 23, 2003; State CouncilJan 1, 2004
31. Decision of the Standing Committee of the NPC on the Implementation of VAT, Consumption Tax, and Business Tax on Enterprises with Foreign Investment and Foreign EnterprisesDec 29, 1993; at the Fifth Session of the Standing Committee of the 8th NPCDec 29, 1993
32. Circular of the State Council on Issues on the Implementation of VAT, Consumption Tax, and Business Tax on Enterprises with Foreign Investment and Foreign EnterprisesFeb 22, 1994; State CouncilJan 1, 1994
33. Law of the People's Republic of China on Tax Administration and Collection Detailed rules for its implementationSep 4, 1992; at the Twenty-seventh Session of the Standing Committee of the 7th NPC; revised and re-promulgated by the Twelfth Session of the Standing Committee of the 8th NPC on Feb 28, 1995; revised again at the Twenty-first Session of the Standing Committee of NPC on Apr 28, 2001
Issued by the State Council for the first time on Aug 4, 1993 and for the second time in Sep 7, 2002
Jan 1, 1993
34. Supplementary Rules of the Standing Committee of NPC of the People's Republic of China on the Penalty for Tax Evasion and Refusal to Pay TaxesSep 4, 1992; at the Twenty-seventh Session of the Standing Committee of the 7th NPCJan 1, 1993
35. Measures of the Customs of the People's Republic of China on the Collection and Administration of Duty on Goods Imported & ExportedApr 1, 2005; General Administration of Customs of Administration PRC (Decree No. 124)Mar 1, 2005
36. Measures of the People's Republic of China on Invoice Management
Detailed Rules for its Implementation
Dec 12, 1993; approved by the State Council and issued by the Ministry of Finance on Dec 23, 1993
Dec 28, 1993; SAT
Dec 23, 1993
Dec 23, 1993
37. Resolutions of the Standing Committee of NPC of the People's Republic of China on the Penalty for False Issuance, Forgery, and/or Illegal Sales of VAT InvoicesOct 30, 1995; at the Sixteenth Session of the Standing Committee of the 8th NPCOct 30, 1995
38. Rules on Tax Administrative Appealing (trial)Feb 24, 2004; SATMay 1, 2004

TAXATION ON FOREIGN INVESTMENT

Of the tax laws, regulations, and methods already promulgated in China, 16 are currently applicable to enterprises with foreign investment, foreign enterprises, or foreigners:

  1. Provisional Regulations of the People's Republic of China on Value-Added Tax
  2. Provisional Regulations of the People's Republic of China on Consumption Tax
  3. Provisional Regulations of the People's Republic of China on Business Tax
  4. Regulations of the People's Republic of China on Import and Export Customs Duty
  5. Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises
  6. Individual Income Tax Law of the People's Republic of China
  7. Provisional Regulations of the People's Republic of China on Resource Tax
  8. Provisional Regulations Governing Urban Real Estate Tax
  9. Provisional Regulations of the People's Republic of China on Land Appreciation Tax
  10. Provisional Regulations of the People's Republic of China on Vehicle Acquisition Tax
  11. Provisional Regulations Concerning the Vehicle and Vessel Usage License Plate Tax
  12. Provisional Measures on Vessel Tonnage Tax
  13. Provisional Regulations of the People's Republic of China Concerning Stamp Tax
  14. Provisional Regulations Governing Deed Tax
  15. Provisional Regulations Concerning Slaughter Tax (suspended already)
  16. Provisional Regulations of the People's Republic of China on Agriculture Tax (levying halted in most areas of China now)

Investments by Overseas Chinese

For tax purposes, enterprises invested in by Chinese compatriots residing in Hong Kong, Macao, and Taiwan, and other overseas Chinese will be treated in the same manner as enterprises with foreign investment and foreign enterprises; Chinese compatriots from Hong Kong, Macao, and Taiwan, and other overseas Chinese will be treated in the same manner as foreigners.

Preferential Treatment and Bilateral Agreements

To facilitate its efforts to open up to the outside world and to encourage the inward flow of funds, technology, and intelligence, China offers numerous preferential treatments in terms of taxation of foreigners and foreign enterprises. It has also successively concluded agreements with 85 countries on avoidance of double taxation on income and on prevention of tax evasion:

Albania
Armenia
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Brazil
Brunei
Bulgaria
Canada
Croatia
Cuba
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Jamaica
Japan
Kazakhstan
Kuwait
Kyrgyz Republic
Laos
Latvia
Lithuania
Luxembourg
Macedonia
Malaysia
Malta

Mauritius
Moldova
Mongolia
Morocco
Nepal
Netherlands
New Zealand
Nigeria
Norway
Oman
Pakistan
Papua New Guinea
Philippines
Poland
Portugal
Qatar
Republic of Korea
Romania
Russia
Seychelles
Singapore
Slovenia
South Africa
Spain
Sri Lanka
Sudan
Sweden
Switzerland
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Arab Emirates
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Yugoslavia

With 74 of these countries, the agreements have been in force since April 1, 2005.