Taxation in China

For taxation in Imperial China, see Taxation in premodern China. For taxation in the Republic of China (Taiwan), see Taxation in Taiwan.

Taxes provide the most important revenue source for the Government of the People's Republic of China. Tax is a key component of macro-economic policy, and greatly affects China's economic and social development. With the changes made since the 1994 tax reform, China has sought to set up a streamlined tax system geared to a socialist market economy.

China's tax revenue came to 11.05 trillion yuan (1.8 trillion U.S. dollars) in 2013, up 9.8 per cent over 2012. Tax revenue in 2015 was 12,488.9 billion yuan. In 2016, tax revenue was 13,035.4 billion yuan. Tax revenue in 2017 was 14,436 billion yuan. In 2018, tax revenue was 15,640.1 billion yuan, an increase of 1204.1 billion yuan over the previous year. Tax revenue in 2019 was 15799.2 billion yuan. In 2020 and 2021, the total tax revenues were respectively 15431 billion and 17273.1 billion Chinese yuan. The 2017 World Bank "Doing Business" rankings estimated that China's total tax rate for corporations was 68% as a percentage of profits through direct and indirect tax. As a percentage of GDP, according to the State Administration of Taxation, overall tax revenues were 30% in China.

The government agency in charge of tax policy is the Ministry of Finance. For tax collection, it is the State Administration of Taxation.

As part of a US$586 billion economic stimulus package in November 2008, the government planned to reform VAT, stating that the plan could cut corporate taxes by 120 billion yuan.

Types of taxes

See also: List of China administrative divisions by tax revenues

Value-added tax (VAT) produces the largest share of China's tax revenue. Corporate income tax is the next largest.

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, VAT, 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. Individual income tax in the PRC was not collected until 1980. "There are no local taxes on personal income in China". The top marginal tax rate on high income earners is 45% for the portion of income above 960,000 RMB. Personal income tax accounts for less than 7% of China's tax revenue, as of 2019.

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

• 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. Since the early 2010s, the Ministry of Finance has sought to implement property taxes but has been opposed by the National People's Congress and many local governments. As of at least early 2024, no property tax measures have made it on to the legislative agenda.
• 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.
• 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.
• Environmental Protection Tax: The environmental protection tax was enacted in 2018 to protect and improve the environment, reduce pollutant emissions, and promote the construction of an ecological civilization. Taxpayers are enterprises, businesses, and production/management that directly discharge taxable pollutants into the environment in the territory of the People's Republic of China and other waters under the jurisdiction of the People's Republic of China. - In case of tax exception (1) When enterprises, public institutions and other producers/operators discharge taxable pollutants into centralized sewage and domestic waste treatment facilities established by law. (2) When enterprises, public institutions and other producers/operators store or dispose of solid waste in facilities or locations that meet national and local standards for environmental protection.

Mined minerals are taxed at a low rate in comparison to the value of the extracted minerals themselves. The rates vary depend on the type and grade of minerals. Resource tax was first established in 1984 on coal, oil, and natural gas. The 1994 tax reform expanded the resource tax to include also include ferrous metals, nonferrous metals, nonmetallic minerals, and salt. Resource taxes were based on the volume of minerals until 2011, when resource taxes became based on the sales value of minerals.

Land use sales are a major non-tax component of government revenues. Prior to the Chinese real estate crash it was the largest source of income for Chinese local governments. The current level of income from this source is debatable due to the high level of fraud as Chinese local governments try to hide the true extent of the shortfall. In China, all land is owned by the various local governments and is leased for up to 70 year periods before reverting back to the government to be leased yet again. Prior to the Chinese real estate crash, the average local government received around 40% of its income from land sales. More recently, fictitious land sales by local governments make it difficult to understand the actual drop in leases and government revenue. Since local governments turn over local taxes to the central government, for redistribution and to help fund the central government, income from land sales is an important source of income for all levels of Chinese government and a shortfall will impact available funds at all levels of government. A drop in this source of has already caused many local governments to have a shortfall in operating funds and has already resulted in responses from reduced wages to layoffs in order to reduce spending, to excessive fines in order to increase income.

Tax filing and payment

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.

Monthly and quarterly filing of tax returns

Value Added Tax (VAT), Corporate Income Tax (CIT), Consumption Tax (CT), Resource Tax, and Environmental Protection Tax are taxes that are paid on a monthly or quarterly basis. If taxpayers must file and pay taxes on a monthly basis, they are obligated to do so within the first 15 days of the following month. They must also ensure that the tax authorities must receive tax returns and payments on or before this date. This deadline is set out in the "Provisions of the State Administration of Taxation on the Time Limit for Tax Declaration and Payment”. The main types of monthly taxes include Individual Income Tax(IIT), Value Added Tax, Resource Tax, and Corporate Income Tax.

In China, several taxes have a quarterly reporting requirement. The quarterly tax filings are usually required for CIT and VAT, among others. Taxpayers with quarterly filing deadlines must submit their tax returns within the first 15 days of the month following the end of each quarter (April, July, October, and January). Urban Maintenance And Construction Tax(UMCT), the Education Surcharge, and the Local Education Surcharge are taxes that are due at the same time as the VAT and CT and are paid at the same time, respectively your tax filing frequency.

General anti-avoidance rules (GAAR)

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.

It is considered that there is no legitimate commercial purpose in the following cases:

(1) More than 75% of the income of foreign enterprises comes from taxable assets in China.

(2) At any point in the preceding year, more than 90% of the foreign corporation's asset value (excluding cash) consists of Chinese assets;

(3) The foreign company has only limited activities and risks, and although legally fully incorporated, it has virtually no economic existence. This provision is specifically aimed at shell companies and similar arrangements.

(4) Overseas tax burden is less compared to direct remittances.

However, a transaction will not be considered an indirect transfer in the following situations:

(1) The exchange of publicly listed shares on a stock market;

(2) When the income would be exempt from Chinese taxation under a relevant tax treaty or agreement if the transaction were direct;

(3) When all of the following conditions are met in the transaction:

The two parties involved in the indirect transfer are part of the same corporate group, where either the transferring company owns more than 80 percent of the shares of the receiving company, or vice versa, or a third company owns over 80 percent of the shares in both the transferring and receiving companies.

The transfer does not result in a reduced tax liability in China.

The receiving company fully pays for the transfer using its own equity.

Tax governance

The 1994 tax reform split taxes into three categories: central government taxes (like customs duties), local government taxes (like business taxes) and shared taxes (like VAT). It reduced the number of taxes from 37 to 23. The 1994 reform also created separate central and local tax authorities which were also separate from the Ministry of Finance or local finance departments.

Rural taxes and fees were reformed beginning in 2000. On 1 January 2006, the agricultural tax was abolished. These rural tax reforms increased the income of farmers and reduced rural inequality. The reforms also put pressure on the financing for lower levels of government.

Before 2002 tax reforms, corporate income tax was paid according to the administrative relationship of each company: central government-owned SOEs paid taxes to the central government, with local companies and local SOEs paying taxes to local governments. Under this arrangement, about 60% of corporate income tax was allocated to local governments. This incentivized local governments to create large local enterprises to generate local profits, and sometimes resulted in local protectionism, especially in highly profitable segments like liquor and tobacco.

After the 2002 tax reforms, corporate income tax was split with 60% to the central government and 40% to local governments, with some exemptions for special central SOEs.

After the Golden Tax Project Phase II was completed in 2003, the VAT invoicing system was made fully electronic. Through improved anti-counterfeiting, auditing, and inspection processes, the problem of false invoices declined and the amount of tax revenue collected from VAT increased significantly.

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".

In 2023, Chinese local governments' fiscal revenues will show a steady increase in proportion to support policies, sending a green light for national economic recovery. The rapid economic improvement resulting from the pandemic has laid the foundation for economic recovery beyond 2022. According to CAFS (the Chinese Academy of Fiscal Sciences) research, China's fiscal situation is expected to improve in 2023, indicating a brighter outlook for the country's local finances. All finance departments are taking many steps to ease the financial burden. The central government paid 10.6 trillion yuan to local governments to help them cope with fiscal decline due to tax and fee cuts. In addition, the central government requested local governments to reduce general spending, establish a mechanism to directly distribute budgets to lower-level governments, and strengthen monitoring of local financial management.

China has undergone tax reforms in the past decade aimed at enhancing the effectiveness of its tax system. However, tax revenue as a share of GDP has seen a significant decline, leading to relatively low current tax rates. As a result, China plans to shift towards specific and higher consumption tax rates in the upcoming years. The Personal Income Tax (PIT) schedule will be adjusted to elevate average tax rates while decreasing Social Security Contributions (SSC). Additionally, a new nationwide property tax will be introduced. The value-added tax (VAT) rate will be lowered, and the number of exemptions reduced. Furthermore, revenues from carbon emissions permits will see an increase.

Malware

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. Both sets of malware allowed for the theft of corporate secrets and other industrial espionage.

GoldenSpy

GoldenSpy was discovered in 2020 inside Aisino's Intelligent Tax Software, it allows system level access allowing an attacker nearly full control over an infected system. It was discovered that the Intelligent Tax software's uninstall feature would leave the malware in place if used.

After GoldenSpy was discovered its creator's attempted to scrub it from infected systems in an attempt to cover their tracks. The uninstaller was delivered directly through the tax software. A second more sophisticated version of the uninstaller was later deployed as well.

The suspicious characteristics of GoldenSpy include: Covert download, occurring two hours after the installation of the Intelligent Tax software, Creation of two autostart services for monitoring and self-restart, Uninstalling the tax software does not remove the GoldenSpy binaries, Beaconing traffic to a domain unrelated to the tax software, and Running with system-level privileges and allowing for remote code execution.

GoldenHelper

GoldenHelper was discovered after GoldenSpy and is an equally sophisticated malware program which was part of the Golden Tax Invoicing software from Baiwang which is used by all companies in China to pay VAT. While it was discovered after GoldenSpy GoldenHelper had been operating for longer. This discovery indicated that Chinese tax software was harboring malware for much longer than suspected.

There are many techniques used by Golden Helper. Obfuscation to randomly generate file names during transfer, file system location randomization, random timestamping, IP-based domain generation algorithm, UAC bypass to eliminate the need for user permissions for installation and elevation to system-level privileges, and more.

Historical views and practice

Guan Zhong (723-645 BCE) wrote that because taxation would reduce the people's wealth and make them dislike the government, it was better to obtain revenue by monopolizing the sale of salt, iron, forest products, and ore.

Confucian thinking generally held that taxation should be low. Chinese historiography often attributes the collapse of dynasties to the imposition of heavy taxes and levies.

Mencius (372-289 BCE) favored low taxation of the people and stated that the rulers of the warring states were imposing taxes like brigands. His view was that the agricultural tax in place but abolish all other taxes. He particularly criticized market taxes, head taxes, and housing taxes. Mencius believed the ideal tax rate was 10%.

After defeating the other six kingdoms, the Qin dynasty maintained the high taxes it had imposed in war time and imposed taxes to fund projects including the Great Wall and the Terracotta Army. Taxes and levies equaled two-thirds of farmers' crops. Discontent with these policies contributed to rebellion and ultimately the defeat of the Qin and establishment of the Han dynasty.

See also

• 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

References

• 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.

Further reading

• Liu, Zuo (2006). Taxation in China. Cengage Learning Asia. ISBN 978-981-254-438-4.
• Li, Jinyan (1991). Taxation in the People's Republic of China. Greenwood Press. ISBN 978-0-275-93688-4.
• Brean, Donald (1998). Taxation in Modern China. Routledge. ISBN 978-0-415-92018-6.
• Bahl, Roy (1998). Taxation Reform in China. University of Michigan Press. ISBN 978-0-472-59003-2.
• Wang, Xuanhui (1998). Taxation in China 1997/98. Sweet & Maxwell. ISBN 978-962-661-003-9.
• Gelatt, Timothy (1986). Corporate and Individual Taxation in the People's Republic of China. Sweet & Maxwell. ISBN 978-0-85121-057-5.
• Bernstein, Thomas; Xiaobo Lü (2003). Taxation without Representation in Contemporary Rural China. Cambridge University Press. ISBN 978-0-521-81318-1.
• Han Liang Huang (2003). The Land Tax in China. University Press of the Pacific. ISBN 978-1-4102-0867-5.
• Li, Jian; Alan Paisey (2007). Transfer Pricing Audits in China. Palgrave Macmillan. ISBN 978-0-230-00196-1.
• Wang, Shaoguang; Angang Hu (2001). The Chinese Economy in Crisis: State Capacity and Tax Reform. M.E. Sharpe. ISBN 978-0-7656-0766-9.
• Zhang, Xin (2003). Law and Practice of International Tax Treaties in China. Wildy, Simmonds and Hill Publishing. ISBN 978-1-898029-62-5.
• Environmental Taxes: Recent Developments in China and Oecd Countries. OECD. 1999. ISBN 978-92-64-17092-6.
• Jin, Chaowu (2006). Regulatory Environment of Chinese Taxation. William S Hein & Co. ISBN 978-0-8377-3325-8.
• China Tax Guide. USA Ibp. 2003. ISBN 978-0-7397-6280-6.
• Dimancescu, Katherine (2006). China Tax and Financial Planning Briefing. WorldTrade Executive. ISBN 978-1-893323-87-2.
• Yu, Bingqing (1999). Law of the People's Republic of China on the Administration of Tax Collection. Foreign Languages Press. ISBN 978-7-119-02477-6.
• Fulton, Trish; Jinyan Li; Dianqing Xu (1998). China's Tax Reform Options. World Scientific Publishing. ISBN 978-981-02-3447-8.
• Gensler, Howard; Jiliang Yang; Yongfu Li (1998). A Guide to China's Tax and Business Laws. Sweet & Maxwell Asia. ISBN 978-962-661-122-7.
• China Master Tax Guide. Kluwer Law International. 2005. ISBN 978-90-411-2424-1.
• Moser, Michael; Winston K. Zee (1999). China Tax Guide. OUP China. ISBN 978-0-19-590610-3.
• Gensler, Howard (1998). China Tax and Accounting Manual. Asia Law & Practice. ISBN 978-962-936-035-1.
• Farah, Paolo Davide (2015-11-24). "China's Role and Contribution in The Global Governance of Climate Change: Institutional Adjustments for Carbon Tax Introduction, Collection and Management in China". Journal of World Energy Law and Business. 8 (6). SSRN 2695612.
• 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

History

• Huang, R. Taxation and Governmental Finance in Sixteenth Century Ming China (Cambridge U. Press, 1974)

External links

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