Features of Chinese Tax Law - Research Paper Example

Features of Chinese Tax Law There is a close relationship between the tax system of a country and the level of investment made in the country by residents of another country, or technically speaking, with the level of foreign direct investment. Foreign direct investment has been described as one of the most important factors for economic development of any country. It not only brings capital into the economy, but also transfers technological advancements and leads to better organisational and managerial practices through highly skilled managers. It also helps the concerned economy through greater access of international economy. In this context the rate of tax plays an important role in developing the economy by affecting the level of investment and the level of income generated from that investment. Hence, the rate of tax is an important indicator of the level of investment that is to be made in any country (Tax Incentives and Foreign Direct Investment: A Global Survey, 2000, p.3). This paper is aimed at describing the features of the tax law in China and its relation with the level of investment to be made in the country. Recent economic change and tax law in China: The recent history of China’s economic system reveals that the country’s economy is growing at rapid rate with the annual increase in the GDP rate of growth at more than 9%. There are numerous causes of this rapid growth of the country’s economy. Among these causes institutional changes are the most important. However, in recent times the People’s Republic of China has made several reformatory changes (Fang, 2010, p.308). These changes included changes in property law, which was introduced with privatisation programmes, changes in competition law. The country has also opened its economy with the introduction of globalisation and liberalisation. In this regard the country’s tax law also played an important role in developing the nation’s economic structure and helping in achieving larger growth rates (Gipouloux, 2011, p.85). Major tax reform policies implemented by China in 1978, 1983, 1994 and in 2004 which have augmented the pace of economic development in the country (Eger et al., 2007, p.29). Taxation in China: In China foreign business organisations having their head offices in the country are taxed. This tax is imposed on their worldwide income. Foreign companies working in China are taxed only on the level of those companies which have been derived from China. But tax credits are given to these foreign enterprises only on the income which is derived from other countries. In the face of globalisation this tax rates have played an important role in increasing the growth path of the country (Cockfield, 2010, p.52). The National Tax Bureau and the Local Tax Bureau are the two systems of China’s tax authorities. The National Tax Bureau access and collect taxes from enterprises and corporations. The Local Tax Bureau collects income taxes from individuals and also collects property taxes from them. According to the New Enterprise Income Tax Law, which has been introduced in January 1 in 2008, both foreign and local business organisations are required to pay 25% of their income acquired from the country to the government of China. There are several tax laws in the country. Among these laws the Personal Income Tax Law of 1999 is most important. This law deals with the collection of taxes on the income of the residents of the country. The Consumption Tax Law of 1994 deals with the process of collection of taxes on the consumption of goods and services by the residents of the country. The Construction Tax Law of 1987 deals with the law regarding the collection of taxes from new constructions which are happening in the country. But among all these laws tax laws for the foreign enterprises and foreign investment is most important for an investor (Eger et al., 2007, pp.98-101). Major taxes on foreign organisations: Foreign enterprise taxpayers are classified into two categories: one is foreign investment enterprises and the other is the foreign enterprises. Foreign investment enterprises are fully foreign-owned enterprises or these are equity joint ventures or cooperatives or contractual joint ventures. On the contrary, foreign enterprises are representative offices and branch offices of foreign-owned enterprises. These organisations are liable to pay mainly three types of taxes: income taxes, transaction taxes and other taxes. Income tax is levied on the level of income of these business organisations. Transaction taxes include Value Added tax, Consumption tax and Business tax. Vehicle and vessel license tax, Stamp tax, Property tax, Deed tax are part of other taxes. Apart from these main taxes business organisations are required to pay custom duties which are imposed on imports and exports of goods and services (Taxation in China, 2008, pp.1-2). Among all these taxes the income tax is the most crucial tax system in China. According to the New Enterprise Income Tax Law, both local and foreign companies are required to pay 205% of their total taxable income to the Chinese government. This tax also joins reduction in pre-payment tax and preferential tax policies. For the Residential and Non-Residential Enterprise tax liabilities in the country are distinguished. Residential Enterprises are required to pay taxes on their income which has been generated from their global business. For example Wall-Mart and General Motors Corporations are treated in China as Residential Corporations. These also include Small Scale Enterprises earning an annual income of less than RMB300, 000. These later enterprises are required to pay only 20% of their global income as tax. Non-Residential Enterprises are those which do not have effective management in China and also they are not included in the foreign law of the country. These enterprises are required to pay taxes on their income which has been generated from China only. Foreign enterprises are also required to pay Value Added tax to the government. This tax is imposed on the companies which are engaged in selling commodities to the marketplace and also repairing and maintenance services and imports and exports of goods and services in the country. These enterprises are required to pay 17% of their income generated from those activities and this is the standard rate of tax. But the rate of Value Added tax is 13% on certain commodities like grain, forage, fertilisers, farming machinery etc. Consumption tax is levied on production, processing as well as importation of certain commodities in the country which are tobacco, alcoholic drinks, jewellery, fireworks, gasoline, motorcycle and motorcar etc. This type o tax is calculated on the basis of fixed quantity of the product or on fixed scheduled rates. For example, the rate of tax on motorcar having engine cylinder capacity less than 2,200ml is 8%. Enterprises which are engaged in transportation, telecommunication, finance, construction, sports, art and entertainment, transfer businesses of intangible assets and business of transferring immovable properties are liable to pay to business tax. The standard business tax rate in the country is 3 to 5%, but this tax rate is 10 to 15% in the entertainment sector. Business enterprises are also required to pay Vehicle License Tax and Vessel Licence Tax on the vehicles which are owned and used for business purposes by these enterprises. These enterprises are also required to pay Stamp Taxes which are levied on the purchases and sales of goods and services by these enterprises and on engineering projects, storage and warehouse, asset insurance, transfers of technologies and property rights, royalty license etc. 0.005% is the minimum stamp tax rate and 0.1% is the maximum tax rate in the country. The foreign enterprises are also required to pay an annual rate of 1.2% of tax on the original value of the real estate owned by an enterprise as Property Tax. On rental incomes of these enterprises 20% of tax is levied. These enterprises are also required to pay 1 to 2% of their income generated from the purchase or acquisition of land or building as Deed Tax. Dividends received by foreign and local enterprises are also calculated under the income tax (Taxation in China, 2008, pp.2-5). According to China’s tax law there is no difference between capital gains and other revenues received in the country. Therefore in the country ‘foreign shareholders are subject to foreign enterprises income tax on capital gains at 20% (withholding tax) from the sales of their investments in foreign investment enterprise’. In this procedure of tax calculation no indexation allowances are given to the foreign enterprises. Cooperative joint ventures are widely used in the country, although it is not a legal entity in the country. But partnerships are not so common in the country. In case of cooperative joint ventures the foreign enterprise the partner is liable to pay tax on the share of the pretax income that is acquired by the foreign partner. More than 85 Double Taxation Agreements (DTAs) have been maintained by China with various trading partners (Wolff, 2008, p.220). The country has adopted a mixed model of OECD and the UN regarding the imposition of tax rates on the income generated from the country or in the country (Taxation in China, 2008, p.5). Tax laws and foreign direct investment in China: In the face of the need for greater liberalisation and globalisation China has adopted various policies including tax reform policies. These policies have been implemented mainly after 1994 and these policies have led the country and its economy to achieve greater success in terms of incorporation of large number of global enterprises into the economic system of the country and also to augment the path of economic development of the country. In 1994, the income tax rates for the foreign enterprises have been reduced from 55% to 33%. This sharp decline in the tax rates encouraged these foreign enterprises to invest more in the country. The income tax rate stands at 25% in modern days and this sharp decline has again forced foreign investors to invest at rapid speed in the country (Zimmerman, 2010, pp.379-380). Hence, it can easily be said that the Chinese tax law is highly beneficial for foreign investors to invest in the economy (Zeng, 1999, pp.23-24). Conclusion: The Chinese tax law has been changed in many times, particularly after the inclusion of the policy of liberalisation and greater openness in the global economic structure. In the face of the greater need for catching up with the fastest growing global trade and economic development the country was suggested to implement softer tax laws by reducing tax rates on incomes of foreign enterprises and thus increasing the ability of those enterprises to invest more in the country’s economy. This policy has helped the country to some great extent to achieve an annual growth rate of 9% (Wong and Liu, 2007, pp.206-207). The new tax laws are expected to help foreign investors to some great extent to augment the growth rate of these economies and also to increase the growth rate of the Chinese economy. References: 1. Cockfield, A. J. (2010), Globalization and its tax discontents: tax policy and international investments: essays in honour of Alex Easson, UK: University of Toronto Press 2. Eger, T. et al. (2007), Economic analysis of law in China, UK: Edward Elgar Publishing 3. Fang, C. (2010), Transforming the Chinese Economy, China: BRILL 4. Gipouloux, F. (2011), Gateways to Globalisation: Asias International Trading and Finance Centres, UK: Edward Elgar Publishing 5. Tax Incentives and Foreign Direct Investment: A Global Survey (2000), UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT: Geneva, No. 16, available at: http://www.unctad.org/en/docs/iteipcmisc3_en.pdf (accessed on January 30, 2012) 6. Taxation in China, (2008), Manivest Asia Limited, available at: http://www.manivestasia.com/library/factsheet/shanghai/FACT_SHEETS_China_Taxation_eng.pdf (accessed on January 30, 2012) 7. Wong, j. and Liu, W. (2007), Chinas surging economy: adjusting for more balanced development, Singapore: World Scientific 8. Wolff, L-C. (2008), Mergers & acquisitions in China: law and practice, China: CCH Hong Kong Limited 9. Zeng, H. et al. (1999), Chinese foreign investment laws: recent developments towards a market economy, Singapore: World Scientific 10. Zimmerman, J. M. (2010), China law deskbook: a legal guide for foreign-invested enterprises, USA: American Bar Association Read More