Corporate Taxes and VAT in China Made Easy as Bread.
In 2007, the People’s Republic of China passed a law unifying local and foreign companies under a unique corporate tax obligation. Corporate tax in China is set at 25% of profits. There are exceptions to this rule for companies in the high tech, infrastructure, agriculture, environmental protection and energy saving industries. These sectors benefit from lower corporate taxes that can be as low as 15% of profits. Taxes are due on a quarterly basis.
The other major tax to be wary of in China is the VAT (value added tax). This is the tax that most people, including locals, have the most difficulty understanding. The VAT in China is 17% of the merchandise’s value, but what does that mean? Who pays the VAT and when? To best answer this we like to use the simple but effective loaf of bread example:
For convenience’s sake, let’s assume the price of a loaf of bread is $1 and that the VAT is 10%.
- The FARMER sells the flour to the BAKER for 20 cents. The VAT is 2 cents, so the BAKER pays him 22 cents (price+VAT). The FARMER pays 2 cents in VAT to the government.
- The BAKER sells the loaf of bread to the SHOP for 60 cents. The VAT is 6 cents, so the SHOP pays him 66 cents (price+VAT). The BAKER already paid 2 cents in VAT when he purchased the flour so he can subtract that amount from the 6 cents he is due. The BAKER pays 4 cents in VAT to the government.
- The SHOP sells the loaf of bread to the CONSUMER for 1 dollar. The VAT is 10 cents, so the CONSUMER pays the SHOP $1.10 (price+VAT). The SHOP already paid 6 cents in VAT when he purchased the loaf of bread so he can subtract that amount from the 10 cents he is due. The SHOP pays 4 cents in VAT to the government.
- In the end the farmer pays 2 cents, the baker pays 4 cents, and the shop pays 4 cents. Combined, they add up to 10 cents; 10% of the final selling price. The circle is complete!
- Now, what if the SHOP or CONSUMER is actually a trading company that plans to sell the loaf of bread overseas? The TRADING COMPANY needs to show customs the fapiao (invoice) to show that he payed VAT on the loaf of bread before being allowed to export it.
- The TRADING COMPANY sells the loaf of bread to the oversea consumer for 2 dollars. The OVERSEA CONSUMER pays him $2.40 (price+VAT)(let’s assume the VAT in the importing country is 20%). The TRADING COMPANY already paid 10 cents in VAT when he purchased the loaf of bread, but he CANNOT subtract that amount from the 40 cents he owes a different country. He can however, claim a portion of his 10 cent VAT back from CHINA since he exported the goods and is subject to double taxation. The percentage of VAT refund depends on the product category.
That’s VAT in China in a nutshell.
Written by Victor Cremailh