The Leading Edge - Summer 2011 - PKF - 17

international

allows for two continuous, fixed-term contracts, and any further contracts must be, in general, open-term contracts, which make it significantly harder to fire an unsuitable employee. In addition, the Central Government will double the minimum salary level in China within the next five years, meaning mandatory salary increases of about 20 percent per annum.
What are the mandatory additions and special circumstances of labor payments?

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The company is required to pay mandatory welfare or social security payments for each employee, including pension, medical, unemployment, injury and maternity. Many cities also require mandatory housing fund contributions. These payments vary regionally but are generally about 40 to 50 percent of an employee’s monthly salary. A new law including foreign employees in some of these payments took effect July 2011. It is important that these costs are built into the business plan as part of operational costs; it is a common mistake to omit them. For overtime payments, the labor law states employees must not receive less than 150 percent of their normal wage for extensions of regular working days, not less than 200 percent in extensions on day of rest and not less than 300 percent for extension of statutory holidays. In addition, China has a relatively high number of national holidays.
What are some prevalent inaccurate accounting practices to know?

A common method of tax avoidance rampant in (but in no way unique to) China is underreporting accounts receivable in an attempt to hide sales to reduce taxable income. A slightly more country-specific accounting practice is multiple sets of financial accounts. While these multiple books are quite often used to avoid tax, they are also sometimes used to cover up other

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Business tax Stamp Duty

inappropriate financial behavior within the company itself. Moreover, often the official set of accounts is prepared electronically whereas the other set is maintained manually, and accordingly, it is often very difficult or impossible to reconcile these accounts. Due to the structuring of China’s tax laws and the liability window, local staff may commonly break the law to “assist” the company cash flow. Diligence, training and monitoring of accounts prepared by local staff need to be maintained. Fines for non-compliance can be as much as five times the original amount due plus the due amount.
China Tax Rates (May 2011) 25 percent 10 percent 3 to 17 percent 3 to 20 percent Varies widely, based on product 0.05 to 0.10 percent

What are the main taxes and tax rates? Corporate income tax Withholding tax Value-added tax

retailing of goods). Non-enterprise units and entities that normally do not engage in taxable activities are given the choice of whether or not they are taxed as small-scale taxpayers, while individual (natural person) taxpayers with business turnover exceeding the threshold shall continue to be taxed as small-scale taxpayers.

What are exchange controls like?

China has tight exchange control policies. After a foreign-invested enterprise receives its business license, it is required to register with the State Administration of Foreign Exchange, upon which a “Foreign Exchange Registration Certificate” will be issued to the enterprise. The certificate is required for the opening of a foreign capital bank account and when handling all foreign exchange-related matters. As for repatriating profit and dividends, the enterprise must submit receipts proving corporate income tax payments have been made in full, an annual audit report, a board resolution on the distribution of profit and dividends, a capital verification report and the Foreign Exchange Registration Certificate. Dividends from profits are subject to a 10-percent withholding tax. A lower withholding rate may be applicable under double tax treaties. LE
Leading Edge Alliance member Dezan Shira & Associates provided this article. Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with 19 offices in four jurisdictions, employing more than 170 business advisory and tax professionals. To contact the firm, please email info@dezshira.com or visit www.dezshira.com.
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Consumption tax

How does value-added tax work in China?

All enterprises and individuals engaged in the sale of goods, provision of processing, repairs and replacement services and import of goods within China shall pay VAT. The rate for general taxpayers is generally 17 percent or 13 percent for some goods. For taxpayers who deal in goods or provide taxable services with different tax rates, the sale amounts for the different tax rates shall be accounted for separately. The sales threshold for small-scale taxpayers is approximately $77,300 (for enterprises engaged primarily in the production of goods or the provision of taxable services) and approximately $123,600 (for enterprises engaged in the wholesaling or

The Leading Edge - Summer 2011 - PKF

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