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Changing of the Beijing Local Business Taxation collection system
There have been major changes in all facets of Chinese taxation
in recent months, especially in the country's capital, Beijing.
Whether it be a government crackdown on individual income tax avoidance
(targeting income earners over 100,000 RMB per year), or the constant
decreasing customs duties across all commodities, keeping up-to-date
with China's tax regulation is a constant task.
In this "insights@lehmanbrown special", we look at the
major changes affecting the business tax collection system in Beijing.
Whilst the system may not seen like a drastic change from the arguably
inefficient current system, there could be upsides for those readers
living in Beijing ... in the form of cold hard cash!
In China there are essentially 3 main types of corporate taxes:
- Corporate Income Tax (based on business profits) and
generally at 33%,
- Value Added Tax (based on sales of goods) usually at
17% and
- Business tax (based on sales of services), generally
between 3-5%.
Business taxation in China is collected at both local and national
levels, whilst Valued Added Tax (VAT) and Corporate Income Tax (CIT)
are collected predominately at national levels (they are also collected
at local levels in some instances).
Business tax:
The "fa piao" (发票) system is the backbone for the tax authorities
to calculate and collect business tax. A "fa piao"
is the generic name for an "invoice" which is provided
by businesses to consumers for the amount of services or goods rendered.
For example, if a consumer was to get a haircut they would collect
(be provided with) a service invoice "fuwu ye fa piao"
(服务业发票) for the cost of the service, on which the hairdresser would
pay business tax. This business tax is collected by the local
tax department.
If, however the consumer was then to buy a pair of scissors from
the hairdresser, they would be provided with a goods invoice "zengzhi
shui fa piao" (增值税发票) for the costs of the goods, on which
the hairdresser would pay Value added tax (VAT). This tax
would be payable to the national tax department.
The old system:
The above example demonstrates the degree of complexity and bureaucracy
of the current "fa piao" system for corporate tax
collection in China. However, these problems are even greater exacerbated
by the fact that the burden for collecting the "fa piao"
invoices rests with the consumer. Thus, if the consumer does not
request the invoice (there was no incentive for individual consumers
to collect the invoices on the tax authority's behalf), and the
business does not offer them, the government does not have any audit
trail or method for accurately calculating VAT and Business Taxes.
Similarly, when a consumer did request a fa piao generally
there was a bargaining process which followed as to what the amount
of the invoice should be.
As a result there was a large problem of underreporting of services
and goods sales in China and, thus, under-collection of taxation.
This vicious cycle then continues as local tax departments, to combat
this underreporting, arbitrarily estimate sales figures on which
businesses are obliged to pay taxes. Of course these figures would
vary widely depending on the person at the the tax authority, the
mood they were in, the relationship that the business had with the
person and many other such factors.
On the other side, business consumers could claim their purchased
fa piao's as business expenditure and therefore reduce their
profits (thereby reducing their corporate income tax payable). This
saw an outbreak of fake fa piao's as businesses tried to
dodge the tax man.
In an attempt to break this cycle, the local Beijing tax department
has, as of August 1, 2002, introduced a new invoice ("Fa Piao")
system for business tax collection purposes
The new systems aims to:
- Increase use of digital anti-forgery invoices.
- Increase using tax-control procedures to better calculate taxes
payable. This includes improved invoice-issuing facilities and
quota systems whereby invoices are purchased with nominal face
values.
- Develop a reward system to 'incentivise' consumers to ask for
invoices.
- Provide convenient access to identify fake invoices through
website and telephone.
Mechanics of the new system:
- Businesses will be required to purchase one of a number of
different types of machines which will be used to print the invoices.
The types of machines will depend on the types of invoices the
company is required to supply (see 2 below)
- Introduction of 10 types of invoices (differing by industry
groups)
- Introduction of the "lottery system" as an incentive scheme
- Introduction of an "IC" card for businesses to record details
of their invoices issued (businesses are required to purchase
the card and the special machine from the tax authority). These
cards are then taken to the local tax department and submitted
for proof or invoice issuance and calculation of taxes payable.
This avoids the use of paper documentation and information can
be readily gathered by the tax authorities to calculate business
taxation obligations.
Other interesting characteristics of the new invoice system:
- The names of the different invoices are based on the industry
classification to which the invoice applies (previously there
was just one single generic invoice).
- The languages used in the cover of the invoices are Chinese
and English, in line with meeting WTO requirements.
- There are scratch award areas on the Beijing Quota Special
Invoice and Beijing Special Invoice for Service Industry, Entertainment
Industry and Physical Cultural Industry, to incentivise consumers
to ask for the invoices. The award amounts are 100 yuan per invoice,
200 yuan per invoice, 500 yuan per invoice, 800 yuan per invoice,
1000 yuan per invoice, 3000 yuan per invoice, 5000 yuan per invoice.
The government has decided to put the "scratch awards"
on these invoices, as they are predominately issued to consumers.
Under the present system there is little incentives for consumers
to collect the invoices (aside from the moral burden of helping
the country collect tax). Thus, the idea is that there is financial
gain for consumers to ask for the invoice and the system also
raises awareness about the need to request the invoices to help
enforce the taxation burden. This is quite evident with the media
attention already generated.
The new invoice system commenced on August 1, 2002 and the government
hopes to have all measures in place by the end of 2002.
Whilst it is difficult to say whether the new system will overcome
the rife corruption and underreporting of business tax by service
businesses in Beijing, it would appear that the tax authority is
making a concerted effort to raise awareness in the public arena
and reward consumers for helping enforce the tax burden.
With the recent arrest of Liu Xiaoqing, and the tax authority's
insistence on cracking down on avoidance of personal income tax,
it would also appear that this system (given the timing) may be
a means of diverting attention away from the government's attack
on individual taxpayers and towards the bigger (corporate) end of
town.
However, even with this new system in place the government must
also crack down on accounting procedures of local companies. As
long as local companies (excluding listed companies) are not required
to be audited, the tax authority will constantly face the problem
of dealing with a predominately cash society where the onus of collecting
taxes is placed on consumers.
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