Foreigners to Afford Two More Taxes

The foreign companies in China will be asked for two additional duties from December 2010.

Another two tax-free policies for the foreign companies in China will be buried into the grave in December.

From December 1, the foreign-invested companies, foreign companies and individual foreigners in China will pay the urban maintenance and construction tax and education supplementary tax. This is a stipulation from the “Notice of Unifying the Urban Maintenance and Construction Tax and Education Supplementary Tax for Domestic Companies, Foreign Companies and Individuals” (hereafter the Notice), which was issued at the beginning of November.

No difference between domestic and foreign companies

Previously, foreign companies in China were spoiled by a lot of favorable conditions in taxation. They were always free of the urban maintenance and construction tax which is an additional tax to the value-added tax, consumption tax and business tax. However, things changed in this year.

The urban maintenance and construction tax is based on the amount of the value-added tax, consumption tax and business tax paid by the taxpayers.

For long, these two taxes were only afforded by the Chinese domestic companies and citizens and had no avail to the foreign companies and individuals. This distinguished taxation system impaired the principle of fair competition and led to the growing contradictions as the market economy kept growing in China.

The new policy brings the foreign companies and individuals into the category of the taxpayers and realizes the unification of taxation for domestic and foreign companies. This is good for creating a fair taxation environment and promoting fair competition.

Possible bad influence for some companies

According to the experts, since the foreign companies are included into the taxpayers of the urban maintenance and construction tax and education supplementary tax, the companies have to accordingly pay the urban maintenance and construction tax and education supplementary tax (10% of the withheld business tax) in addition to the business tax.

For a joint venture founded by a Chinese company and a foreign company, the Chinese company has to pay the urban maintenance and construction tax and education supplementary tax if there are clauses about foreign companies’ only affording business tax in their agreement. This will increase the taxation load for the Chinese companies.

Therefore, new requirements are put forward for signing contracts, which to a great extent determines the taxation amount and payment. When working on the contract, the negotiators should pay attention to the taxation items and define each party’s obligations and duties to keep their interests as much as possible.

Frequent contact with taxation departments recommended

In addition, the experts think that the new policy still has some problems needing to be solved. For example, as the Notice stipulates, the new rule is carried out on December 1, 2010. But it is not clear whether it refers to the occurrence time of taxpaying (i.e. the new rule is effective for the taxpaying activities happening on December 1 and following days) or to the time of tax settlement (i.e. the new is effective for the tax that declare settlement on December 1 and the following days).

Therefore, the experts remind the companies of paying continuous attention to this problem and having frequent contact with the taxation departments. Timely notification should be given to the companies’ taxpaying department when definite answer is available.