Surtax on VAT, business tax and consumption tax
Please be informed that a Circular on the collection of Urban Construction and Maintenance Fee ("UCMF") and Education Surtax ("ES") on Domestic Enterprises, Foreign Invested Enterprises and Individuals was released late last week. The key points of this Circular are summarised below.
- A brief introduction on UCMF and ES
- UCMF and ES are imposed on Value Added Tax ("VAT"), Business Tax ("BT") and Consumption Tax ("CT") payable.
- The applicable UCMF and ES rates vary, depending on local practices. Generally, the applicable tax rate of ES is 3%. UCMF is 7% for a taxpayer in a city, 5% for a taxpayer in a county town or town, and 1% for a taxpayer living a place other than a city, county town or town.
- The taxpayers should file UCMF and ES together with VAT/BT/CT filing.
- Previously, foreign invested enterprises, foreign enterprises and foreign individuals were exempt from UCMF and ES whereas domestic enterprises and individuals were subject to UCMF and ES. So China would like to complete its mission of providing a unified tax environment for both foreign investment enterprise and domestic enterprises right under the 11th Five Year Plan that ends at 2010.
Salient points of the new Circular
We summarize below the salient points of the Circular for ease of reference:
- The State Council determined to unify the regime of UCMF and ES on domestic enterprises and individuals, foreign invested enterprises, foreign enterprises and foreign individuals.
- With effect from December 1, 2010, The Provisional Regulations on UCMF, The Provisional Regulation on Taxation of ES and their subsequent Circulars which applied to domestic enterprises and individuals will equally apply to foreign invested enterprises, foreign enterprises and foreign individuals.
- Consequences of the new Circular
- Additional tax cost of 4% to 10% on the indirect tax liability will be due, i.e. 1% UCMF + 3% ES up to 7% UCMF + 3% ES.
- With regard to BT, generally, 5% BT is levied on services (service fees such as technical service fee, documentation fee, etc.) meaning that the effective tax burden on the service fee will increase with 0.2% to 0.5% in the future (5% BT x (1% UCMF + 3% ES)) or up to (5% BT x (7% UCMF + 3% ES). It will be borne by the customer. If this is not borne by the customer, it will be a cost to the supplier and reduce it's profits.
- In most cases, UCMF will have to paid at the higher end of the range as most foreign companies or projects will be located in urban areas.
- A tax credit (based on the respective double tax treaty or as input VAT) will not be available meaning that those are actual costs, which have to be taken into consideration when doing price calculations in the future. However, both UCMF and ES are deductible for corporate tax purposes. It remains to be seen if tax exemptions or reductions will be granted by the local authorities to further attract foreign business.
- Further, foreign companies may want to check what transactions their business undertakes will be affected by these new rules and a clear plan to ensure compliance by December 1, 2010 including establishing the scope of the changes to the systems and processes that UCMF and ES will require, should be set-up.
- Foreign investment enterprises may also wish to consider transitional arrangements (particularly when dealing with long-term contracts), contractual issues (need to revisit and revise tax clauses) and communication on these changes with their customers.
- Foreign investment enterprises (especially with newly set up entity) might wish to negotiate with the local government or finance authorities for a possible financial subsidy especially on UCMF.
The introduction will affect foreign companies' business processes and may significantly impact your financials, including cash flow. It is important to have a structured approach to ensure an efficient implementation, ongoing compliance and minimise any disruption to your business.