Incoterms_® and Commercial Contracts

[Page922:]

[Page923:]

1. Introduction

Since the new system of indirect taxation came into effect in 1994, indirect taxes consist of a broadly based value added tax (VAT) on goods, the Business Tax on certain immovable goods and services, the Consumption Tax that applies to certain luxury goods, the Vehicle and Vessel Tax, the Resource Tax, the Agricultural Native Product Tax, and the Banquet Tax. In the People’s Republic of China, the principal source of government tax revenue is indirect taxation.

[Page924:]

[Page925:]

2. Value Added Tax (VAT)

The key to the 1994 tax reform was the introduction of a standard VAT, which became possible by the removal of price controls on most goods and services by the end of 1993. The Provisional Regulations on Value Added Tax became effective on January 1, 1994 (the VAT Regulations).¹ Owing to the difficulties in adopting a broadly based VAT on the supplies of all goods and services, the VAT was imposed mainly on goods and on some selected services.² Other services are taxed under Business Tax.

The new VAT is similar to VAT in other countries. It has a broad base with limited exemptions. It is imposed at all stages of manufacturing, distribution, import and export on the value added by each taxpayer. This is achieved by charging VAT on the full value of supplies made by taxpayers, but allowing taxpayers an input tax credit (ITC) for taxes paid on goods and certain services used for the purpose of supplying taxable goods and services. Tax is generally payable by the recipient of the supply at the time the consideration is paid or becomes payable.

2.1. Scope of VAT

VAT currently applies to all individuals and enterprises that are engaged in the sale of goods or the rendering of certain services within China, or that are engaged in the importation of foreign goods.

2.1.1. Supply of goods

In the Detailed Rules for the Implementation of the Provisional Regulations on Value-Added Tax (the VAT Rules),³ “goods” are defined to include “all tangible movable property, including electricity, heating, power and gas”.⁴ Accordingly, the sale of personal property is taxable under VAT, whereas the sale of real property is not. Intangible property, such as intellectual property (patents, trade marks and copyrights), proprietary technology and goodwill, is exempt from VAT. It is not clear whether “goods” includes the sale of a business as a going concern.

The definition of “goods” includes all industrial and agricultural products. Thus, the new VAT has been extended not only to all industrial enterprises, but also to primary producers, including those engaged in agriculture, forestry, fishing and mining.

A taxpayer is liable to VAT when there is a sale of goods. The term “sale of goods” is defined in article 3 of the VAT Rules as “the transfer of ownership of goods for consideration in cash, property or other economic benefits”. “Sale of goods” does not include, therefore, rentals of goods, the giving of an option to purchase goods, or the assignment of rights under a contract.

[Page926:]

Under article 4 of the VAT Rules, there is a deemed sale of goods where taxpayers:

• entrust others to sell their goods;
• sell goods on consignment;
• transfer goods to branches for sale outside the country;
• use taxable goods to manufacture non-taxable goods;
• transfer taxable goods to another person as a contribution to its capital;
• use taxable goods for welfare or personal consumption; or
• make a gift of taxable goods.

Wholesale and retail goods that were taxed under the 1984 Business Tax, are now subject to VAT. The extension of VAT to the distribution stage ensures that manufacturers are not denied an ITC in respect of raw materials, parts and other supplies purchased from wholesalers that may have borne the tax at an earlier stage.

2.1.2. Services subject to VAT

Taxpayers are also liable for VAT if they are engaged in the processing of goods, or in the repair or maintenance businesses. Non-taxable services are those taxable under business tax, such as transportation and communications, construction and installation, financial services and insurance, telecommunication and postal services. Services purchased from overseas are exempt from VAT since they are not provided within China. For example, repair services provided to a Chinese firm by a foreign company outside China are not taxable.

2.1.3. Imports of goods

The importation of foreign goods is taxable.

2.1.4. Territorial application

Supplies of goods and services are subject to VAT only if they are carried out in China.⁵

“People’s Republic of China” is not defined under the VAT legislation. Under China’s tax treaties, the term is defined to include all the territories of China in which the laws relating to Chinese tax apply, which excludes Hong Kong, Macau and Taiwan.

Under article 7 of the VAT Rules, a sale of goods is deemed to occur in China if the goods are located in China or delivered from China to the purchaser.

Services are generally deemed to be rendered in China if they are performed on its territory.

[Page927:]

2.1.5. Exempt supplies

On exempt supplies, recipients are not required to pay VAT and suppliers may not claim ITCs for purchases relating to the making of the exempt supplies. Therefore, an element of tax is included in the cost of making the supply. In effect, a person who makes an exempt supply is exempt from the benefits of VAT, as well as from its obligations and liabilities. Exempt supplies as stated in article 16 of the VAT Regulations include:

• agricultural products produced and sold directly by farmers;
• contraceptive medicines;
• antique books;
• imports of instruments and equipment for scientific research and educational goods or equipment given to the taxpayer by foreign governments or international organizations;
• imports of materials and equipment from foreign governments and international organizations on account of international assistance;
• equipment and machinery required to be imported under contract processing, contract assembly and compensation trade;
• articles imported directly by organizations for the disabled;
• used goods; and
• other exemptions permitted by the State Council.

Goods and services that are outside the scope of the VAT are exempt from tax. These include goods or services supplied outside China, property that is not considered to be “goods” for the purposes of the VAT (for example, real property and intangible property) and services taxable under business tax. Individuals are exempt from VAT if their monthly turnover is less than RMB 2,000 from the sale of goods, or less than RMB 800 from rendering taxable services.⁶

VAT is calculated at the rate of 17% or 13% on the amounts of sales of goods or services.⁷ “Sales amount” is the “total compensation” and all other charges (i.e. fees) received from the purchasers.⁸ Pursuant to article 2 of the VAT Rules “compensation” includes money, goods and any economic benefit obtained from the purchaser. Where payment is in a foreign currency, its value is determined according to the exchange rate on the date on which the tax on the supply becomes payable.⁹

Where payment is made wholly or partly in kind, the market value of the goods taken in exchange is included in the taxable value of the supply. Where the consideration is below the normal market price, the value of the consideration is deemed to be the sale price for similar goods sold during the month, the average sale price for similar goods sold in previous months, or the cost of the goods plus a reasonable mark up.¹⁰ Where consideration is received for both a sale of taxable goods and a supply of non-taxable services, the whole amount is subject to VAT and the sale is deemed to be a sale of goods.¹¹

[Page928:]

The taxable value for imports is the customs value plus customs duties, insurance and freight costs and consumption tax incurred in bringing the goods to China.

2.1.6. Small and exempt suppliers

In order to simplify tax administration and compliance, certain individuals are exempt from VAT if their turnover is below the specified amounts, and “small taxpayers” are taxed under a simplified method.¹² Small taxpayers’ tax liability is 6% of total turnover, rather than the amount of value added.¹³ In China, more than one quarter of manufacturers and more than one half of wholesalers and retailers are small taxpayers. They will continue to be taxed on a gross turnover basis.

Exempt suppliers and small taxpayers are not entitled to claim any ITCs.¹⁴ Small taxpayers are given the option of being taxed under the new VAT if they have established a satisfactory accounting system.¹⁵

2.2. Timing

VAT is generally payable at the time of supply. Taxpayers must report VAT in the accounting period in which the supply occurs. Pursuant to article 33 of the VAT Rules, the time of supply is the earlier of the following occurrences:

• for sales of goods under the direct payment method, it is the date on which
• the sales sum is received or the documented evidence of the right to collect
• the sales sum is obtained, and upon delivery to the purchasers of bills of
• lading, regardless of whether the goods are delivered;

• for sales of goods where the sales amount is entrusted for collection, including
• to banks, it is the date on which the goods are delivered and the procedures for entrusted collection are completed;
• for sales of goods on credit or receipt by instalments, it is the date of collection agreed to in the contracts;
• for sales of goods with payment received in advance, it is the date on which the goods are delivered;
• for sales of goods on consignment to other taxpayers, it is the date on which the detailed account of consignment sales is received from the consignee;
• for sales of taxable services, it is the date on which the services are provided and the sales sum is received or the documented evidence of the right to collect the sales sum is obtained; and
• for taxpayers that have deemed sales of goods, it is the date on which the goods are transferred.

[Page929:]

2.3. Input Tax Credits (ITCs)

VAT is collected at each level of trade on all taxable goods and services. To avoid the cascading of tax, taxpayers are entitled to a refundable ITC for tax paid on business inputs. The effect of an ITC is to remove any VAT from the cost of business inputs that relate to taxable supplies. Therefore, the tax is fully borne by consumers at the final point of sale and business enterprises merely collect, rather than pay, the VAT. In practice, of course, the economic burden may be wholly or partially shifted back to the supplier in the form of lower prices.

An ITC is available for the total of VAT paid or payable on purchases of goods and services in China and on goods imported into China to the extent that the goods are used in producing taxable goods or services.¹⁶ VAT paid on property and services for use partly in taxable supplies may be recovered on a proportional basis.

Where inputs are agricultural products that are exempt from VAT, the amount of an ITC is deemed to be 10% of the purchase price.¹⁷

ITCs are available only for purchases of goods and services that have borne VAT. Taxpayers are not eligible for ITCs with respect to payments on account of:

• business tax and/or consumption tax paid on business inputs;
• interest and dividends; and
• exempt supplies other than agricultural products.

The payment of VAT on inputs does not result in an ITC for the following items:¹⁸

• fixed assets;
• goods and services that are used in making non-taxable supplies such as non-taxable services, the transfer of intangible assets and the sale of immovable property;
• goods and services used in making exempt supplies;
• goods and services used for personal consumption or group welfare;
• abnormal losses of goods purchased; and
• goods and services consumed in the production of work-in-progress or finished goods that suffer abnormal losses.

The definition of “fixed assets” includes machinery, transportation vehicles, equipment, instruments, appliances with a useful life of more than one year and goods worth RMB 2,000 or more with a useful life of more than two years.¹⁹ The rationale for the denial of tax credits in respect of fixed assets is to control the perceived excessive demand by enterprises for capital investment.

The amount of an ITC must be supported by an invoice. Enterprises may not claim ITCs until they have obtained the relevant invoice issued or signed by the vendor.²⁰ VAT invoices are designed for the special use of VAT collection. Vendors must issue VAT invoices to purchasers of goods and services that are subject to VAT. Invoices not including VAT must be issued for goods and services that are exempt or sold to exempt consumers or suppliers.

Under the current VAT regime, it is possible to adopt the invoice-based credit system.²¹

[Page930:]

2.4. VAT rates

The standard VAT rate is 17%.²² It applies to the supply of most taxable goods and all taxable services.

A lower rate of 13% applies to sales and imports of the following goods that were taxed at lower rates under the old tax system:²³

• grain and edible oil;
• running water, hot water, gas, residential coal products, air conditioning and central heating;
• books, newspapers and magazines;
• animal feed, chemical fertilizers and agricultural chemicals; and
• other goods stipulated by the State Council.

2.5. Exports

The treatment of exports under the new VAT is similar to that under VAT systems in other countries. Exports are taxed at a zero rate.²⁴ With the invoice-based ITC system and the zero rating of exports, taxes paid on all inputs, other than fixed assets, are refunded when goods are exported.

The significance of zero rating is that while no output VAT is chargeable, an ITC can still be obtained. Where the final product is zero-rated, all VAT charged at the interim stages in the production chain is effectively refunded in full, provided that no exempt businesses (such as exempt suppliers or small taxpayers) are interposed in the production chain. For example, an enterprise that exports machinery to a purchaser overseas is entitled to recover all the VAT it has paid to acquire parts and materials to manufacture the machinery, as well as services that are reasonably attributable to its business.

The distinction between zero rating and exemption is that a business that provides only exempt supplies cannot reclaim or recover input tax that it has paid. The business therefore has two options: to absorb the cost of the input VAT out of its own profit margin or to wholly or partly pass it on to its customers.

2.6. Administration

Enterprises and individuals must register with the local tax office before the commencement of business activity. Taxpayers must use invoices that are designed for VAT purposes.²⁵ These invoices act as control documents with respect to the entitlement of taxpayers to claim ITCs and they also serve as a VAT “audit trail”. The basic requirement with respect to accounting records is to maintain an accounting of the relevant output VAT and of the relevant input VAT, plus a “net” account showing the status of settlements to, or refunds from, the tax authorities.

Taxpayers must keep relevant records for a minimum period of 15 years. Microfilm and copies of original documents are permissible in suitable circumstances.

[Page931:]

VAT may be paid every day, every three, five, ten, or 15 days or every month. The applicable payment period is determined by local tax authorities.²⁶ Taxpayers with large amounts of VAT payable will be required to pay tax more frequently than smaller taxpayers.

Returns must generally be filed within the first ten days of the following month.²⁷Head offices and each of their branches are required to pay applicable VAT to local tax authorities in the place where they are located. However, with the approval of the State Administration of Taxation (SAT), a head office may pay on a consolidated basis for all its branches.²⁸

Foreign companies that render taxable services in China without having an establishment in China are liable to VAT.²⁹ The VAT payable by such companies is withheld by the company’s customers or agents.

2.7. VAT refunds for Foreign Invested Enterprises (FIEs)

Notices published by the SAT with regard to refunds of VAT on exports (which are zero-rated under the VAT legislation) classify FIEs for the purposes of VAT into two groups according to whether they were established before or after December 31, 1993.

The VAT allows credits against VAT on outputs for tax already paid on business inputs, and as export sales are zero-rated for VAT this would normally lead to a tax refund.

FIEs established before December 31, 1993 are, however, entitled to a refund for the amount of VAT and consumption tax paid when it exceeds the liability under the consolidated industrial and commercial tax that was in force up to December 31, 1993. In other words, FIEs whose tax burden is higher under the new tax system can claim refunds for the increased amount of taxes.

To prevent a double benefit (i.e. ITC and refunds for increased indirect tax liability after December 31, 1993), FIEs established before December 31, 1993 cannot claim a refund for VAT paid on raw materials and parts used in producing export goods.

FIEs established after December 31, 1993 are not entitled to tax refunds for a higher indirect tax burden, as they were not paying indirect taxes before December 31, 1993. They can, however, claim ITCs on raw materials and spare parts used in producing export goods, as export sales are zero-rated.

FIEs are regarded as established after December 31, 1993 if they obtained their business licence from the State Administration of Industry and Commerce (SAIC) after that date.

According to a notice by the SAT, FIEs will obtain a VAT refund when ITCs cannot be fully offset by VAT on domestic sales (uncredited ITCs). Where the value of exports multiplied by the VAT rate exceeds the uncredited ITC, the VAT refund equals the amount of the uncredited ITC. In other cases, the VAT tax refund equals the value of exports multiplied by the VAT rate.

A taxpayer may carry forward the amount of uncredited ITC in excess of the amount of the VAT refund for the same period.

[Page932:]

2.8. VAT refund rates

In July 1995, the rate at which VAT refunds was calculated was reduced from 17% to 14%. Refunds of VAT in respect of items subject to the lower rate of 13% were reduced to 10%.

On January 1, 1996 the rate at which VAT refunds to foreign companies were calculated in respect of goods which were subject to the 17% rate was reduced further from 14% to 9%. In other words, post 1993 FIEs cannot fully recover the VAT input at a rate of 17% for exports. The non-refundable VAT is calculated on the prices of the exported goods converted to renminbi, multiplied by the difference between 17% and the refund rate of 9%. In effect, exported goods are subject to domestic VAT at a rate of 8%, and the non-refunded input VAT is treated as part of the product costs.

A SAT notice issued on September 3, 1996 clarified that: (1) the VAT refund of inputs in connection with exported agricultural products is computed at 3%; (2) there is no VAT refund for exports that are exempt from tax; and (3) where the goods purchased were subject to the lower rate of 13%, the refund is calculated at 6%.³⁰

2.9. Procedure for claiming VAT refunds

A SAT circular issued in late 1995 discussed two methods used by the tax authorities for calculating VAT refunds. One is “exemption, set off, refund” and the other method is “pay first, refund later”. To obtain the VAT refund under the first method, FIEs must complete a VAT refund application form on a monthly basis and submit various other documents and invoices to the local tax bureau. The local tax bureau must process the application in 15 days and remit the case to the STB at the next level for approval. A decision must be made within 15 days. Under this method, a post 1993- FIE would be allowed to set off the amount of refundable VAT against the VAT due on its domestic sales. An FIE will be able to obtain a refund if its export sales exceed 50% of its total sales and the refundable VAT is greater than the VAT payable on its domestic sales. Otherwise, the relevant regulation requires FIEs to carry forward the excess amount of VAT to offset the VAT payable in the next month. When a VAT refund is approved, the responsible tax office must refund the tax within 30 days.

Under the second method, FIEs are required to pay the VAT at a rate of 17% and file applications to request a refund at the reduced rate of 9%. Although both methods are sound, the SAT seems to accept only the second method.

However, it should be noted that goods are not considered to be exported by FIEs if they are exported by a foreign trade corporation acting as their agent. Such sales to foreign trade corporations are considered to be domestic sales. Also, where an FIE enters into an agency agreement to handle goods for export and issues a VAT invoice to the agent, the FIE is not considered to have exported the goods if the agreement provides that the agent is responsible for clearing the goods through customs, and obtaining payments and documents relating to the exportation otherwise show that the agent is the exporter.

[Page933:]

3. Business Tax

Unlike VAT systems in other countries, the Chinese VAT is imposed mostly on the production and distribution of personal tangible goods. Sales of other goods and services are subject to the Business Tax. This type of tax is generally levied on gross turnover and no tax credit is allowed for taxes paid on business inputs pursuant to article 4 of the Provisional Regulations on Business Tax (the Business Tax Regulations).³¹

3.1. Scope

Business tax applies to business activities that are not subject to VAT. It is payable by all individuals and enterprises that are engaged in the provision of taxable services, the transfer of intangible property and the sale of immovable property within China.³² Tax is imposed on taxpayers when services are provided or property is transferred for compensation.

“Compensation” is defined to include payments in cash, property or other forms of economic benefits in article 4 of the Detailed Rules for the Implementation of the Provisional Regulations on Business Tax (the Business Tax Rules).³³

“Taxable services” as defined in article 2 of the Business Tax Rules include transportation (by land, air, water and pipe), communication, construction, banking and finance, insurance, post and telecommunications, cultural and sports activities, entertainment and services (such as travel agencies, hotels, catering, tourism, advertising, leasing and warehousing). Taxable services do not include those provided by employees to their employers.³⁴

Intangible property and immovable property are not “goods” for the purposes of VAT and are therefore not subject to VAT. “Intangible property” refers to land-use rights, patents, proprietary technology, trademarks, copyrights and goodwill. “Immovable property” includes buildings and other structures affixed to land.

The terms “transfer” and “sale” are not defined. “Transfer” may be broadly interpreted to include the transfer of possession of property without the transfer of ownership, such as by leasing, rental or licensing. “Sale” generally refers to the transfer of ownership of property, including rights therein.

A taxpayer is liable for business tax only on taxable activities within China. Under articles 7 and 8 of the Business Tax Rules, taxable activity is considered to take place within China where:

• services are provided within China;
• passengers or goods are transported from China to other countries;
• tourist services are arranged from within China for tours outside China;
• intangible property is used in China under a licence;
• immovable property located within China is sold;
• insurance services are provided by companies within China, with the exception of insurance in respect of export goods; and
• insurance services are provided by insurance companies outside China for assets located within China.

[Page934:]

3.2. Exemptions

Taxpayers are exempt from business tax if their monthly business revenue is below thresholds of RMB 200 to RMB 800, the exact amount of which is determined by the local governments.³⁵ Pursuant to article 6 of the Business Tax Regulations, the following services are exempt from business tax:

• nursing services provided by nurseries, kindergartens, homes for the aged, welfare institutions for the handicapped, matchmaking and funeral services;
• services provided on an individual basis by the disabled;
• medical services provided by hospitals, clinics and other medical institutions;
• educational services provided by hospitals, clinics and other medical institutions;
• agricultural mechanical ploughing, irrigation and drainage, prevention and treatment of plants and animals;
• admission fees for cultural and religious activities at museums, cultural centres, places of worship; and
• those enjoying such other exemptions as are decided by the State Council.

3.3. Tax base

In general, business tax is imposed on the full price received by the seller or service provider including fees and charges.³⁶

Where payment for a taxable activity is in kind, the market value of the property taken in exchange is included in the taxable value. Payments in foreign currencies must be converted into Chinese currency at the rate of exchange prevailing in China at the time of supply.³⁷

According to article 5 of the Business Tax Rules, where a below market price is charged or an unjustifiable price is charged for the rendering of services, the transfer of intangible property or the sale of immovable property, whether the transaction is between related parties or not, the tax authorities are empowered to adjust the price using the following sequence of methods:

• by reference to the average prices charged by the taxpayer in the same month for similar services on immoveable properties;
• by reference to the average prices charged by the taxpayer in the most recent period for similar services or immoveable properties; and
• using the following formula to determine the assessable price: assessable price = operating costs X (1 – the cost plus margin) x (1 – Business Tax Rate) (the cost plus margin ratio is determined by the tax authorities under the people’s governments of the provinces, autonomous regions and municipalities directly under the central government).

[Page935:]

Although tax is generally imposed on the gross turnover, certain expenses may be deducted in calculating the turnover of a taxpayer in the following situations:

• a taxpayer engaged in international transportation or travel services may deduct from gross revenue the amount of fees paid to another enterprise that undertakes to provide the transportation or travel services outside China;
• a general contractor in the construction business may deduct payments made to subcontractors;
• a general insurer may deduct the amount paid to a sub-insurer;
• banks and other financial institutions may subtract from their business revenue interest paid on borrowed funds; and
• financial institutions engaged in the trading of currencies, securities and futures contracts are taxable only on the difference between the sales proceeds and the cost of purchase.³⁸

A notice of the SAT and the Ministry of Finance issued on August 11, 1995 specified that financial institutions would be temporarily exempted from business tax on “interinstitutional transactions”. These are defined as funds transactions conducted between associated financial institutions, between Chinese banks and between other banks.

3.4. Timing

A taxpayer’s liability for business tax generally arises on the earlier of: the day on which the payment for the services, transfer of intangible property or sales of immovable property becomes due, and the day on which payment is received.³⁹ Where a taxpayer receives advance payments for the transfer of land-use rights or the sale of immovable property, liability for tax arises when the advance payment is received.⁴⁰ Where an enterprise makes a gift of a property, tax liability arises when the ownership of the property is transferred.⁴¹

3.5. Tax rates

Business Tax is imposed at the following rates:⁴²

• 3% for transportation, construction, postal communication, cultural and athletic activities;
• 5% for banking and insurance services, and the transfer of intangible property and immovable property; 8% for foreign banks in Shanghai since January 1, 1997, except those located in Pudong district and therefore exempt from business tax; and
• 5% to 20% for entertainment (the applicable rate is determined by the local government).

[Page936:]

3.6. Administration

Business tax is paid and returns are filed at one-month intervals or less.⁴³ Local tax authorities set the payment period for individual taxpayers at five days, ten days, 15 days one month or per transaction depending on the amounts of tax payable. The location in which business tax must be paid to the tax authorities is identified according to article 13 of the Business Tax Regulations as follows:

• for services, at the place of provision, and for transport business, at the place where the enterprise is based;
• for assignments of land-use rights, at the place where the land is located;
• for sale of immovable property, at the place where the property is located; and
• for other intangible assets, at the place where the taxpayer’s office is located.

Unlike the VAT and consumption taxes, the business tax is generally withheld by taxpayers.

[Page937:]

4. Other indirect taxes

4.1. Consumption Tax

Consumption tax is an excise tax levied on manufacturers and importers. This tax is levied in addition to VAT and is justified by the State on the basis of the efficiency of its collection, and its contribution to controlling the excessive production of certain luxury goods.

Pursuant to Article 1 of the Provisional Regulations on Consumption Tax (the Consumption Tax Regulations) ⁴⁴ all units, enterprises and individuals engaged in the production, subcontracting for processing, or importation of consumer goods are subject to consumption tax.

Goods manufactured by a taxpayer for the production of other taxable goods are not taxable.

Exports are exempt from the consumption tax.⁴⁵ Taxable goods include largely luxury goods, tobacco products, liquor products, cosmetics, fireworks and firecrackers, gasoline, diesel, tyres, motorcycles and automobiles.

These goods are taxed at rates ranging from 3% on non-luxury automobiles to 45% on top-quality cigarettes. Gasoline and diesel fuel are taxed on an ad valorem basis at the rate of RMB 0.20 per litre for gasoline and RMB 0.10 per litre for diesel. The taxable value is generally the price, or other consideration, for the goods sold.

4.2. Resource Tax

The Resource Tax is charged on resources including crude oil, natural gas, coal, other non-metal items, ferrous metal, non-ferrous metals and salt.⁴⁶ The amount of Resource Tax payable is based on the quantity of, and the tax per unit on, the resource concerned. The tax for crude oil is fixed at RMB 8 to RMB 30 per metric ton and for natural gas at RMB 2 to RMB 15 per 1,000 cubic metres.

4.3. Agriculture Native Product Tax

This tax is payable by FIEs engaged in farming and other agricultural activities, and applies at various rates on the gross sale price of tobacco leaves, tea, oranges, bananas, apples, pears, dried fruits, fish, bamboo, natural rubber, leather, wool, mushrooms, scallops and sea cucumber. FIEs liable to this tax are usually exempt from VAT.

4.4. Stamp duties

Under article 1 of the Provisional Regulations on Stamp Tax (the Stamp Tax Regulations),⁴⁷ all individuals and entities that write or obtain “taxable documents” are liable for Stamp Tax. “Taxable documents” include contracts for purchase and sale, the undertaking of processing work, the contracting of construction projects, the lease of property, transportation of goods, storage and custody, the lending of funds and insurance of property and technology, conveyances, business account books, registration certificates for rights and licences and other documents determined to be taxable by the Ministry of Finance.

[Page938:]

Tax rates vary in accordance with the nature of the document and are made public in the Table of Stamp Taxable Items and Tax Rates attached to the Stamp Tax Regulations. For example, purchase and sale contracts are taxed at 0.03% of the sale price, construction and installation contracts are taxed at 0.03% of the fee charged and contracts for the undertaking of processing work and for the transportation of goods are taxed at 0.05%.

In Shenzhen, securities transactions have recently become subject to the stamp tax at the rate of 0.6% of the market price of transferred stock. Taxpayers are required to pay the tax at the applicable rate by purchasing and affixing tax stamps, which must be pasted on the taxable document.

There is no tax on duplicates or manuscript copies of documents on which stamp tax has already been paid or on instruments written by the owner of property by which such property is donated to the government, social welfare entities or schools.⁴⁸

4.5. Vehicle and Vessel Tax

Enterprises and individuals that possess and use a vehicle or vessel within the territory of China are liable to vehicle and vessel tax pursuant to the Provisional Regulations on the Vehicle and Vessel Usage Licence Plate Tax (the Vehicle and Vessel Tax Regulations).⁴⁹ In order to obtain a licence plate for a vehicle or vessel subject to the tax, the taxpayer must apply to the local tax office to register the vehicle or vessel. The tax is paid annually thereafter.⁵⁰

Tax rates range from RMB 1.20 to RMB 5 per ton for motor vessels, between RMB 120 and RMB 320 per vehicle for passenger vehicles, RMB 48 per motorcycle, RMB 60 per three-wheel vehicle, RMB 60 per cargo vehicle and RMB 30 per tractor.⁵¹ Tax is normally collected quarterly, though the local tax office may permit tax to be paid annually or semi-annually pursuant to article 5.

4.6. Banquet Tax

Banquets are very common in China. Chinese banquets tend to be lavish, and the cost per person can quite easily amount to as much as a month’s salary.⁵² The taxpayers are entities and individuals who hold banquets in restaurants, hotels and other catering establishments. The tax is charged at the rate of 15% to 20% of the banquet price for banquets that have a total price of RMB 200, including beverages and cigarettes. The owner or manager of a restaurant or hotel that provides the banquet is required to withhold the tax.

Local governments have the power to determine whether to levy this tax. In some provinces, such as Guangdong, the tax is not collected at present.

---

---