There are many tax rebates available to foreign countries in China.
Explaining what a China tax rebate is
China tax rebate refers to some rebate on selected taxes that are already paid, like VAT. This is not the only tax paid to the government as there are others, like import taxes and corporation income tax. One might get a rebate on these two even though the VAT rebate stands out as being pretty standard.
After applying a rebate application, the local authorities will return the funds paid to the company.
What are the Company that can apply for a Rebate?
The nature of the company you are running in China does not matter because every business in china qualifies for a rebate. Also, the taxes you have paid can determine if you will be eligible for any rebates.
Steps for Getting a Tax Rebate in China
To get a china rebate, one needs various business documents like license, export license, etc., from the local authorities. Also, one needs to submit many declaration forms, alongside other items that will serve as proof. Examples are financial declarations, documents to support the eligibility of taxable items, or exempt.
Also, you should be able to prove to the local tax agencies that all the taxes on the item, services, or exports have been paid, which will be refunded in the form of a rebate.
For an exporter, the export item might be considered VAT exempt; or the one might get a preferential refund rate on them. For people operating a Chinese business, examples of things that can be refunded (full or partial refunds) are business costs, cost of equipment purchase, factory upgrade, etc.
It is essential for firms to
- Know that they have gotten or exported a good that is tax refundable. It could be a service as well.
- Be aware of the tax rebate available for such items. It is not always a full rebate, but a percentage of the tax paid.
- Make available multiple documentary proof source which reveals information of taxes you paid and your general finances.
- Get several forms of declaration alongside proof to the local tax agencies.
- All this information needs to be made available in Chinese.
How do foreign-invested companies avoid taxes in China?
1. Use capital to weaken
Thin capitalization refers to the financing of corporate investors for tax avoidance or other purposes. When choosing corporate financing methods, they reduce the equity ratio, increase the debt ratio, and replace equity financing with loans. The characteristic of reduced capital is the unreasonable ratio of registered capital to liabilities. The ratio of corporate equity capital to non-capital companies should be 1: 1. When equity capital is lower than debt capital, capital is weakened. In some foreign-funded enterprises, foreign investors often do not use their own funds to invest, but instead provide loans to enterprises through overseas parent companies to meet their working capital needs.
In this way, companies can record loan interest and reduce taxable income. This does not affect the income of the overseas parent company. Overseas parent companies can not only receive interest income, but also receive dividend income in accordance with the proportion of the agreement. This is more profitable than getting direct dividends from overseas parent companies.
2. Transfer pricing
Transfer pricing is one of the most widely used tax avoidance methods in foreign-invested enterprises. Transfer pricing refers to the internal prices used by the parent company and its subsidiaries, subsidiaries or subsidiaries to conduct goods, services or technology transactions within a multinational company. Multinational companies use transfer pricing to transfer profits from high-tax countries to branches in low-tax countries, increasing the tax burden of low-tax-related companies, while the profits and tax burdens of high-tax-related companies are declining. The final result can be the overall multinational company the tax burden has decreased.
The use of transfer pricing by foreign-funded enterprises can mainly be through: the sale of goods, the provision of labor services, capital financing, the transfer of equipment, and the transaction of intangible assets. In order to avoid a large amount of tax losses, China has also introduced a reversal and pricing tax avoidance clause in the upcoming new tax law. Therefore, if foreign companies want to avoid tax through transfer pricing, there will be many obstacles.
According to the Chinese tax law, the overseas parent company of a foreign-invested enterprise providing patents, technical know-how, trademarks and other intellectual property rights to foreign-invested enterprises must pay royalties paid by withholding income tax in accordance with the 10% rule. To avoid withholding income tax in this respect, overseas parent companies often carry out property rights transfers such as proprietary technology and equipment investment at the same time, and royalties are included in the equipment price. In this case, there is no need to collect royalties separately.
However, when foreign companies use royalties to avoid withholding taxes, they must also consider this issue, because royalties are collected by the price of the equipment and tariffs are invisible, so in this case , We must measure the gains and losses of gains. In the tax law and the five-year compensation period, the use of “two exemptions and three reductions”, “two exemptions and three reductions” and the five-year compensation period are all provided by China to encourage foreign-invested enterprises to invest in China.
Foreign-invested enterprises operating in China are exempted from corporate income tax for the first and second years from the profit-making year, and levied half of the corporate income tax for the third to fifth years. Some foreign-invested enterprises adopt this preferential tax treatment. After the expiry of the “two exemptions and three reductions” period, they will invest in new foreign-invested enterprises and regain the tax incentives. It should be noted that this preferential measure has been cancelled in the new tax law to be implemented early next year.
Without a doubt, China desire to encourage activities and industries to boost the economy. This is possible by providing tax rebates. However, it is your responsibility to decide if you qualify and apply for such a tax rebate. Many might be eligible and will not apply. It is the same as giving money away.
It is evident that this is an intricate, detailed, and time-consuming activity. It, however, is a worthy endeavor if you qualify for an impressive rebate.
All this comes down to the extensive nature of your business’s tax affairs, the exact goods and services you deal in, exports or inputs that are tax refundable, and how to make the application to the local tax agency of your region. Also, your knowledge of Chinese should be sound.
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