China FIEs Now Liable for Urban Maintenance and Construction Taxes

From December 1, 2010, foreign-invested enterprises (FIEs) in China will be required to pay urban maintenance and construction tax and local fees, according to a recent announcement made by the State Council.

The move aims to promote fair competition and fair treatment between foreign and domestic firms. Since 1985, foreign-invested enterprises have been exempt from paying the tax. Although this amendment marks a significant change in commercial tax laws, it is not expected to severely impact foreign investments.

These new applicable taxes are to assist with urban maintenance, construction and the educational system, and are rated at 7 percent for urban areas, 5 percent for counties (towns), and 1 percent for other regions. There will also be a 3 percent surcharge for local fees that must be paid by both foreign and domestic companies . The calculation for these taxes is the total turnover tax liability (including value-added tax, business tax and consumption tax) multiplied by the corresponding tax rate.

Company accountants should begin preparation for the calculation of these additional fees, inform the overseas head office, and calculate the additional amounts due.

For example, a company in Beijing (urban area) owes only value-added tax of RMB 50 and business tax of RMB 50. The total tax liability is RMB 100. The urban tax rate is 7 percent; therefore RMB 100 x 7 percent is RMB 7. Consequently, the total tax is RMB 107.

The education surcharge follows the same calculation pattern, except for the fact that the tax rate is always 3 percent regardless of the city, county or other regions. To find the total tax, add the education surcharge to the previous equation (RMB 100 x 3 percent = RMB 3) and the total tax liability after the education surcharge and urban tax will be RMB 107 + RMB 3 = RMB 110.

There are special cases that company accountants should pay attention regarding the urban tax and education surcharge. Urban tax and education surcharge are exempt for imported goods when value-added tax and consumption tax are applicable. However, for exported goods, when the value-added and consumption taxes are refundable, the urban tax and education surcharge is not.

Companies can file for the December tax return in the first 15 days of January 2011. The announcement from the State Council does not specify if this new regulation shall apply to representative offices. Dezan Shira & Associates has not received further notice from the State Administration of Taxation, but will post additional updates immediately upon notification.

---