When it comes to tax matters, most people feel lost. Taxes are complex issues; it is sometimes helpful to understand other countries’ tax systems for comparison purposes. Taxes are the most important source of revenue in China. The Latin Department of CW CPA provides our readers with a clear and simple comparison of the main taxes in China and Mexico.
In China, taxes can be classified as follows:
- Income taxes: annual charge levied on both earned income (e.g. wages, salaries, commission) and unearned income (e.g. dividends, interest, rental payments). There are two categories:
- Corporate Income tax (CIT);
- Individual Income Tax (IIT)
- Value-added tax (VAT)
- Consumption taxes (CT): this tax applies whenever certain luxury goods are manufactured, processed or imported
- Other taxes: applied, in some cases, independently by the different levels of government
Based on the proposed division above, we will compare each tax with its respective or similar tax in Mexico.
- Income tax
Income taxes are levied on enterprises and individuals within a financial year. In Mexico, this tax is known as Impuesto Sobre la Renta (ISR, its acronym in Spanish).
- Corporate Income tax (CIT)
In China, resident companies pay this tax on their worldwide income, while non-resident companies pay this tax on their income in China. The standard rate of this tax for legal entities is 25%, although, in some cases, special rates between 20% and 10% might be applicable.
The tax rates may vary depending on the sector and industry in which the companies operate, the geographical area where they are incorporated and in which business activities they are engaged. For example, enterprises involved in qualified new or high technology, key software production as well as enterprises established in Special Economic Zones (e.g. Qianhai Shenzhen-Hong Kong or Zhuhai’s Hengqin New Area, etc.) may be taxed differently.
|High-technology enterprises (HNTE)||10% – 15%|
|Companies engaged in encouraged businesses in certain regions||15%|
Enterprises are entitled to certain deductions. Generally, the expenses, costs and losses directly related to the taxable income are deductible. Fixed assets with useful lives of more than 1 year must be depreciated. The useful life of buildings and infrastructure is 20 years and electronic equipment is 3 years. Generally, depreciation is calculated using the straight-line method.
Intangible assets such as patents, trademarks, copyrights and land use rights are allowed to be amortized. Organizational and start-up expenses are fully tax-deductible in the first year of operation. Interest on loans are generally tax-deductible. Charitable donations are tax-deductible at up to 12% of the annual accounting profit.
Special incentives are granted to new high-technology enterprises (HNTE), companies in Special Economic Zones (SEZ) and Pilot Free Trade Zones (FTZ). R&D expenses incurred as a result of developing new technology, new products, or new craftsmanship are also tax-deductible.
Tax losses can be carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred.
In Mexico, the CIT standard rate is 30%. Domestic as well as foreign companies are subject to the same tax regime. However, in some cases, foreign companies can apply for benefits, incentives and exemptions from local governments. Capital gains from the sale of fixed assets, shares and real property are treated as normal income; thus, they are subject to the standard rate.
Mexican enterprises are entitled to certain deductions. Straight-line depreciation is allowed according to what is specified in the law (e.g. the estimated useful life for assets is 20 years; 3.3 years for computers, etc.). Start-up expenses which have been incurred prior to the commencement of operations may be amortized at the rate of 10% per year. All federal, state, and local taxes levied on a company are regarded as deductible expenses for CIT purposes, except federal VAT and excise tax and taxes on acquisitions of fixed assets and real estate. Net operating losses can be carried forward and deducted, although they may be subject to certain limitations. The maximum amount for deductible donations is limited to 7% of the taxable income in the previous year. Deductions for certain business expenses (e.g. in the case of business meals and use of company-owned cars) are limited.
- Individual Income Tax (IIT).
PRC residents pay taxes on their national and international income, while PRC non-residents pay taxes on their income in China. Chinese law determines the different sources of income and groups them into different categories, for example, wages and salaries, operation of own business or on a contract lease basis, labor services, dividends, interest, royalties, leasing income, transfer of property, other income (not related to the previous categories). The tax is applied based on progressive rates ranging from 3% to 45%, which vary according to the income source as well as the income amount.
Individuals are entitled to certain deductions and allowances, depending on the income category. Individual taxpayers who earn income from wages and salaries received in China are entitled to receive a flat rate monthly deduction of RMB 3,500; foreigners are entitled to a flat rate monthly deduction of RMB 4,800. Social security contributions made in accordance with the Chinese Social Security Law are deductible for IIT purposes. Personal basic contributions such as payments to housing funds as well as certain medical insurance, pension and unemployment insurance payments are deductible.
Individuals earning income from labor services, author’s remuneration, royalty income and rental income are entitled to a certain deduction if they fulfil the following criteria. If the amount received in a single payment is not more than RMB 4,000, a standard deduction of RMB 800 is allowed. If the amount received from a single payment exceeds RMB 4,000, a deduction equivalent to 20% of the payment is allowed. In these cases, where more than one payment is received in the same month by an individual, the payments should be added up in order to determine the deduction allowance. Charitable contributions made to non-profit organizations are deductible to the extent of 30% of one’s monthly taxable income. This deduction is applicable to all income sources.
IIT in Mexico is levied at a progressive rate of 1.92% to 35%. Residents must pay taxes on their worldwide income; non-residents must pay only for income earned from Mexican sources.
Individuals are entitled to certain deductions. Personal deductions are allowed, but limits and restrictions may apply. Contributions made to authorized charities are deductible up to 7% of the previous year’s taxable income. Medical (including psychological and nutritional therapy), dental and funeral expenses for themselves and their dependents are also deductible. Moreover, home mortgage interest (adjusted for inflation) is deductible as well as health insurance payments. Contributions to retirement accounts and voluntary contributions to the retirement accounts of the Mexican Social Security System are deductible. Tuition expenses paid for children, spouses, parents and for themselves are tax-deductible with certain limits, depending on the level of education. The cost of university-level education is not deductible. The tax loss may be carried forward for ten years against professional and business income only. Rental losses can be deducted against other investment income in the same year.
- Value-added tax (VAT)
VAT is a national tax levied on the sale, importation of goods, provision of services and the sales of intangible properties. In China, there are two types of VAT taxpayers: general tax payer and small-scale taxpayers. This scheme is based on annual taxable sales.
For general taxpayers, the standard rate is 17%, but depending on the type of products or services, it can be taxed at different rates, for example, at 11%, 6% and 0%. Transportation, postal, basic telecommunications, construction and immovable property leasing services are taxed at a rate of 11%. Some value-added telecommunications services, financial services, consumer services, among others, are taxable at a rate of 6%. Exports of goods as well as repair, replacement and processing services, among others, are taxed at a rate of 0%. General VAT payers are allowed to credit input VAT against output VAT.
Small-scale taxpayers are taxpayers who, in a financial year, do not exceed the established sales limits. The limits range from RMB 500,000 for taxpayers in the industrial sector, RMB 800,000 for taxpayers in the commercial sector and RMB 5, 000,000 for VAT reform taxpayers. The rate for small-scale VAT payers is 3%.
Generally, exports of goods from China are taxed at 0%. Taxpayers who are engaged in 0% taxed business activities may be allowed to credit or refund the input VAT incurred. However, the type of goods being exported will determine the percentage of input VAT refunded based on a scale ranging from 0% to 17%.
Exemption from VAT means that related input VAT cannot be credited or refund. Exceptions may apply and requirements need to be fulfilled.
Companies are generally required to register with the local tax bureau at the time of incorporation to have its status recognized as either general taxpayer or small-scale taxpayer. A VAT return must be filed each month and submitted before the 15th of the following month.
In Mexico, VAT (IVA, its acronym in Spanish) has a standard rate of 16% and is levied on products or services, more specifically, sales of goods and services, lease payments and imports of goods and services. Exports, sales of medicine and unprocessed foods are zero-rated. In addition, some goods are exempt from VAT payment, for example, books, the sale of land, interest, medical services, education, salaries and wages, rentals of residential property, etc.
VAT is calculated on a monthly basis, and VAT monthly payments are required by the 17th day of the subsequent month. Input VAT may usually be credited against output VAT. Creditable VAT is recoverable as a refund, offset against other taxes or can credit against subsequent VAT liabilities. VAT overpayments may be used to offset the tax liabilities from other federal taxes. In addition, a monthly report on VAT transactions prepared by the taxpayer must be filed on a monthly basis.
- Consumption Tax (CT)
Consumption tax in China is one of the most important taxes. Organizations and individuals engaging in production, processing and importation of consumables specified in Consumption Tax Law should be taxpayers of CT and should pay consumption tax pursuant to Chinese regulations. This tax is levied on the following types of products: luxury products, such as cosmetics, precious jewellery, gems, jade and golf balls and clubs, luxury watches, yachts; products whose over-consumption is harmful to health, social order and the environment, such as tobacco, wine and alcohol, firecrackers and fireworks; high-end products and financially significant products, such as motorcycles, sedans and vehicle tires; and non-renewable products, such as gasoline and diesel.
Consumption tax should be paid at the point of sale. Consumption tax should be paid on imported products when making a customs declaration. Generally, taxable consumables exported by a taxpayer are exempt from CT. If the exported goods have previously been imported into China, the consumption tax paid upon import is refundable. Goods that are VAT exempt are also CT exempt.
The tax rates to be used for calculations vary considerably, depending on the type of product. There are two methods to calculate this tax: ad valorem and based on quantity. Ad valorem means that the tax will be levied based on the value of the product; on the other hand, the quantity dependent method imposes the tax based on the volume and/or quantity of the taxable product sold.
The Special Tax on Production and Services (IEPS its acronym in Spanish) is a special tax levied on the production of certain goods and other relevant services. In Mexico, IEPS is levied on gasoline, beer, wine, spirits, junk food, cigarettes and other tobacco products as well as certain services related to the consumption of the aforementioned products. In addition, services involving raffles and gambling as well as some telecommunications services are also IEPS taxable. Generally speaking, IEPS rates vary between 3% and 53%. For example, rates ranging from 25% to 53% are applicable to alcoholic beverages and services related to these products; rates from 30.4% to 160% are levied on tobacco, cigarettes and services related to these products; a 8% tax rate is applicable to food with a calorie density of 275 kilocalories; gambling and lotteries are subject to a 30% tax rate; and telecommunications services provided through public networks are subject to a 3% tax rate. Generally, products are exempt from IEPS upon export. On imported products, input IEPS is creditable when paid at the customs office.
- Other taxes
In China, there are various types of taxes that are levied on natural resources, fixed assets, or for special purposes, etc. For easy reference we have grouped them into this category.
Withholding tax (WHT) on profits (dividends, interest, royalties, etc.) received by non-residents companies and individuals in China apply at a general rate of 10%. This rate can be reduced if there is a double tax treaty (DTT) between China and the foreign party. China and Mexico have signed a DTT; thus, the Mexican party can enjoy reduced rates. Currently, this agreement stipulates 5% for dividends, 10% for dividends and 10% for royalties.
Stamp duty is a type of tax which is levied on certain documents, such as documents issued for purchase and sale transactions, process contracting, property leasing, commodity transportation, documents of transfer of property title, business books of account, etc. Some calculations shall be based on the proportional tax rate, while other calculations shall be made in accordance with the quota amount. The tax rates vary between 0.005% and 0.1%. In some cases, the quota amount is applicable, and the range of this quota varies between 1 and 5 yuan per document. Mexico does not have this type of tax.
Foreign individuals and companies as well as foreign-invested enterprises, who are subject to VAT and CIT, are also subject to surcharges in China. These are taxes for specific purposes which differ from one geographical area to another, for example, the Urban Construction and Maintenance Taxes (UCMT), the rates of which can be 7%, 5% and 1%; a 3% tax rate for Education Surcharges (ES) and Local Education Surcharges (LES). Together, these surcharges amount to 12% of the company’s total turnover tax liability (VAT and CT). In Mexico, these taxes can be applied and collected locally, for example, the surcharge for the Promotion of Education.
Property tax in China is levied on all owners and users of properties for commercial purposes. The rate of this tax is 1.2% on the residual value of the property minus 10% to 30% of the original value of the property. In Mexico, this type of tax is levied at different rates across the country.
Urban and Township Land Use Tax is a type of tax levied on individuals and organizations that use land in cities or towns or industrial and mining areas. The tax rate varies from area to area. Local governments have the right to increase or decrease the tax rate. The tax rate is between RMB 0.6 and RMB 30. In Mexico, this tax does not exist.
Individuals and organizations that transfer state-owned land use rights, buildings on the land and the attachments thereto and other property as well as derive income therefrom are subject to this tax. A four-tier progressive tax rate system shall apply to land appreciation tax. Tax rates are from 30% up to 60%. In Mexico, the sale of property is taxed at rates between 2% and 4%. These rates are applicable to the amount of the transaction under fair market conditions and at market value.
Exploitation of natural resources, such as salt production and certain mineral resources, are liable to resource tax. The amount payable for resource tax shall be computed using the ad valorem method or quantity-based method (i.e. multiplying the sales amount of taxable products by the proportional tax rate specifically applicable to the taxpayer, or multiplying the sales quantity of taxable products by the norm quota tax rate specifically applicable to the taxpayer). In Mexico, the exploitation of natural resources as well as oil production are subject to a special fiscal regime as established in the Hydrocarbons Revenue Law. A special tax for mining of 7.5% may apply.
In China, vehicles and vessels are subject to vehicle and vessel tax, the amount of which is determined by Chinese law. Passenger cars, buses, and motorcycles are taxed at a fixed unit amount – this means the number of passengers. Transport vehicles are generally taxed at a fixed amount according to their weight. Vessels are taxed at a fixed amount according to their deadweight. Vehicles and vessels which are energy saving and use renewable energy may be exempt from vehicle and vessel tax or enjoy a 50% reduction.
CW CPA can assist overseas companies in analyzing the implications that changes in international and domestic tax policy can have on their operations and in ensuring meticulous compliance with the relevant regulations and reporting requirements. If you have any questions regarding this article or any other enquiries about tax practices in China, please contact Victor Herrera at firstname.lastname@example.org.