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Contents
I. income Tax on Corporate Business (EIT) 3
2. Income Tax on Foreign Investment Enterprises (FElT) 19
3. Value Added Tax (VAT) 36
4. Business Tax (BT) 50
5. Customs Duty (CD) 59
6. Stamp Tax (ST) 67
7. Land Appreciation Tax (LAT) 73
8. Income Tax on Individuals as Employees or Individual 78
Enterpriser (lIT)
9. Overview of Tax System and Administration 95
Appendix
Past examination papers analysis 106

Income tax on corporate business (EIT)
1. TAXPAYER
Income tax on corporate business refers to the income tax imposed on domestic enterprise. The taxpayers that subject to the tax are enterprises or organization which are independently economically accountable entities, including state-owned enterprises, collective enterprises, private enterprises, joint enterprises, joint-stock companies and other organizations with operational income and other income.
State-owned enterprises are enterprises owned by the people through public agencies and governmental bureaus and registered pursuant to relevant government regulations.
Collective enterprises that's mean of production is collectively owned.
Private enterprises are enterprises whose means of production are owned by
individuals.
Joint enterprises are enterprises owned by several parties.
Joint-stock enterprises are enterprises whose registered capital is in the form of stock.
Other organizations are entities with production, operation and other income, such as institutions and social groups.
2. BASIS OF ASSESSMENT
Taxable income  =Total income -- deductible items
The total income includes income from production and operation, income from property transfers, income from interest, leasing, royalties, dividends and other income that obtained within and outside China. To avoid double taxation, tax paid overseas can be used as a tax credit.
The total income includes:
Income from production and operation refers to the revenue from the taxpayer's major business activities. It refers to the income from sales of goods, services
rendered, operation, construction, other activities.
Gain on property transfer refers to the gain on the disposal of fixed assets, investment, inventories and intangible assets.
Interest refers to the income from bank deposit, bonds, debtors and others.
Leasing refers to the rental income from fixed assets, packaging, and other property.
Royalties refer to the income from providing or transferring patent, trademark, copyright and proprietary technology.
Investment refers to the dividends, etc. from investment in stock company.
Other income refers to the gain from disposal of fixed assets, cash or inventory,
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Penalty receipt  , non settlement of creditor due to the creditor’s reason, refund of Education surcharge.
If the amounts of discount and the sales are printed on the same invoice, the discount can be net off to arrive a net sales figure. if it is not printed on the same invoice, the discount cannot be deducted.
Any deduction or refund of turnover taxes is taxable under the corporate income tax.
Any use of the self-manufactured products for construction or staff welfare purpose is deemed as income of the taxpayer.
Any grant from the government should be included into the income in the year of money receipt.
Any income generated from the construction in progress should be included in the total income but not to set off the cost of construction in progress.
Any non-monetary consideration must be valued according to the market value and included into the total income.
Interest from government bonds is not taxable but other bonds, like enterprises bond is taxable.
Donation receipt in form of assets can be treated as capital reserve and not subject to income tax at the time of receipt. It becomes taxable at the time of transfer of that assets or liquidation at the higher value of transfer price and the value of the assets at the time of donation receipt.
For the payment by installments, the time for income can be recognized at the delivery of the product or the date of invoices issuance or the payment date specified in the sales contract.
For installation of machinery, construction, ship building that lasting over 1 year, income can be recognized according completion percentage method.
3. DEDUCTIBLE EXPENSES
All expenses can be classified into revenue or capital nature. The capital nature expenses can only be deducted through depreciation and amortization over a number of years specified by the tax authority. The general rules is that revenue expenses incurred in the course of carrying on the business, such as cost of goods sold. taxes on sales, non-operational gains/losses, selling expenses, administrative expenses and financial expense. They are deductible in computing taxable income. They include:
3.1 Cost of goods sold
It includes manufacturing cost, transportation cost, consumption tax, custom duty, resource tax and non-deductible value added tax. The valuation method of issuing goods can be first-in-first-out, weighted average, moving average, standard cost or retails sales method. The taxpayer can choose any one of the methods and it should be consistently applied. Any change in the valuation method should be approved by the tax authority.
3.2 Taxes on sales
It includes consumption tax, business tax, resource tax, custom duty, education surcharge, city maintenance and development tax.
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3.3 Non-operational loss
It includes investment loss, loss on the disposal of fixed assets and intangible assets.
3.4 Selling expenses
It includes advertising, transportation of finished goods to the buyers, agency fee, packaging, exhibition fee, insurance, the traveling expenses, wages and salaries of sales department
3.5 Administrative expenses
It includes the amortization of intangible assets and pre-operating expenses, depreciation of office furniture and fixture, provision or write off of bad debts, stamp duty, audit fee, legal fee, research and development expenses, social security payment, entertainment, staff training, wages and salaries of administrative development, expense of board of directors meeting and investors’ meeting.
@A company calculates the provision of bad debts, the collectable debtor balance is RMB5,000,000, collectable bill balance is RMB400,000, receipt in advance balance is RMB200,000 at the end of the year. Calculate the allowable deduction of the provision of bad debts for the year.
The collectable debts include the amount of collectable bills at the end of the year, so the allowable deduction of the provision of bad debts to the taxable income for the year (5,000,000 + 400,000) x 5% RMB27,000
3.6 Financial expense
It included the net interest expense, exchange gain or loss, bank charges and other financial handling charge.
For interest, the maximum allowable amount is the loan with interest rate not higher than the rate offered by the commercial banks for the same length of loan period and the similar degree of risk.
Some special cases for paying attention:
The interest for borrowing money to invest should be capitalized into the cost of investment.
If the money borrowed from the related company is more than 50% of the taxpayer’s registered capital, the interest in relation to the excess portion is not deductible.
For property developer, the interest incurred before the completion of the property should be capitalized as the cost of development.
Interest incurred during the pre-operation period should be capitalized as pre-operation expense.
3.7 Wages and salaries
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The allowable wages and salaries is RMB 800 per month per person. There is a 20% upward for some developed areas. It includes the basic wages, bonus, allowance and overtimes. For an approved software enterprises, the full amount of actual wages and salaries payment are deductible.
3.8 Staff benefits
The provisions for trade union fund and workers education fund that are equivalent to 2% and 1.5% of the total allowable wages and salaries respectively are tax allowable. The deductible amount for staff welfare is the actual amount incurred. The staff welfare refers to the recurring staff welfare e.g. medical expense. It is tax allowable for all the contribution paid to the compulsory social security funds according to the relevant rules, e.g. retirement fund, unemployment fund, etc.
3.9 Entertainment expense
The maximum allowable is the lower of the actual amount and the amount per the following table. All the excess are not allowable and cannot be carried forward.
a An enterprise's annual sales income is RMB55,000,000, sales discount is RMB300,000, sales returns RMB100,000, other business income RMB 1,500,000, and how much is deductible amount for the year.
(55,000,000 + 1,500,000-300,000- 100,000) x 3% + 30,000 = RMB 198,300
3.10 The actual write off of fixed assets or current assets is allowable after the tax bureau's approval. However it should be noted that the input VAT associated with the inventory written off should be deductible under income tax but not to be set off the output VAT.
3.11 If the taxpayer can provide the documents issued by the headquarter concerning the scope, the basis and the method of allocation of the central administrative expenses, the share of headquarters’ administrative expenses is tax allowable after the approval from the tax bureau. The maximum deductible is 2 % of the total income.
3.12 Research and development (R&D) expenses for new product / new technology / new method. It includes the research staffs’ wages and salaries, depreciation of machinery, material cost, designing fee, etc. and is tax allowable. For nationalized and collectively owned enterprise, if the current R&D expenses is more than 10% of the last year's figure, it is 150% of the current year’s R&D that can be tax deductible. However, the extra 50% deduction is not allowed for the enterprises suffering losses during the current year. If after the extra 50% deduction, there is a loss suffering for the year, the net loss cannot be carried forward.
3.13 The expenses for transfer of fixed assets are allowable.
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Annual turnover (in RMB)   Allowable %   (Fast addition factor)
The portion equal or below 15 million     0.5% (0)
The portion exceeding 15 million   0.3%(RMB3O,000)

3.14 Advertisement expense
Advertisement that used for the business operation can be classified into two types:
(a) Advertisement expense through the media:
The maximum allowable limit of 2 % of turnover (8% for the industries of pharmaceutics, food, home electric appliance, telecommunication, software development, integral circus, property development, sport and culture, etc.) is generally allowed and the exceeding part can be carried forward without time limit. The taxpayer may apply to the State Administration of Taxation for the higher percentage of deduction.
The advertisement expense incurred by enterprise in white wine industry is non tax deductible. To encourage the high technology industry, the advertisement expenses incurred in the first 5 years after the establishment of the enterprise in the industry of soft development, integral circus, Internet, venture capital can be fully deducted without limitation. After the first 5 years, the above rule of 8% applies.
To be deductible, the advertisement should be:
produced by the unit approved by the Commercial and Industrial Bureau.
paid and the legitimate invoice thereof is obtained.
conducted through the media.
(An white wine production collectively owned enterprise has RMB 18,000,000 turnover in the year of 2001, cost of sales RMB7,000,000, sales tax and surcharge are RMB5,000,000, all other costs RMB4,500,000. The costs above include RMB900,000 for research and development expenses for new product (the current R&D expenses is 20% more than last year’s), and advertisement expense of white wine RMB600,000. Calculate the income tax payable for the enterprise.
The current R&D expenses is more than 10% of the last year’s, therefore 150% of the current year’s R&D can be tax deductible. Advertisement expense of white wine cannot be deducted before tax. So, the taxable income for the year = 18,000,000 - 7,000,000-5,000,000- 4,500,000 -(900,000 x 50%) + 600,000 = RMB 1,650,000, the tax payable for the year = 1,650,000 x 33% = RMB544,500
(b) For others not satisfying all the above condition, it should be classified as promotion expenses.
Advertisement expenses not conducted through the media or promotion expenses The maximum limit is 0.5% of turnover and the exceeding part is neither deductible nor carried forward.
@An industrial enterprise had income RMB38,000,000 for the first year, advertisement expense RMB 1,000,000 and promotion expense RMB400,000. The income in second year was RMB42,000,000, advertisement expense RMB800,000
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and promotion expense RMB200,000. Calculate the allowable deduction for advertisement expense and promotion expense for the second year.
It had RMB 1,000,000 of advertisement expense in the first year, the allowable deduction limit = 38,000,000 x 2% = RMB76O,000. The exceeding part of RMB24O,000 cannot be deducted in first year but can be carried forward without time limit. For promotion expense RMB400,000, the allowable limit = 38,000,000 x 5% = RMB 190,000, the exceeding part ofRMB21O,000 is neither deductible nor carried forward.
In the second year, it had RMB 800,000 of advertisement expense, the allowable deduction limit = 42,000,000 x 2% = RMB84O,000. The unused portion of RMB4O,000 can be deducted by using the brought forward RMB24O,000 from the first year. The allowable deduction for the advertisement expense for the second year = 800,000 + 40,000 = RMB84O,000; for promotion expense RMB200,000, allowable deduction = 42,000,000 x 5% = RMB2 10,000, the unused portion cannot be deducted, so the allowable deduction for promotion expense is