8. TAX DECLARATION AND COLLECTION
8.1 Tax filing
Any FIE or FE with establishments should file an income tax return and make payment in advance within 15 days of the end of each quarter. The annual income tax should be declared within 4 months after the year-end together with an audit report. If, due to special reasons, the declaration cannot be made in time, the tax bureau can grant an extension for the annual declaration for a period of no more than 1 month.
For tax payment by any FE without establishment, the withholding agent who makes the payment of interest, rent and royalty should file an income tax return within 5 days of payment.
If an FIE has several places of operation (e.g. a manufacturing head quarter in Guangzhou and several sales offices all over China), it can file a tax consolidation combining all the results and report and pay tax to the tax bureau located in the head quarter. Within 5 months after the year end, the FIE should present its tax payment certificate paid by FIE, the financial statements of sales offices and the tax declaration report of sales offices to the local tax bureau.
8.2 Tax consolidation for manufacturing or service branches
The manufacturing and service branches refers to those branches that they have manufacturing or providing service activities locally and keep a good accounting records. The tax rate applicable to each branch should be the rate prevailing at each location. It is different from an FIE that has several sales offices which should be subjected to the rate prevailing at the head office.
However it can also file a tax consolidation combining all the results and report and pay the tax to the tax bureau located in the head quarter. In the case that the tax rates prevailing at each location are different, then there are 3 possible cases as follows:
(i) CASE 1: Each unit has the profits position.
Each unit should be taxed at the tax rate prevailing at location of each unit.
(ii) CASE 2: Each unit has the loss position.
Each unit should carry forward its loss for no more than 5 years to be offset by its future profit.
(iii) CASE 3: Some units have profits and others have loss.
(An enterprise have 3 offices A, B and C in the areas with tax rate 33%, 27% and 15% respectively, the profit (loss) of the offices are as follows:
After the offset, the net result is a loss. Then all units are not subject to income tax.
After the offset, each unit has profit and should be taxed at the rate prevailing at the each unit's location.
Office A Office B Office C Combined
Year
1999 Profit!
(loss)
for the year RMB1.5 million (RMB 3 million) RMB0.75million (RMBO.75 million)
- offset RMB1.5 million of loss for office B +RMB1.5
million of profits from office A - offset RMB
0.75 million of
loss for office B --
+ RMB 0.75
million of profits
from office C --
Taxable income 0 (RMBO.75
million) 0 (RMB 0.75
million)

Office A Office B Office C Combined
Year 2000 RMB 3 million
+ RMB1.5
million that offset loss for office B RMB 3.75 million
- offset RMB 3 million last year
loss RMB1.5million
+ RMB 0.75
million that offset loss for
office B RMB
8.25million
--
Taxable RMB 4.5 million RMB 0.75 million RMB RMB7.5 million
income 2.25million
×tax rate
Tax payable 33%
RMB 1.485 m 27%
RMB 0.2025 m 15%
RMB 0.3375 m --
RMB 2.025m

Office A Office B Office C Combined
Year 2001 (RMB1.5
million)
+RMB1.5 million from office B RMB2.25 million RMB2.25
million RMB3 million
- offset RMB 1.5
million for the loss
of office A -- --
Taxable income 0 RMB 0.75 million RMB 2.25million RMB 3 million
*taxrate -- 27% 15% --
Tax payable Year 2002 -- RMBO.2025m RMBO.3375m RMBO.54m
RMB2.25 million RMB1.5 million RMB2.25
million RMB6 million

When the loss-making unit earns profit in the subsequent years, the profit should be offset by its previous loss first, while the original profitable unit should be added back the loss it offset before.
From the summary, it shows that the total cumulative tax payable for each individual office is same whether there is a loss transfer between the offices or not. For example:
the total cumulative tax payable for office A = 5.25 * 33% = 1.7325m that is the sum of all the tax payable over the years after the inter-office set off. However the consolidation reporting method is still recommended as a smaller tax amount is paid in the earlier period. The reason can be better explained by the following example:
@A foreign enterprise set up three organizations in Shanghai, Nan king and Guangzhou for production business activities. The result of production business activities for year 2000 and 2001 is as follows:
Calculate the tax payable for the enterprise by both (a) Consolidation reporting and (b) non-consolidation reporting.
(a) Consolidation reporting:
In 2000, the profit from Nan king should cover the loss in Guangzhou:
Tax payable in year 2000 = 3,000,000 x 24% = RMB 720,000
Tax payable in year 2001 = 3,000,000 x 24% + (3,000,000 + 1,500,000) x 30% +
(4,500,000- 1,500,000) x 15% = RMB 2,520,000
(b) Non-consolidation reporting
In 2000, total tax payable under separate reporting = 3,000,000 x 24% + 1,500,000 x
30% = RMB 1,170,000
In 2001, total tax payable under separate reporting = 3,000,000 x 24% + 3,000,000 x
30% + (4,500,000 - 1,500,000) x 15% = RMB 2,070,000
It can be seen that the total tax payable under both methods are same but the consolidation reporting method is recommended as a smaller tax amount is paid in the

- offset the
RMB1.5 million loss in last year + offset RMB1.5 million of loss for office A - --
Taxable income RMB0.75 million RMB3 million RMB 2.25
million RMB 6 million
×tax rate 33% 27% 15% --
Tax payable RMB0.2475m RMB0.81 m RMB0.3375 m RMBI.395m
1999-2002
cumulative taxable income RMB5.25 million RMB4.5 million RMB6.75
million RMB 16.5
million
Cumulative Tax payable RMB1.7325m RMB1.215 m RMB1.0125 m RMB3.96 m

Year 2000 Shanghai
RMB3 (24%) million Nan king (30%) RMB1.5 million Guangzhou (15%) RMB-1.5 million
Year 2001. RMB3 million RMB3 million RMB4.5 million

earlier period.
(iv) The tax bureau may allocate the consolidated profits into each unit according to the ratio of the turnover or assets value, or number of staff, if the tax bureau considers that the reported figures of each individual unit does not reflect the true position of the taxable income of the all units.
8.3 Foreign currency
(i) If an FIE or FE uses RMB as its reporting currency, in practice, the transaction in foreign currency can be converted into equivalent RMB at the prevailing exchange rate on either the date of transaction or the first day of the transaction month.
(ii) If an FIE or FE uses a foreign currency as its reporting currency, quarterly taxable income should be converted to equivalent RMB at the rate prevailing at the quarter end. For the annual settlement, the balance of tax payables in foreign currency should be converted into equivalent RMB at the rate prevailing at the year-end.
If there is tax refund, the amount should be converted back into foreign currency at the rate that was used when the tax payment was made. Then the foreign currency should be converted into RMB again at the rate prevailing at the issuance date of tax refund notice.
(a (Question 2, December 2000)
Company H is a joint venture located in a Special Economic Zone and engages in the business of hotel service. The total investment of Company H is RMB 90,000,000, of which 40% is foreign investment. It started operation in 1993 and began to make profit from 1997.
The company has 120 employees.
The following is the profit and loss account of Company H for 1999: (in RMB)
Turnover 90,000,000
business costs 27,000,000
management expenses 13,500,000
Includes
salary and bonus paid to employees 4,980,000
social security paid abroad for Company H's foreign 1,500,000
employees
business tax 4,500,000
expenses for treating guests 900,000
financial expenses 3,300,000
Includes
Interest expenses for the loan of the foreign party borrowed
from foreign banks as investment 1,500,000 Interest expenses for RMB 3,000,000 loan from another
company 300,000
management fee paid to associated enterprise 1,800,000
compensation from an insurance company for the canteen destroyed 3,000,000 by fire
Cost for rebuilding the canteen 4,500,000
donation to the building for a park 1,500,000
Company H calculates its income tax for 1999 as follows:
Taxable income = 90,000,000 - 27,000,000 - 13,500,000 - 1,800,000 - 4,500,000 - 900,000 -3,300,000 + 3,000,000 -4,500,000 - 1,500,000 = 36,000,000
Income tax to be paid = 36,000,000 x 15% x 50% = 27,000,000
Note: Company H is exempted from local income tax.
You are required:
(a) to identify the mistakes made by the company in its calculation of income tax, giving brief reasons in each case; and
(b) to calculate the correct amount of income tax payable by Company H for
1999.
(a (Question 2, June 1999)
Palace of Paris (PP), a joint venture bowling club, was opened in December 1996. The foreign party used USD 2,000,000, which was a loan from a foreign bank, to buy bowling equipment and put into the joint venture as its investment. The Chinese party put its right to use the land and a newly built building as its investment, totaling USD
2,100,000.
According to the accounts, the business income of PP in 1995 was 12,000,000 yuan; 2,400,000 yuan business tax was paid; the cost of business was 7,000,000 yuan, which included 5,000,000 yuan depreciation for the equipment; cost for management was 3,000,000, including one-time opening fee of 800,000 yuan and guest treating expense of 600,000 yuan; cost for account was 900,000 yuan, including 820,000 yuan paid as the interest for the foreign party's loan. The profit for 1997 was - 1,300,000 (negative) yuan, which was reported to the tax authority.
The business income of PP in 1998 was 18,000,000 yuan; 3,600,000 yuan business tax was paid; the cost of business was 7,500,000 yuan, which included 5,000,000 depreciation for the equipment; cost for management was 3,200,0000, including guest treating expense of 600,000 yuan and a fine of 200,000 yuan; cost for account was 1,080,000 yuan, including 820,000 yuan paid as the interest for the foreign party's loan and 200,000 yuan paid to another enterprise as annual interest for a loan of 1,000,000 yuan. The profit of 1998 was 2,620,000 yuan. Offsetting the loss of
1,300,000 yuan of the previous year, a profit of 1,320,000 yuan was reported to the tax authority and PP claimed 435,600 yuan income tax.
Note:
(1) When calculating the depreciation of equipment, 10% is allowed to be deduced as residue value.
(2) The annual interest rate of the bank is 10%.
Required:
(a) Identify and explain the mistakes in the calculation of tax for the years of 1997 and 1998.
(b) Calculate the income tax and local tax for each of the years of 1997 and
1998.
(i Mock exam question
A Joint Venture export production enterprise located at the Special Economic Zone has 20 years of operation period, it started its operation in year 1994, there is profit at that year and started to enjoy the 5 years¡¯ tax exemption. Total value of production in year 1999 is RMB 67.5 million, value of exportation RMB 29.7 million; total value of production in year 2000 is RMB 82.5 million, value of exportation RMB 66 million; the taxable income in year 1999 is RMB 5.25 million, prepaid income tax RMB 675,000; the taxable income in year 2000 is RMB 7.5 million, prepaid income tax RMB 900,000.
After inspection, the enterprise has the following expenses from the income in year
1999:
(1) Concealed income from sale of products RMB 750,000, the tax authority impose a fine of 2 times of the amount of the value added tax evasion;
(2) Paid RMB 600,00 management fee to the related enterprise;
(3) Paid RMB 525,000 of overseas investment loan interest;
(4) Expenses on the expansion of the production area RMB 1.35 million;
(5) Donation to the related scientific institution for the research and development
RMB 120,000.
The enterprise has the following expenses from the income in year 2000:
(1) Purchased domestic made machinery RMB 900,000 in June and started to use in the same month, all prices of purchased machinery are deducted before tax (the machinery have 10 useful years, 10% of disposal value, depreciation is calculated using the straight-line method);
(2) Donation to a sport competition RMB 525,000
(3) Paid interest of RMB 600,000 for the short term loan of RMB 7.5 million and the interest rate of commercial bank is 7%;
(4) Overseas social insurance of five overseas management staffs RMB 450,000.
(5) RMB 750,000 of profit from a branch in oversea, (paid RMB 270,000 of tax overseas), which is not including in the taxable income.
Required:
Calculate the taxable income and underpay income tax for the year 1999 and year 2000 (assume local income tax is exempted)
(1) Tax payable for the year 1999:
Penalties of concealed income from sale of products are punishment, which cannot be deducted before tax.
Amount of penalties = 750,000 ¡À (1 + 17%) x 17% x 2 = RMB 217,949
Event (2) to event (5) in the question cannot be deducted before tax, adjustment
should be made.
Taxable income = 5,250,000 + 217,949 + 600,000 + 525,000 + 1,350,000 +
120,000 = RMB 8,062,949
(Exportation value in year 1999 is RMB 29.7 million, it is 44% of the total
production value of RMB 67.5 million, the tax rate for the year is 15%)
Taxable income = 8,062,949 x 15% RMB 1,209,442
Underpayment income tax 1,209,442-675,000 RMB 534,442
(2) Tax payable for the year 2000:
Purchase domestic made machinery is capital investment, RMB 900,000 cannot be totally deducted before tax, but the current year’s depreciation of the machinery can be deducted before tax, amount of depreciation = 900,000 x (1 - 10%)¡Â 10+ l2x6RMB 40,500
Taxable income = 7,500,000 + 900,000 - 40,500 + 525,000 + (600,000 - 7,500,000 x 7%) + 450,000 = RMB 9,409,500
(Exportation value in year 2000 is RMB 66 million, it is 80% of the total
production value of RMB 82.5 million, and therefore the tax rate for the year is
10%)
Tax payable = 9,409,000 x 10% = RMB 940,900
PRC income tax for overseas income = (750,000 + 270,000) x 33% RMB
336,600
Deduction for tax paid overseas 336,600 - 270,000 RMB 66,600
Tax payable 940,900 + 66,600 RMB 1,007,500
Since the tax payable in year 2000 is lesser than the one in year 1999, so there is no preferential policy for purchase of domestic made machinery..
Underpayment income tax 1,007,500- 900,000 RMB 107,500