China has implemented a series of tax reforms in the last two years.
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These include a new Corporate Income Tax (CIT) Law in 2008 and the amendments to three major turnover taxes: the consumption tax (CT), value added tax (VAT) and business tax, which took effect 1 January 2009. The country is paying more attention to environmental protection than ever before and the Government has widely used green taxes as an effective tool for environmental protection in these tax reforms; for example, fuel tax reform and lifts in the resources tax. However, in this article, we will focus on the green taxes in CIT, CT and VAT.
Green tax levies
CT is levied on luxury goods and non-environmentally friendly products like disposable wooden chopsticks. In addition, CT on vehicles is levied based on cylinder capacity. China’s CT policy on vehicles changed just before the relaxation of the amended CT regulations and now forms part of it. The principle is that greener vehicles are going to pay less tax. (See table).
The new policy has simplified the classification of vehicles and significantly increased the highest CT rate from 8% to as high as 40%. For vehicles with engines under 1,000cc, the CT rate has been reduced to just 1%. More tax bands were introduced in the new policy to differentiate the tax cost of vehicles with different engine sizes and to make the tax levy fairer.
Green tax incentive
Green taxes are targeting more than carbon emissions and working at more than cutting pollution. China has taken a proactive approach by installing tax incentives to protect the environment.
Trading of recycled materials
There is a big change in the VAT treatments for trading of recycled materials. A comparison of the new and old policy is shown here.
At first glance, the policy is not in favour of either the sellers (the output VAT will affect their cashflow) or the buyers (as now they don’t have the 10% VAT credit). However, a closer look using examples reveals new benefits.
Notes (All figures in the table are US dollars):
Assuming the applicable VAT rate for the goods is 17%. Under the new policy, the total income received by the seller will be the aggregated amount of the goods value and VAT refund. To keep the same income of $100, the goods value can be lowered to $89.37 with a VAT refund of $10.63 (being $89.37×17%×70%).
Under the old policy, the buyer could get 10% of the goods value as an input VAT credit without cost. Starting in 2009, the buyer can only get an input VAT credit based on a VAT special invoice.
To enjoy the VAT refund, the seller must be a general VAT taxpayer registered with the authorities for the business of trading recycled materials in addition to other criteria such as having fixed place for processing and 80% of sales being transacted through banks. The new policy prevents the abuse of the VAT incentives for trading recycled materials and helps regulate the market and improve industry standards.
Manufacturing with recycled materials
The Ministry of Finance and the State Administration of Taxation has recently amended the VAT incentive policies on manufacturing with recycled materials. There are three types of VAT incentives:
- VAT exemption
- Levy but full refund
- Levy but 50% refund
The matching lists of goods and recycled materials for the above three types of VAT incentives can be found in the tax notice Caishui (2008) No. 156.
For enterprises engaged in manufacturing qualified products with recycled materials listed in the Catalogue of Preferential CIT Treatment on the Integrated Utilisation of Resources, a 10% reduction is available when calculating the taxable revenue derived from such manufacturing activities for CIT purposes. However, the matching list in this catalogue is different from those eligible for VAT incentives. Enterprises need to check whether their business qualifies for both VAT and CIT incentives.
Purchase of specialised equipment
Ten per cent of the amount invested in certain specialised equipment may be credited against the CIT payable by the enterprise for the current year, and any excess in the credit may be carried forward for five succeeding tax years. To enjoy this tax incentive, the enterprise must purchase and use specialised equipment for environmental protection, energy or water conservation, environmentally safe production, etc.
The equipment is prescribed in Catalogue of Preferential CIT Treatments for Specialised Equipment in Environmental Protection, Catalogue of Preferential CIT Treatments for Specialised Equipment in Energy or Water Conservation and Catalogue of Preferential CIT Treatments for Specialised Equipment in Safe Production.
The amount of CIT payable is the taxable income multiplied by the applicable tax rate. This example shows how the credit system works.
Qualified environmental protection and energy or water conservation projects
Qualified environmental protection and energy or water conservation projects include sewage treatment, landfill diversion, development and utilisation of methane, technological innovation in energy conservation and emission reduction, and seawater desalination. The Government is due to issue a catalogue which outlines the qualification criteria and scope. Income derived by an enterprise from engaging in qualified projects is eligible for a three-year CIT exemption and three-year 50% CIT reduction starting from the year in which the project first generates income.
Green tax is not new to China. But in this tax reform, the Government has developed more detailed standards and administrative procedures to regulate the market and make green taxes more effective.
Though we are experiencing a worldwide recession, there is no excuse not taking action in environmental protection. Governments all over the world are reviewing their green policies and implementing new ones. Green tax is a growing field of taxation, especially in developing countries like China. Is your company ready to go green and benefit while leading the way for others?
Bolivia Cheung is partner and Charlotte Chen is assistant manager at KPMG China