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Many international companies having  operations in China are bound to be hit by the two new surtaxes that will affect their tax filings starting in January 2011.Foreign enterprises, foreign invested enterprises, and foreign individuals in China must now pay the Urban Construction and Maintenance Tax as well as an Education Surcharge. Earlier, these taxes were only imposed on domestic enterprises and Chinese individuals with foreign enterprises, but now all tax payers of China’s indirect taxes must pay.

A brief about the surtax

This surtax is calculated as a percentage of the actual amount of the Value Added Tax (VAT), the consumption tax and the business tax paid by the taxpayers. While the Education Surcharge is 3 percent across the board, the rate for the Urban Construction and Maintenance Tax varies by location. In city areas like Shanghai and Beijing, the rate is 7 percent, while in county and township areas the rate is 5 percent, and in other, less populated areas the rate is as low as 1 percent.

As per the principle of tax burden sharing, those who benefit, pay and those who benefit more will pay more. The two surtaxes will increase the cost of doing business in China or with China. For instance,  a foreign enterprise providing consulting services to a Chinese enterprise in Shanghai, will need to pay a business tax of 5 percent of the service fee as well as an additional surcharge of 0.5% of the service fee [5% x (7% + 3%)]. The recent change in law is another effort by the Chinese government to put domestic enterprises on an equal footing with foreign enterprises and foreign invested enterprises. Two years ago China unified its enterprise income tax law for the first time.

Foreign companies need to prepare to for the tax increase and review the effect on their business plans. These two surcharges should start to apply to the tax filing of Foreign Invested Enterprises conducted in the month of January2011.

Do you need the help of an expert?

In the current economic climate, the last thing you want to do is to pay your hard-earned profits as unnecessary taxes when doing business overseas. To overcome any challenges in taxation, it is best to partner with an expert to help simplify the process. They have the complete up-to date information on how to keep up with the ever changing laws regarding expat tax, global transfer pricing, regulatory filings, to name a few. A dependable professional partner in an international expansion can help eliminate the anxieties concerning your overseas expansion project and allow you to focus on building your business alone.