Question:
Taip Ltd is a foreign investment enterprise which has been a qualified software enterprise for enterprise incometax(EIT) since its inception in 2010. Taip Ltd produces software products in Mainland China and exports these products to associated companies in the Hong Kong Special Administrative Region for further sale to European customers. Taip Ltd‘s total costs, profits/(losses) and applicable tax rates are summarised below：
In 2015 the tax authorities conducted a transfer pricing audit and concluded that Taip Ltd should adjust its profit based on a mark-up of 10% on total costs for all five years, 2010 to 2014.
Required：
(a)List the four methods (other than cost plus) which the tax authorities can use for transfer pricing adjustments.
Note：No mark will be given for stating ‘other method’.
(b)Calculate the total amount of additional enterprise income tax (EIT) payable by Taip Ltd for the years 2010 to 2014 inclusive.
Answer：
Taip Ltd
(a)In addition to the cost plus method, the following four methods can be used for transfer pricing adjustments：
-Comparable uncontrolled price method
-Resale price method
-Transactional net profit method
-Profit split method
(b)Additional enterprise income tax (EIT) payable for the years 2010 to 2014
Question:
Trinity Ltd is a production and trading company which sells cosmetics. In 2015 Trinity Ltd carried out the following transactions (except where stated otherwise, the amounts are exclusive of value added tax (VAT))：
(1)Imported 10,000 cosmetic packs from France at a cost including freight and insurance (CIF) of USD100,000. The French supplier granted Trinity Ltd an early settlement discount of 2%. Trinity Ltd sold 8,000 of the imported cosmetic packs to a sole distribution agent, Beast Co, for RMB2,350,000. Trinity Ltd granted Beast Co an early settlement discount of RMB50,000.
(2)Purchased lipsticks from a manufacturer for RMB400,000. The manufacturer paid consumption tax on the production and sale of the lipsticks. The lipsticks were exported to a Vietnam customer for USD300,000.
(3)Purchased chemicals for RMB85,000 for use in the production of face powder. The total turnover from the sale of the face powder in 2015 was RMB250,000. The unsold inventory of face powder at 31 December 2015 had a cost of RMB150,000.
(4)Purchased 1, 000 eyeliners for RMB10,000. All these eyeliners were given to customers as free gifts. The retail price of each eyeliner is RMB30 (VAT inclusive)。
Required：
Calculate the following amounts payable by Trinity Ltd for 2015：
(a)The customs duty and consumption tax on the importation of the cosmetic packs.
Notes：
1. The customs duty rate on cosmetics is 6·5%。
2. The consumption tax rate on cosmetics is 30%。
(b)The export value added tax (VAT) refundable on the lipsticks.
Note：The VAT refund rate for lipsticks is 13%。
(c)The consumption tax on the production and sale of the face powder.
(d)The total output VAT and total input/import VAT credit as a result of transactions (1) to (4). State zero (0) for any transaction(s) which do not have a VAT impact.
Answer：
Trinity Ltd
(a)Cosmetic packs
Customs duty = (USD100，000 x 6.5% x 6)= RMB39，000
Composite value for consumption tax = ((100，000 x 6 + 39，000)÷(1-30%))= RMB912，857
Consumption tax on importation = (912，857 x 30%) = RMB273，857
(b)Lipsticks
VAT refundable on export = (400，000 x 13%) = RMB52，000
(c)Face powder
Consumption tax on production and sale = (250，000 x 30%) = RMB75，000
Question:
(a)State ANY TWO major differences between a direct tax and an indirect tax.
(b)State two direct taxes and two indirect taxes levied in China.
(c)In January 2014 Tee Ltd received approval from the local tax bureau on a tax exemption application. The amount of tax which was exempt for 2014 amounted to RMB5 million. In December 2015 the tax bureau found that it had made a wrong decision.
Required:
State,with reason(s),whether the tax bureau can require Tee Ltd to pay back the amount of tax previously exempt. (2 marks)
(d)State whether the tax authorities can impose each of the following administrative actions on taxpayers:
(i)imprisonment;
(ii)stop a tax refund on exports;
(iii)stop providing VAT special invoices;
(iv)force the closure of the business of the taxpayer.
Note:
You are not required to give any reasons.
(e)Briefly explain the method the tax bureau will normally use to impose enterprise income tax on a company which has lost all of its accounting records due to a fire.
Answer:
(a)Differences between direct and indirect taxes
- A direct tax is usually levied on income or wealth of a person while an indirect tax is usually levied on the consumption of goods and services.
- The payer of a direct tax bears the tax directly and it is more difficult to shift the tax burden to another person.
- A direct tax is usually simpler to administer whereas an indirect tax is usually more complicated to administer.
- A direct tax is usually progressive whereas an indirect tax is usually regressive.
(b)Direct taxes:
- Individual income tax
- Enterprise income tax
Indirect taxes (any TWO):
- Value added tax
- Business tax
- Consumption tax
(c)The tax bureau can recover the tax wrongly exempt in 2014.
The tax bureau can recover any taxes under-collected as a result of a wrong decision made within three years;
and for under-collected amounts over RMB100,000 the time limit is extended to five years.
(d)(i)No. [Imprisonment is a criminal penalty and can only be decided by a court]
(ii)Yes.
(iii)Yes.
(iv)No. [This is the authority of the State Administration for Industry and Commerce]
(e)The tax bureau can assess the enterprise income tax on a deemed basis by reference to the tax burden of other taxpayers involved in the same or similar industries with a similar scale of operations and a similar level of revenue.
Question:
(a)Design Ltd provides computer design services to overseas clients. The company‘s accountant has informed the chief executive officer that there are three alternative value added tax (VAT)policies which Design Ltd can choose to adopt:
(1)Taxable
(2)Zero rated
(3)VAT exempt
The following items from Design Ltd‘s budget for 2016 are relevant to its VAT position:
RMB
Amount expected to be collected from overseas clients in 2016 9,805,000
New computers to be purchased in January 2016 with an expected
useful life of three years with no scrap value. This amount is VAT inclusive
and the supplier is a VAT general taxpayer who can provide a VAT special invoice 3,500,000
Other service expenses in 2016. This amount is VAT inclusive and VAT
special invoices at 6% can be obtained for all items 210,000
Required:
Assuming that there are no other transactions, costs or expenses in the year 2016, for each of the three alternative value added tax (VAT)policies available to Design Ltd:
(i)Calculate the amount of VAT payable or refundable for the year 2016. (4 marks)
(ii)Calculate the gross profit for the year 2016. (5 marks)
(b)State ONE major reason for the tax reform of merging business tax into value added tax.
Answer:
(a)Design Ltd
(b)Major reasons for the merger of business tax and value added tax (VAT)are:
- Reduce the tax burden by eliminating double taxation,
- Encourage capital (fixed assets)investment by service industries.
