Ernst & Young is out with a very informative online publication on indirect taxes in China (h/t All Roads). The publication is entitled, “Navigating Chinese Indirect Taxes,” and it provides a great overview of these taxes and how they can, and almost certainly will, impact your China business. It starts out with the following general comments regarding indirect taxes in China:

Indirect taxes (specifically Value Added Tax, business tax, customs duty and
consumption tax) play an important role in China, accounting for almost 60% of the government’s tax revenue. Newly revised regulations are changing how indirect taxes are treated in China. But these are often the forgotten tax on business. Tax directors may overlook these costs as they are above the line and usually not directly visible within the accounts or financial statements.
We are often surprised to learn that many companies have yet to grasp the significance of the indirect taxes passing through the organization. More often than not, indirect taxes are viewed as process-oriented throughput costs rather than as a direct charge to the bottom line that should be managed through proactive and concerted efforts. It is not common for companies in China to employ dedicated resources accountable for the risks and costs that arise from processing indirect taxes. This approach creates risks and results in missed savings opportunities.

I am constantly telling our clients that taxes in China are really not all that different from taxes in the United States. China’s business tax system is generally (cough, cough) logical and manageable and is not to be ignored. What this means is that if you are a small to mid-sized company doing business in China legally, you need someone either inside or outside your company handling your financial books and you need a good accountant overseeing it all. Because you are a foreign business and your operations may have tax repercussions not only in China, but also in your home country, it almost always will make sense for your accountant to at least be familiar with both China’s tax laws and those of your home country. These people are few and far between and cannot be found at all outside China’s bigger cities.
What do you think?

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog ( Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • Cool…. A marketing brochure. It’s a nice informative marketing brochure, but it’s a marketing brochure.
    The Chinese tax system is quite different from the tax system of the United States and similar to that of Europe. One thing that I found amusing is that China choose to adopt a VAT tax rather than something like a corporate income tax was precisely so that companies *wouldn’t* think of the tax consequences of what they were doing, and that they wouldn’t make decisions based on tax reasons rather that business reasons.

  • At this point you are probably asking too much work for an accountant, and you probably want a tax lawyer that will to a one time consultation and give you the general information about what you need to watch out for. Once the accountant knows the basic issues then can do the work.
    Most of the really big tax issues aren’t ongoing issues, but one time decisions in which you want to bring in a tax lawyer. How you set up your corporate structure to begin with.

  • What I think is that no foreign business conducted in China can afford to overlook its (indirect) taxation issues. Keywords should be ‘know your Business Scope’, ‘get your percentages right’ and ‘comply’.
    If one was to look into Chinese recent taxation laws, bylaws and regulations, he would soon get pretty busy (like my colleague and I lately) in obtaining a clear cut view of how it works; especially now, that it has consistently changed over the last two years.
    I am not familiar with the American taxation laws, however, the Chinese recent 2009 VAT Tentative Regulations, the BT Tentative Regulations and other detailed provisions on income tax on foreign-capital-run businesses in China on consumption tax etc, are quite detailed and make sense all along.
    As for the people technically getting dirty with the numbers, I most likely believe they are hard to find outside most commercially driven cities here in China. If anything, because of better opportunities in the cities. Let us not forget that business accounting must be written in Chinese or in Chinese and English.

  • Johnny be good

    Higher taxes and more aggressive taxing are coming soon boys and girls. Record drop in FDI and the crackdown on ROs. It’s do or die time.

  • Kai Ni

    Theres a world of difference between China and US taxes and the US has far more indirect taxation than China does. Health care being one example.

  • Johnny be good

    Can we say Hong Kong Holding Company?

  • HereComesTheJudge

    If Americans read this and assume as a result China’s tax system is similar to theirs I think they’ll have a big shock coming to them. China tax and accounting is definately an area where on the ground expert advice is needed – in China.

  • Johnny be good: Can we say Hong Kong Holding Company?
    Can we say…. This is why China’s major taxes are VAT-based and not income-based? A holding company in HK or the British Virgin Islands isn’t going to help you against the VAT-man.

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