Every newly-established China Wholly Foreign Owned Enterprises (WFOE or WOFE) will always face such a question: Should our company registered as a small-scale taxpayer or a general taxpayer?
For this question, you can choose based on your specific situations and the following contents!
I. Recognition criteria for China WFOE's general taxpayers
In accordance with the regulations of the Ministry of Finance and the State Administration of Taxation, taxpayers are divided into general taxpayers and small-scale taxpayers.
Taxpayers whose annual taxable sales amount subject to VAT (hereinafter referred to as the “annual taxable sales amount”) exceeds the standard as prescribed by the Ministry of Finance and the State Administration of Taxation are defined as general taxpayers, and taxpayers whose annual taxable sales amount does not exceed the said standard are defined as small-scale taxpayers.
In accordance with the relevant policies and regulations, the criteria for converting to general taxpayers are:
1.Taxpayers engaged in the production of goods or provision of taxable services, or engaged principally in the production of goods or provision of taxable services, with an annual taxable sales amount exceeding RMB 500,000;
2.Taxpayers with an annual sales amount of taxable services exceeding RMB 5,000,000;
3.Taxpayers engaged in other industries have an annual taxable sales amount exceeding RMB 800,000.
II. Can a China WFOE not exceeding the standards for small-scale taxpayers become a general taxpayer?
In accordance with the regulations of the Ministry of Finance and the State Administration of Taxation, if a taxpayer whose annual taxable sales amount does not exceed the prescribed standard has a sound accounting system and is able to provide accurate tax-related materials, it may apply to the competent tax authority for the qualification of a general taxpayer and be treated as a general taxpayer.
Sound accounting system means the capability of setting up account books according to the uniform accounting system of the State and conducting accounting on the basis of lawful and valid vouchers.
Therefore, if an enterprise fails to exceed the standards for small-scale taxpayers yet has a sound accounting system and is able to provide accurate tax-related materials, it may also apply to become a general taxpayer.
III. Can a general taxpayer be converted to a small-scale taxpayer?
In accordance with provisions as provided for in Article 33 of the Detailed Rule for the Implementation of the Provisional Regulation on Value-Added Tax
, once a taxpayer has been identified as a general taxpayer, it shall not be converted to a small-scale taxpayer, except as otherwise provided for by the State Administration of Taxation.
Therefore, enterprises should be cautious when applying to become general taxpayers. Once they become general taxpayers and then intend to switch back to small-scale taxpayers, they will not be switched back.
IV. Difference between small-scale taxpayers and general taxpayers
: Apply to a basic tax rate of 17% and variable levy. The output tax-input tax is the tax amount. The sellers of goods can make out “VAT special invoices” or “VAT general invoices”. The “VAT special invoices” made out by the sellers of goods can be verified and deducted within 180 days by the other party. General taxpayers are also subject to tax rates of 5%, 6%, 11% and 13%.
: Apply to 3% VAT rate. The sellers of goods can only make out “VAT general invoices” and collect them in full (Monthly tax-exclusive sales amount of RMB 30,000, quarterly tax-free sales amount of RMB 90,000), and the above VAT general invoices cannot be deducted by the other party. Small-scale taxpayers cannot deduct the input tax yet can only use the costs to deduct the income tax payable.
V. Attentions for choosing general taxpayers or small-scale taxpayers
In general, large corporate clients require their suppliers to have general taxpayer qualifications, so that they can deduct input tax
. That is, if your clients request VAT special invoices, then your company should be identified as a general taxpayer.
The general taxpayers can deduct the input tax as long as they obtain the legitimate receipts for purchased raw materials and fixed assets. Therefore, the application for a general taxpayer depends first on whether your upstream suppliers can obtain the input tax invoices (VAT special invoices).
If they cannot, it is recommended that your company should apply to become a small-scale taxpayer instead of general taxpayer.
3.Corporate income tax
Regardless of the type of business, enterprises should conduct final settlement and payment of corporate income tax every year. If no legitimate receipts are obtained, the costs cannot be paid out, and the profits will be very high with the sales revenue only. Enterprises are unable to stand the corporate income tax at 25% of their profits. Therefore, when small-scale taxpayer enterprises consider expenditure increase for obtaining receipts, they should consider not only the difference in the tax rate of VAT, but also the corporate income tax rate at 25%.
4.Current preferential policies
Small-scale taxpayers are exempted from VAT, urban construction tax, educational surcharges and local educational surcharges if their monthly sales amount does not exceed RMB 30,000 and quarterly sales amount does not exceed RMB 90,000. However, as long as it exceeds RMB 1, the sales amount will be fully taxed. The general taxpayers are not reduced or exempted from VAT, educational surcharges or local educational surcharges, and may be reduced or exempted from water conservancy fund only.
In 2011, China began to implement a reform program to replace the business tax with a value-added tax, in order to avoid double imposition, irreparable deduction, and non- drawback of business tax, achieve the purpose of “taxation at all levels and deduction at different levels” of value-added tax, and effectively reduce the tax burdens on enterprises. More importantly, the “reform program to replace the business tax with a value-added tax” has changed the price system in market economic exchanges, turned the “tax included in price” of business tax into “tax excluded in price” of value-added tax, formed an deducted relation between the input and output of value-added tax, and will deeply affect the adjustment of the industrial structure and the internal structure of enterprises. Therefore, enterprises should obtain qualifications for making out and deducting VAT in the future, in order to satisfy the demands of upstream and downstream clients.
The general taxpayers have a positive effect on their corporate image and have certain benefits for their development of clients.
You may consult Business China
for your detailed case.