China: The VAT and income tax bearing ratio of different industries in China

Chinese tax authority has recently emphasized on efficient corporate tax declaration, and enterprises are also required to provide principal financial statements by way of electronic to tax bureau. Tax collectors will analyze those financial information in order to detect any significant abnormal variations, and the “tax bearing ratio” may indicate abnormal tax payment or tax evasion. 

Illustration: 

Accounting tax bearing ratio 

= gross sales revenue × 17% ÷Sale 

The actual tax bearing ratio 

= actual taxes paid ÷ Sales 

Why tax bearing ratio ≠17% 

The VAT is 17% where a product is sold at the price of RMB 2000 with the cost of RMB 1000, then seller has to pay RMB 170 tax for the profit made. However, due to timing difference, one may not actually pay RMB 170 tax immediately when profit is made. Therefore, a manufacturer may not settle its VAT at the same time upon its receipts and payments. 

What is “tax bearing ratio” for? 

Timing difference results from the difference between actual and accounting tax and hence, China’s tax authority faces immense difficulties to determine whether a taxpayer pays sufficient taxes. Therefore it introduced the concept of “tax bearing ratio” as an industry benchmark to estimate appropriate amount of tax to be payable by an enterprise. 

How it works? 

As an example, tax bearing ratio is 5% for car manufacturing industry, and a car manufacturer may pay RMB 30 VAT in cash for an annual profit of RMB 1000. This indicates that it does not pay sufficient tax for its profit made as the actual tax bearing ratio is only 3% (=RMB 30/ RMB 1000) which is much lower than industry average tax bearing ratio of 5%. 

Following list is tax bearing ratio of main industries at present: