On 4 November 2010, the PRC State Administration of Taxation and the Ministry of Finance jointly issued the Tax Circular Caishui [2010] No. 103 to levy City Maintenance and Construction Tax ("CMCT") and Education Surcharge also on foreign enterprises, foreign invested enterprises and foreign individuals. The Circular took effect on 1 December 2010.
CMCT and Education Surcharge are two types of surcharges, levied on taxpayers who pay VAT (excluding import VAT), Consumption Tax ("CT", excluding import CT) and Business Tax ("BT") in China. Each surcharge is calculated as a percentage of the actual amount of the VAT, CT and BT paid by the taxpayers. Education Surcharge is calculated at 3% of the VAT, CT and BT payments. Depending on the location, the CMCT rates differ as follows:
1. If the tax payer (or the tax withholding agent in case of a foreign enterprise) is located in an urban area, the rate is 7% of the VAT, CT and BT payments;
2. If the tax payer (or the tax withholding agent in case of a foreign enterprise) is located in a county or township area, the rate is 5% of the VAT, CT and BT payments;
3. If the tax payer (or the tax withholding agent in case of a foreign enterprise) is located in other areas, the rate is 1% of the VAT, CT and BT payments.
The above surcharges have already been introduced in 1985 and 1986 respectively. However, so far, they have been only imposed on domestic enterprises and Chinese individuals. In the past, foreign enterprises, foreign invested enterprises and foreign individuals were specifically exempted from them.
The above Circular now also requires foreign enterprises, foreign invested enterprises and foreign individuals to pay these two surcharges. This change will increase the tax burden of foreign enterprises, foreign invested enterprises and foreign individuals in China. They should take these additional tax costs into consideration for their business calculations.
