The unification of China's tax system for foreign funded enterprises, foreign enterprises and domestic enterprises has gone a step further. Commencing from 1 December 2010, foreign enterprises, foreign funded enterprises and foreign individuals will begin to pay Urban Maintenance and Construction Tax and Educational Surcharge.

Urban Maintenance and Construction Tax (城市维护建设税) and Educational Surcharge (教育费附加) are two types of surcharges, levied on taxpayers who pay Value Added Tax ("VAT"), Consumption Tax (CT) and Business Tax (BT). Specifically, each surcharge is calculated as a percentage of the actual amount of the VAT, CT and BT paid by the taxpayers. The rate for Educational Surcharge is 3%. Depending on the location, the rates for City Maintenance and Construction Tax differ:
1. In city areas, the rate is 7%,
2. In county and township areas, the rate is 5%,
3. In other areas, the rate is 1%.

Since their introduction in 1985 and 1986 respectively, the two surcharges have been imposed on domestic enterprises and Chinese individuals only. Foreign enterprises, foreign invested enterprises and foreign individuals have been specifically exempted from these two surcharges.

The recent change will increase the operating costs of foreign funded enterprise by about 0.5%.  For example, Kaizen Corporate Services (Shenzhen) Limited is a wholly foreign funded enterprise principally engaged in general consulting business. It is obligated to report and pay Business Tax on a monthly basis. With the recent change, it will also be obligated to report and pay Urban Maintenance and Construction Tax and Educational Surcharge at the time when it is reports and pay its Business Tax at the rates of 7% and 3% respectively. The total extra tax liabilities are calculated as follows:

Total extra tax liabilities  = Business Tax x (Urban Maintenance and Construction Tax at 7% + Educational Surcharge at 3%)
                         = Turnover x (Business Tax Rate at 5% x 10%)
                         = Turnover x 0.5%

The extension of Urban Maintenance and Construction Tax and Educational Surcharge to foreign enterprises and foreign funded enterprises, following the unification of Vehicle and Vessel Usage Tax in 2007, Enterprise Income Tax in 2008, Farmland Occupation Tax and Urban Real Estate Tax in 2009, is the last of such moves to unify the different tax systems applicable to domestic and foreign funded enterprises. This very last move signifies that the unification of the two tax systems has been completed and the beginning of a new era of “unified tax system and fair taxation?and now that there is one and only one tax system applicable to all enterprises doing business in China or with Chinese enterprises.

For more information about the application of the two surcharges, please contact us at enquiries@bycpa.com .

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