Starting in April, registered customers who make purchase with their “My Starbucks Rewards” (MSR) Card in any participating Starbucks store will be able to get a complimentary “Star” on every 50RMB of Purchases. Recorded in the MSR Account, these Stars will be used to determine the level of the Card, namely Welcome Level, Green Level (5 Stars) and Gold Level (25 Stars). And various benefits will be offered to customers with these Cards, such as “Free Morning Beverage” E-coupon, “Free Size Upgrade” E-coupon, “Birthday Beverage” E-coupon, Buy Three Beverages Get One Free, etc. The new sales initiatives launched by Starbucks will definitely increase its membership and promote its sales of food and beverages significantly. However, its tax treatment under such sales promotion is quite complex and disputable, which may actually lead to potential tax risks.
1. Tax Treatments of such Sales Promotion
(1) Individual Income Tax
According to Circular Cai Shui  No. 50, gifts to individuals who reached certain volume by accumulated consumption are not subject to individual income tax. Therefore, customers under such sales initiatives are not subject to tax and companies are not responsible for withholding the individual income tax.
(2) Enterprise Income Tax
According to Circular Guo Shui Han  No. 875, discounts given on sales prices to promote sales belong to commercial discounts and such discounts could be deducted from the sales revenue. To be more specific, when providing such rewards to customers, companies shall make a division of sales revenue between certain sales and rewards. And the rewards part shall be deferred and later recognized when customer claim the rewards or the rewards expired.
(3) Value Added Tax
According to Implementing Rules for the Interim Regulations of the People’s Republic of China on Value-added Tax, donations of goods either by self-produced, processed or purchased shall be regarded as deemed sales. However, under Starbucks’ sales promotion scheme, customers gain benefits from their previous purchases, not out of donations. Therefore, it does not constitute deemed sales. But it is worth noting that the sales amount and the discount amount shall be listed respectively in the same invoice, otherwise the discount amount was not allowed to be deducted.
2. Practical Suggestions for Sales Promotion
(1) Avoid Disputable Sales Promotion Schemes
It is quite common that stores work out various promotion schemes to attract customers. Since relevant regulations on these aspects in China are quite general, the preferable tax treatment of many promotion schemes may be denied by the local tax authorities. As a result, the companies have to bear the heavily tax burdens of such schemes and even back taxes and penalties which may add up to a quite considerable number. Therefore, Hwuason Lawyers suggest company revisit the promotion schemes and apply discount strategies more often to avoid potential tax risks.
(2) Comply with Certain Rules on Tax and Accounting
There are certain rules and detailed requirements with respect to sales deductions. Sometimes companies fall to comply with such rules and were not subject to favorable tax treatments. For instance, the law requires that deductable discount amounts shall be listed together with the sale amounts in the invoice. However, some companies lack information of discount amounts on their invoices and subsequently have to accept the unfavorable tax treatments. In order to avoid such losses, Hwuason Lawyers suggest company strictly comply with the law and deal with the related tax and accounting issues properly.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (email@example.com) or Lingyan Hu (firstname.lastname@example.org). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
SAT issued Circular No 41 2011 on 25th July, and stipulated that individuals should pay individual income tax for equity transfer income, penalty, compensation, and so on when exiting from investments for all sorts of reasons.
According to circular 41, in investment quit cases, the transfer property income includes not only the equity transfer income, but relevant other payment activities. In accordance with individual income tax law and its implement rules, property transfer income refers to income gained from transfer of securities, equity, constructions, tenure, machine equipments, vehicle and vessel, and other properties. The Circular No 41 stipulated the tax calculations as well.
According to individual income tax law and its implement rules, royalty fees, interest, dividends, rent income, property transfer income, contingent income and other income apply 20% tax rate. The difference is taxable income of interest, dividends, contingent income and others is based on income per time.
In addition, in accordance with Guoshuihan  No 285, parties of equity transactions should pay tax from signing equity transfer agreements to equity register alteration, and take the equity register alteration procedures with duty-paid proof of individual income tax in administration departments for industry and commerce.
As reported by some media that Shanghai, Xiamen and Tangshan still collects IIT upon deduction of 2000 RMB, the reporter heard from Beijing local bureau that Beijing city already implement the new deduction standard of 3500 RMB.
12366 hotline confirmed that Beijing Online Tax System has already been updated to the newest laws and taxpayer are entitled to report any company still accord to the 2000 standard as illegal. The ignorance of new tax law in other regions reflects the public credibility of policies from central government and need to be solved in some useful way.
To solve the problem, Liu said that it’s possible to negotiate with local tax bureau to get a tax refund after, specifically, the refund money will be deducted from later tax rather than a full amount refund in form of cash, which is more applicable as the tax paid to the tax bureau is already transferred to financial departments.
On June 30 2011, the individual income tax law is amended by the sixth time. Subsequently, the implement rule of individual income tax law is amended by the third time on 19 July 2011. According to the latest rules, wages and salaries income should apply new regulations since September 1 2011, then how it is executed in practice?
According to SAT officer’s introduction, SAT issued Circular on implementing new individual income law (Circular No 46), and its policy unscramble documentation on SAT website. In accordance with tax law and circulars, wages and salaries income gained after September 1 2011 should apply new tax rate rules. For example, enterprise pay wages and salaries to staffs and withhold tax in August, no matter which month wages and salaries belong to, it should apply 2000 Yuan deduction standard and old tax rate. Likewise, once the wages and salaries are paid in September, it should apply 3500 Yuan deduction standard and new tax rate. To some enterprises that delay payment time from August to September intentionally and pay September salaries at the end of September, enterprises should merge two months salaries, minus 3500 Yuan uniformly with housing fund, pension and so on, and apply new tax rate to calculate tax.
Regarding to withholding individual income tax, according to article 9 of individual income tax law, tax on wages and salaries income should be paid by month by withholding agent before 15 of next month. Tax authorities paid high attention to the individual income tax law amendment and implement, and noticed some misleading reports. SAT officer emphasizes that the policy link is unified and explicit, local tax authorities should implement new rules seriously, enhance tax publicity, answer enquiries seriously, and collect tax in law. Meanwhile, officer reminds tax payers and withholding agents to understand relevant rules in depth and pay tax in law.
This morning Liu Tianyong from Hwuason Law Firm said that as certain exemption amount of IIT has been excluded from tax, additional welfare should bare tax obligations. Yet the so-called “moon cake tax” is not appropriate enough to convince most people.
Most people cannot understand the tax levied on moon cakes as “incomes”, said Liu, although Tax Law explicitly stipulates that all welfares shall be levied for IIT. As the IIT law has become a hot topic among Chinese people since the amendment of IIT Law this year, any detail of IIT law has become popular topic, explains why the “moon cake tax” aroused great argument.
Liu said that there’s not a legal amount on IIT of presents, but to be more humanistic, we should refer to the rules of other countries to find a better way.