As for some companies, sales commission may take up a substantial proportion of gross income. Generally speaking, sales commission can be deducted as selling expenses before tax. However, due to the complexity of transactions, not all sales commission can be deducted entirely. Hence companies shall comply with the law when deducting such expenses so as to avoid potential tax risks.
1. Payments to employee
A US foreign representative office asked us to review its tax planning proposals concerning sales commission previously. Its employees complained about their heavy tax burden on individual income tax and they asked the company to change part of their income into sales commission.
According to Circular Caishui  No. 29, sales commission is subject to intermediary service companies or individuals with certain qualifications. Therefore, sales commission can only be paid to an independent third party and any employee, agent or representative is strictly excluded. In addition, we also want to remind the company about the potential tax risks in tax planning. Without solid legal basis, tax planning can easily result in tax evasion and the company may suffer severe legal liabilities as a consequence.
2. Payments to individuals
Many companies are troubled by the problems of payments to individuals. Indeed payments to individuals for their intermediary services actually happen during business operation. However, such payments can only be deducted as sales commission when paying individuals with intermediary service qualifications. Hwuason Lawyers suggest company aware that payments to individuals without qualifications are subject to individual income tax under remuneration category. And the company is liable to withhold their individual income tax according to PRC Individual Income Tax Law.
In fact, there exist certain requirements for deduction of sales commission and company shall not claim such deduction at its own will. On the contrary, company shall submit adequate materials to the tax authority to support such deductions, like sales contract, sales commission agreement, payment receipts, invoices, etc.
3. Oversea sales commission payments
Oversea sales commission is quite common especially in international trade. When dealing with the deduction of oversea sales commission, company shall pay special attentions to the withholding tax of such payments. To be precise, if the foreign company or individual has no agent in China, the company is liable to withhold the business tax and corporate income tax or individual income tax according to the current tax law.
Since the total amount of sales commissions can add up to significant numbers as for some companies and the tax law imposes strict rules on the deduction of sales commission, Hwuason Lawyers suggest companies follow the rules to avoid the potential tax risks on deduction of sales commission.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (firstname.lastname@example.org) or Lingyan Hu (email@example.com). Or you can visit our website at www.hwuason.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.
According to EIT and its implementation regulations, where research and development expenses are incurred during the development of new technologies, new products or new production techniques, the super-deduction for research and development expenses refers to, if the expenses are not capitalized as intangible assets but are charged to the income statement of the current period, a 50% super-deduction that is allowable in addition to the actual expense deduction; if the expenditures are capitalized as intangible assets, cost bases of the intangible assets equal to 150% of actual costs are allowable for amortization purposes.
To high-tech enterprises, R&D expenses super-deduction makes enterprises deduct R&D expenses after enjoying 15% EIT rate in order to save taxes. Loss after R&D expenses super-deduction of high-tech enterprises is exempted from EIT, and could be covered by profit of next year so that reduce enterprise’ long-term tax burden. To high-tech enterprises going to public, high-tech qualification seems more crucial. High-tech qualification belongs to intangible asset, which promotes enterprises to go to public greatly. After High-tech Enterprises Recognition Measures issues, China enhance high-tech enterprises management constantly. General Accounting Office, Ministry of Finance and Ministry of Science and Technology cancelled abundant of high-tech enterprises through high-tech reexamines, selective examinations, and inspections, high-tech recognition and management becomes more serious. To cope with the above inspections and maintain high-tech qualification, enterprises should collect R&D expenses seriously according to relevant requirements during daily financial account. Due to the scope of super-deduction R&D expenses is greatly coincident with that of high-tech enterprises, R&D super-deduction is equivalent of ensuring current R&D expenses through tax authorities’ confirmation. Therefore, when high-tech reexamine, enterprises’ R&D expenses ratio is easier to be accepted by high-tech recognition organizations, which is vital to the high-tech qualification maintenance and reexamine.
Enterprise income tax calculation and settlement of 2010 has been launched. According to relevant regulations, R&D expenses super-deduction materials should be submit together with EIT filing documentations. If the declaratory R&D expenses are not true or there is irregularity in application materials, enterprises shouldn’t enjoy super-deduction policy and tax authorities are entitled to make reasonable adjustment. Therefore, Hwuason law firm suggest high-tech enterprises make the best application on R&D expenses super-deduction, submit materials before May 31 2011 (Hwuason suggest March 15 is suitable), and ensure the authenticity of the declaratory R&D expenses and the integrality of application materials.
The land VAT settlement period of real estate enterprises is generally after project development and sale, while land VAT often could be deducted after payment, which makes many real estate enterprises deficit when calculation and settlement. According to Chinese tax law, current deficit shouldn’t be switched back to precious year for reducing taxable income, hence, period inconformity might raise the tax burden and cash cost to real estate enterprises. In practice, some real estate enterprises should make special negotiations with tax authorities on the above issues, which takes very long time. On Dec 24 2010, SAT issued “Notice on EIT treatments before real estate enterprises’ cancellation” (Notice No 29 in 2010 of SAT) and stipulated that before real estate enterprises’ cancellation, overpaid EIT tax due to land VAT settlement could be refunded, which provides legal ground to solve the above issues.
Notice No 29 stipulated that real estate enterprise could share land VAT during settlement period to previous year, and if land VAT has been settled with deficit during calculation and settlement, real estate enterprises could apply refund when cancel tax registration. The specific calculation method is: shared land VAT=total amount of land VAT*(project yearly sale revenue/total project sale revenue), enterprise then use shared land VAT minus current deducted land VAT, the balance is land VAT that shall be supplement deducted. Enterprise could apply tax refund to overpaid tax.
Notice No 29 retroactive implements to Jan 1 2010. To enterprises that cancel tax registration after Jan 1 2010, if in line with the above conditions, could apply tax refund to tax authorities. To enterprises that cancel tax registration before Jan 1 2010, there is no regulations in Notice No 29. Hwuason law firm suggests those enterprises consult and negotiate with tax authorities for the utmost tax refund possibilities. Now is 2010 EIT calculation and settlement period, hwuason suggests enterprises who are preparing financial statements of the fourth quarter of 2010 or the all-year pay great attention to Notice No 29 and make relevant financial and tax treatments.