China’s Urban Maintenance and Construction Tax: Key Points

New regulations on China’s urban maintenance and construction tax took effect September 1, 2021, which clarified the calculation and management of the country’s urban construction and maintenance tax. This includes the Urban Maintenance and Construction Tax Law and two supporting regulations.

On August 11, 2020, the Urban Maintenance and Construction Tax Law of the People’s Republic of China (the “UMCT Law”) was passed by the Standing Committee of the 13th National People’s Congress at the 21th session. It came into effect September 1, 2021.

The prior governing regulation, the Interim Regulations on Urban maintenance and Construction Tax of the People’s Republic of China (the “UMCT Interim Regulations”) promulgated and amended by the State Council in 1985 and 2011, respectively, were repealed simultaneously as the new law came in force.

Compared to the UMCT Interim Regulations, the UMCT Law retains most of the existing taxation system, but there are some noteworthy changes. These include the cancelation of the special purpose of the UMCT, clarification of the UMCT’s taxation basis, as well as setting rules for deciding the location of the taxpayer, which is related to the place of taxation.

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To ensure the smooth implementation of the UMCT Law, the State Taxation Administration (STA) also released two other supporting regulations – the Announcement on Matters Related to the Collection and Management of Urban Maintenance and Construction Tax (STA Announcement [2021] No.26) and Announcement on Matters including the Method for Determining the Basis for Urban Maintenance and Construction Tax (STA Announcement [2021] No.28), both of which came into force on September 1, 2021 as well.

In this article, we will introduce the urban maintenance and construction tax (UMCT), demonstrate how UMCT is calculated and levied under the new regulatory framework, and analyze the potential impact of the UMCT Law.

What is the urban maintenance and construction tax?

Urban maintenance and construction tax, in addition to the education surcharge (ES) and local education surcharge (LES), are the typical surtaxes levied in China, which means these taxes are levied on the basis of turnover taxes, rather than the total value of the business transactions.

Currently, China has two major turnover taxes – value-added tax (VAT) and consumption tax (CT). VAT is levied on organizations and individuals engaging in sale of goods, providing processing, repair, and assembly services, sale of services, intangible assets, and immovables, and importation of goods. Consumption tax is levied on manufacture, import, and sale of certain products that are either luxury and financially significant or harmful to the health, social order, and the environment, as indicated in the CT taxable items list.

According to the UMCT Law, all entities or individual subject to VAT and CT shall be taxpayers of UMCT and shall pay UMCT in accordance with laws and regulations.

How UMCT is calculated and levied?

The time when the UMCT liability arises is the same as that for VAT and CT and the UMCT shall be simultaneously paid with the VAT and CT, at the same place of payment and in the same tax payment period.

The UMCT payable amount = UMCT Tax Base ×Applicable Tax Rates

UMCT tax rates

Under the UMCT Law, the UMCT tax rates remain the same as before:

• 7 percent for taxpayers in a city;
• 5 percent for taxpayers in a county or town; and
• 1 percent for taxpayers in a place other than a city, county, or town.

That is to say, the surtaxes in the urban area will remain at 12 percent of the turnover taxes, with UMCT charged at seven percent, ES at three percent, and LES at two percent.

On the other hand, the UMCT Law adds new rules on deciding the location of a taxpayer, stipulating that the location of a taxpayer is the taxpayer’s domicile or any other place related to the taxpayer’s production and business activities.

To be noted here – the location of a taxpayer is different from the location of the tax payment. The purpose of determining the location of taxpayers is to determine the specific applicable tax rate of UMCT, rather than to determine the location of tax payment. For example, the location of offshore oil and gas exploration and development is offshore, not belonging to cities, counties, or towns, and the one percent tax rate is applicable, but the location of tax payment is not offshore.

In addition, the UMCT Law grants local governments (local province, autonomous region, or centrally administered municipality) certain authority in determining the specific location of the taxpayer, in order to avoid the universal “taxpayer location” standard that could unreasonably change the tax rates and tax burden of the taxpayers.

UMCT tax base

The UMCT tax base is the amount of VAT and CT actually paid by taxpayers.

According to the new UMCT Law, the amount of tax refunded for the end-of-period VAT credits shall be deducted from the calculation basis of the UMCT. End-of-period VAT credits appear when the input VAT outnumbers the output VAT.

For example, Company A, which is located in the urban area of City A needs to pay RMB 1 million of VAT in August 2020 and applied for and obtained a VAT rebate of RMB 100,000 last month. Enterprise A can deduct the tax credit of RMB 100,000 in the calculation basis of UMCT. The tax base for calculating UMCT payable is RMB 1,000,000-RMB 100,000 = RMB 900,000.

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Actually, this practice is not new, having already been introduced in the Notice on Policies Concerning UMCT, ES and LES Involved in the Refund of End-of-Period VAT Uncredited (Cai Shui [2018] No.80) in July 2018. But now, the UMCT Law has elevated the rule into national law, which is more authoritative and stable.

Also, the STA Announcement [2021] No.26 supplements with the clarification that the amount of tax refunded for the end-of-period VAT credits can only be deducted from the UMCT calculation basis when the corresponding VAT is determined in accordance with the general VAT calculation method. The balance not fully deducted in the current period will get deducted in the subsequent tax return period, according to relevant provisions.

Besides the tax refunded for the end-of-period VAT credits, the UMCT Law introduces a new rule that the amounts of VAT and CT paid for imported goods or labor services, services, or intangible assets sold within the territory of China by overseas entities and individuals – will not be subject to UMCT.

The STA Announcement [2021] No.28 made it clear that the basis for calculation and collection of ES and LES shall be the same as that for the calculation of UMCT.

That is to say, for imported goods or labor services, services, or intangible assets sold within the territory of China by overseas entities and individuals, the withholding tax rate will be reduced from 6.72 percent to six percent, with the 12 percent surtaxes no longer imposed on these activities. This change will help taxpayers save a lot when the transaction amount is large.

Beyond the above two changes, the STA Announcement [2021] No.28 further clarified that:

• The amount of VAT and CT actually paid refers to the amount of the VAT and CT (excluding the VAT and CT paid due to import of goods or sale of labor services, services, and intangible assets within the territory by overseas entities and individuals) that shall be paid by a taxpayer as calculated in accordance with the relevant laws and regulations, plus VAT exempt-credit amount*, and deducting the amount of the VAT and CT directly exempted or reduced and the amount of tax refunded for the end-of-period VAT credits.
• The amount of the VAT and CT directly exempted or reduced refer to the amount of the VAT and CT directly reduced or exempted in accordance with the relevant laws and regulations and tax policies, excluding the amount of the VAT and CT refunded under the methods of “return after collection(先征后返)”, “refund after collection(先征后退)” and “refund upon collection (即征即退)”.

* Here the VAT exempt-credit amount refers to the part of export VAT rebate that is used to offset the VAT payable on sales in domestic market. For manufacturing enterprises exporting self-produced goods, the corresponding export VAT rebate amount can be used to offset the amount of VAT payable on sales in domestic market, and the rest can be refunded. This is the so called “exemption, credit, and refund method”.

Tax exemption/reduction

The new UMCT Law imposes no changes on the exemption or reduction policies of the UMCT. Currently, the below preferential policies are still effective:

• During the period between January 1, 2019 and December 31, 2024, taxpayers that fall into the scope of small and low-profit enterprises (SLPEs), small-scale taxpayers, or self-employed individuals can enjoy up to 50 percent surtaxes (including UMCT) reduction, based on the decision made by provincial governments.
• UMCT and ES shall be exempted for standard gold sold through Gold Exchange member units and delivered in physical delivery.
• UMCT and ES shall be exempted for the standard gold sold by Shanghai Futures Exchange (SFRX) members and customers through SFRX and delivered in physical delivery.
• UMCT and ES shall be exempted from funds for major national water conservancy projects.
• During the period between January 1, 2019 and December 31, 2023, UMCT, ES, and LES shall be exempted or reduced for ex-soldiers to find jobs on their own.
• During the period between January 1, 2019 and December 31, 2023, UMCT, ES, and LES shall be exempted or reduced for supporting ex-soldiers to start up a business or to be employed.
• During the period between January 1, 2019 and December 31, 2025, UMCT, ES, and LES shall be exempted or reduced for supporting some key groups to start up a business or to be employed.

Other changes in UMCT Law

Previously, the UMCT was levied for special purpose according to relevant regulations. For example, the repealed UMCT Interim Regulations stipulated that UMCT was levied for the purpose of strengthening urban maintenance and construction and expanding and stabilizing the sources of funds for urban maintenance and construction.

With the continuous reform of the budget system, UMCT revenue has been incorporated into the general public budget since 2016, and no special purpose has been designated ever since.  Now, the UMCT Law has officially removed the “special purpose” provision in the final document.

Background: Establishing law-based tax administration

In 2015, the STA released the Guiding Opinions on Comprehensively Promoting the Governing of Taxes according to Law (Shui Zong Fa [2015] No.32), stipulating that China will accelerate the process of upgrading relevant tax regulations into law, to improve the certainty of tax policies, enhance the authority of the tax documents, and ensure the efficiency of tax administrations. This is an important part of China’s broader efforts to achieve rule of law, that is, law-based governance of the country. Businesses are well-advised to keep a close eye on the future developments of China’s tax laws as it is related to how they will pay tax in China.

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