DuYun, XMU

Are you safe?

Tax self examination

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This courseware (including follow-up series ppt) is only used for undergraduate course "CTRM"in School of Economics, Xiamen University ；

To download and use this courseware, please inform DuYun, Department of Public Finance,School of Economics ,Xiamen University,

Email: duyun@xmu.edu.cn

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Content

1 Skills and techniques for tax self-examination2 Tax inspection on inventories and asset 3 Tax inspection on cost and charge

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1.Tax self-examination

Are you safe?Motive: Tax avoidance Risk: break the tax law Aftermath: fine or penalty—— Tax self- examination is necessary.

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1.1 General taxpayers and small-scale taxpayers

Thing is: Shall we chose general taxpayers or small-scale taxpayers?

The basics: how to tell the difference between general taxpayers or small-scale taxpayers?

For VAT, on the basis of their operation scale and sound accounting, sales exceed 500 000 for industry, and 800 000 for business.

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New Regulations for VAT General Taxpayers

To help manage the qualification of general taxpayers status for the payment of value-added taxes, the State Administration of Taxation recently issued a new management approach effective March 20, 2010.

It stipulates that if VAT taxpayers’ annual taxable sales pass the level of the small-scale taxpayer set by the Ministry of Finance, they shall apply to the tax authorities for the general taxpayer qualification.

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risk1

Tax authorities will approve the general taxpayer qualification for taxpayers who have fixed production or operation sites, comply with the standard national accounting regulations, and can provide accurate complete tax records.

Risk1: Comply with the general conditions of the taxpayers but does not apply to the general taxpayer.

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Self-examination

Review of the accounting statements,cash flows and capital flows credentials

Review of Sales Journal, goods purchased credentials

To verify the actual taxable sales of the taxpayer by means of estimating of unit energy consumption, such as material consumption, water and electricity consumption, wage consumption.

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Choice between GT and ST

Problem:Taxpayers who have been confirmed as general taxpayers can not be converted to small-scale taxpayers.

Choice between GT and STTax burden balance point ( Equilibrium )

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Small-scale taxpayer

VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT. The applicable rate is 4% for commercial enterprises and 6% for other operations. (3%,2009.1.1)

The formula for the computation of VAT is as follows:

Tax payable = sales value x tax rate (3%)

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General taxpayer

The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT.

The formula for the computation of the tax payable is as follows:

Tax payable = current output VAT - current input VAT

Output VAT = sales value x applicable tax rate

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VAT on imported goods

VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT.

The formula for the computation of the tax payable is as follows:

Tax payable = composite assessable value x applicable tax rate Composite assessable value = customs dutiable value + customs duty

For taxpayers importing taxable consumer goods, the consumption tax payable will be added to the composite assessable value.

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Export Tax Exemption and Rebate

China implements a zero tax rate on exports. There is no export-related tax.

Subject to the types of products, tax payments made in respect of the stages preceding export will be partly or fully refunded.

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1.2. Inspection on lease or contract business

Risk2:(1)operating disguised as the lessor, the leasing or

contracting companies, institutions and individuals do not obey regulations, to evade tax liability to operate

(2)To lease contract supermarket counters and business premises of the mall, operating disguised as supermarkets, shopping malls, to evade tax liability.

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Method of inspection

Check the lessor's financial booksOther receivables , Other payables, other

operating income , operating income, operating expenses, management fees, finance charges and other accounts,

Auditing whether there is contract fee and rental income

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Example

[Example] In February 2005 ， A company which sells rubber products have obtained the business license and tax registration, it means VAT general taxpayer. In February 2006, A company lease its stores to Liu (private) who is also engaged in the company's main business. They signed a package agreement which said the company store contracting operations to Ryu and provide a business license, but Liu should operate independently, and self-financing, to pay debt and taxes himself.

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Fine

But thing is: Liu, neither to regist in tax authorities, nor to declare the tax.

When a inspection on Company A, the inspector find the company received a contract fee income in "other operating income" ,they ask for contract, then they find out Liu did not fulfill the taxpayer's tax violations.

So there is a Fine.

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1.3 Self-examination on sales

Owners wishing to sell all or part of a collection have four basic options: selling themselves; outright sale to a dealer, consignment sale, or auction sale.

1.3.1 for industryRisk1: Confirmation of sales revenueDifferent method of settlementDirect Trade,Credit and Installment Trade,Receipts

in advance

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Risk2

Tradional tax planning for Credit and Installment Trade

2003.11,New accounting system abolished “received installment income”, and provide that every time the company received the installment income, it must confirm and pay tax.

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Risk3: extra income

Extra income not including in pricee.g. Package income

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1.3.2 for Sales

1)Self-examination on sales return and sales discount

2)Consignment(Consigned) :A important tax inspect field

3)other behaviors be treated as sales.

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1)sales return and sales discount

sales return and sales discount are very often in sales.

Simplest accounting for sales return

D: operate income

payable VAT

C: receivable account

and:

D: inventory goods

C: sales cost

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Review of sales discount

e.g. 360buy.com 1.To encourage the purchaser to buy goods, the se

ller afford the concession 10%, the price of the goods is ￥ 15000, the VAT rate is 17%, hence, what is the receivable account of such goods?

2.As in the previous example, to quicken the cash flow, the company not only keep the above business concession, but also provide cash flow discount, the cash flow discount condition is 2/10, 1/20,n/30,hence, what is the sales revenue?

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e.g. 360buy.com

The answer is15000× （ 1 ＋ 17% ） × （ 1 － 10% ）＝ 15 795 15000 × （ 1 － 10% ）＝ 13 500

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2)Consigned sales

DefinitionA, consigner: The company want to consign it’s

goods to be sold by other company.B, consignee: the company be consigned to sell

goods for other company

Consigned fee

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For consigner

Accounting: Items of an account When sign a consignment contract:

D: Receivable account of consigned goods

C: Consigned finished goods (to…)

Tax risk:

When should the consigner affirm its’ revenue?

And how to account it?

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Example: Consigned sales

Example: Daming company operates mobile phone wholesale and retail business.

When in the examination on the company, the inspectors found that the one kind of mobile phone keeps same amount for two consecutive accounting periods.

So they go to the enterprise warehouse, they found the difference is 1200

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excuse

Enterprises explained the 1,200 units are sent to consigned agency, and they did not receive the consignment list, so they do not accounting it.

Inspectors require companies to show the franchise agreement, then they verified and found that the date of consignment has passed more than 180 days.

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fine

Under the “VAT Implementation of the Interim Rules” [2005]

The company shall pay the VAT as if the provisions of the sales of goods.

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For consignee

Account items

D: Consigned goods (from …)

C: payable consignment of goods

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Example

March,2005,shangda company have received the consigned goods from Xiada company, the price is ￥ 90 000, sign a consign contract.

July,2005, shangda company sold out theses goods, the sales price is 100 000, the VAT rate is 17%.

August,2005, shangda company pay the money to xiada company

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3.Other behavior be treated as sales

Goal: goods which is self made or from commission processing

Cause: for consume or investment, should be treated as sales.

Hence, Tax risk happens

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Accounting:

For consume:

D: construction in progress

C: sales revenue

payable VATFor investment:

D: long-term equity investments

C: main business revenue

payable VAT

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1.4 Tax risk from mixed sales

Example: Shafa company engages in decoration material and decoration. it means mixed sales.

One day, the inspector from tax bureau find Shafa company has a such recording:

D: receivable account 50 000 and Issued ordinary invoice

another account item is C: raw materials 30 000

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Tax risk

Is it correct? Why? How to adjust it?Tax risk

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Other behaviors

1, sales of raw materialsAccounting items

D: Bank deposits

C: other operating revenue

payable VAT

Tax risk:

directly to offset against the raw materials

or:

books it in another item: non business income

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Other behaviors

2, Deposit on packagingexample :xiada company has a deposit on packagi

ng but is failed to return, the sum is ￥ 2000Tax risk: Avoid the VAT by means of offsetting agai

nst packaging or wrappage, or low priced and easily worn articles.

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Accounting

D: other payable account (deposit on packaging )

2000/(1+17%)*17%=290.5C: payable VAT

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Other behaviors

3. TM to sell Used goods is cost addedSales price and sales revenue

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Other behaviors

4. Non-normal lossNon-normal loss, accidents of fire or earthquake an

d so on.ExampleShangda company encounter a big fire in may,200

8, it lose about ￥ 60 000’s inventories, the insure company has compensated for it. Thing is, Shangda company still account it’s input VAT, among it, 4 000had already offset against output VAT.

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Correct it

Compensate rate?Accounting adjustment:

D: unsettled asset profit or loss 60 000*17%=10 200

C: payable VAT (input) 4 000

payable VAT(output) 6 200

and

D: payable VAT(paid) 4000

C: Bank deposit 4000

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The motive of hiding the non-normal loss

To check or inspect the company sales costIs it more higher than the average?It is normal about material, inventory goods o

produce cost?

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2 Tax inspection on inventories and asset

2.1 inventory2.2 assest

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2.1 inventory

2.1.1.materials

Purchased materials: price and quantity

Self-made or consigned processing materials

Issued materials

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2.1.2 low priced and easier be worn articles

PlanningConsuming Amortization

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2.1.3 package

package

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2.2 Fixed asset

New fixed assetShortageDepreciation of fixed assets

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3.Tax inspection on cost and charge

3.1 Payable wage and welfare3.2 Manufacturing overhead3.3 Sales cost3.4 Operating expense3.5 Management fee3.6 Financial cost3.7 Net earning3.8 non-operating income and expense

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Skill for tax self-examination

Practical experience1 to be good at capturing the clues

powerful inspector: out of conventional 2 to be good at analizing the data,figure and nu

meric

cash flow, value, data (or figure, numeric) is soul or spirit of accounting.

e.g.1:management fee of a company is always a relatively stable (change of the data)

e.g.2: scarlet letter is always the foucus.

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analizing the data,figure and numeric

e.g.3: ending balanceDebit balance & Credit balance If there has credit balance of raw materials, what h

as happened?If there has debit balance of accounts payable, wh

at has happen?If there is zero of ending balance of cost of

production,what has happen?

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Correspondence between account items

For material purchase, what is the corresponding account? What if there has amount of credit on material purchase simultaneously there has amount of debit on bank deposit?

For inventory goods, what is the corresponding account? What if there has amount of credit on inventory goods simultaneously there has amount of debit on fixed assets?

e.g.4: accuracy of dataYuan, jiao, fen

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example

One day a inspector find a voucher in Shengli company booked as below:

D: bank deposit 30 000C: account payable 30 000And there has no original certificate.

Has problem or not?If it happened in your company, how to explain it or

how to correct it?

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Practical experience

3.to be good at finding errors distinguish between business partners.

Every company has his operating field.Every company has some relative fixed customers.Duration of settlement or billing circle and clearing

balance is relatively stable.Whether there is a odd place? For material purcha

se, and so on