Many foreign owned companies in China should pay the individual for the personal labor services (e.g. the design, consulting, translation services, the performance, the exhibition, the IT services and etc.). It is surprise to find that most of them did not enter the labor service contract. The accountant only calculated and deducted the individual income tax and made such labor service fee as the hiring cost.

Q1: Is it improper for the above actions?

A1: Yes, it is wrong. Firstly, the labor service contract should be entered. Labor service fee is not only subject to the Individual Income Tax but also the VAT and the surtax. Only after obtaining the VAT invoice, such labor service fee can be taken as the cost of the company.

Q2: What is the risk for such improper actions?

A2: It is easily to cause the disputes if there is no written labor service contract to specify the matters on the labor service fee and the tax liability. During the tax inspection, if there is no written contract or invoice, such labor service fee cannot have the pre-tax deduction. The company shall repay the tax and even the overdue payment. It will bring both penalties both to the company and the individual himself.

Q3: What kinds of service can be considered as the labor service?

A3: Not all kinds of the fee paid to the individual can be considered as the labor service fee. Labor service fee means the personal remuneration gained from the design, decoration, installation, drawing, testing, testing, medical, legal, accounting, consulting, lecturing, news, broadcasting, translation, proofreading, painting, sculpture, video, audio and video recordings, performances, advertising, exhibition, technical service, reference services, brokerage services, agency services and other labor services.

Q4: What is the technique when entering the labor service contract?

A4: There are different VATs under the different way of payment of the labor service fee. Some of them are even exempted from the VAT. The technique for the drafting the labor service contract is very important.

Conclusion: According to our experience, it is the common situation that some improper actions were found during the labor service. We are pleased to discuss with you the details (e.g. legal risk, the way to enter the labor contract, the way of issuance the invoice, the way to calculate the tax and etc.).

The tax bureau is paying more attention on the tax administration. The companies which did not have been found the tax problems still have possibility to be challenged by the tax bureau now during the tax inspection. As a result, it is very important to have an up-to-date and regular “body check” on both tax and legal matters. Shanghai Dongjin is happy to provide such services and to minimize the business risk for the clients.

If you have any questions, please send the email to me.

Mr. Mike Chang 

TEL: 0086-21-68868321 / FAX: 0086-21-68868021

Email: mikechang@shanghaiinvest.com