There are many types of compensation, including death compensation, disability compensation, traffic accident compensation, quality compensation, economic compensation, etc. The so-called compensation refers to a certain amount of monetary funds paid by one party to the other party to compensate for the shortfall in liquidated damages when its breach of contract causes losses to the other party. Compensation involves turnover tax, income tax and other taxes. The relevant tax treatment is analyzed as follows. Compensation shall be calculated and levied as out-of-price expenses and VAT shall be levied. Article 12 of the "Implementing Rules for the Interim Regulations of the People's Republic of China on Value-Added Tax" stipulates that the out-of-price expenses mentioned in paragraph 1 of Article 6 of the Regulations include out-of-price expenses to the purchaser. Collected handling fees, subsidies, funds, fund-raising fees, returned profits, incentive fees, liquidated damages, late payment fees, deferred payment interest, compensation, collection fees, advance payments, packaging fees, packaging rentals, reserve fees, quality fees , transportation and handling fees and other extra-price charges of various natures. The details further clarify the content of extra-price fees, separate deferred payment interest from liquidated damages, and increase late payment fees and compensation. Here, the compensation is listed as an extra-price fee to calculate and levy VAT, but it should be treated separately according to the circumstances. From the perspective of the recognition principle of goods sales revenue, revenue must be recognized only when the company has transferred the main risks and rewards of goods ownership to the purchaser. That is to say, income can only be recognized when the inflow of economic benefits is likely to result in an increase in the company's assets or a decrease in liabilities, and the inflow of economic benefits can be measured reliably. Compensation is classified as an extra-price fee to calculate and levy VAT. It must be collected from the purchaser at the same time as the sales revenue is recognized, and then it can be used as a basis to calculate and levy VAT. If the income cannot be confirmed and the tax liability has not been formed, at this time , the compensation collected by the seller from the buyer is not collected from the buyer outside the price. It is only used as a kind of breach of contract compensation and is classified as non-operating income without paying value-added tax. Compensation is calculated as extra-price charges and business tax is levied. Article 13 of the "Implementing Rules for the Interim Regulations of the People's Republic of China and the State on Business Tax" stipulates that the extra-price expenses mentioned in Article 5 of the Regulations include handling fees, subsidies, funds, Fund-raising fees, returned profits, incentive fees, liquidated damages, late payment fees, deferred payment interest, compensation, collection fees, advance payments, penalty interest and other extra-price charges of various natures are provided to taxpayers based on their turnover. All prices and extra-price fees collected for taxable services, transfer of intangible assets, or sale of real estate. The processing of business tax when calculating compensation as an extra-price expense is the same as the above-mentioned value-added tax. The "Notice of the Ministry of Finance and the State Administration of Taxation on Several Policy Issues on Business Tax" (Caishui [2003] No. 16) clarifies that when entities and individuals provide taxable services, transfer intangible assets and sell real estate, the transferee shall be liable for the loss due to the transferee's breach of contract. The compensation income obtained by the party shall be included in the turnover and levied business tax. The Interim Regulations on Business Tax and its Implementation Rules have absorbed the spirit of this provision and clearly listed compensation as an out-of-price charge to calculate and levy business tax. In fact, the State Administration of Taxation has already given a clear answer to the question of incorporating compensation into turnover to collect business tax. For example, the "Reply of the State Administration of Taxation on the Collection of Business Tax on Compensation from Leasing Business" (Guo Shuihan [2000] No. 563) clearly stated in reply to the "Request for Instructions from the Hebei Provincial Local Taxation Bureau on the Collection of Business Tax on Compensation for Rental Hotels" , after an organization or individual rented a hotel to other units, the lessee failed to pay the rent in accordance with the contract regulations, resulting in an economic dispute between the two parties. After mediation by the People's Court, the lessor obtained part of the compensation. Since the compensation is obtained by the lessor from leasing the hotel, the compensation obtained by the lessor is essentially the rental income obtained from leasing the hotel. According to the provisions of the Interim Business Tax Regulations, the compensation obtained by the lessor shall be calculated according to the service industry tax item. Business tax is levied on rental projects. Compensation income obtained by individuals is exempted from personal income tax in accordance with the law. Whether personal income tax is levied on compensation income obtained by individuals shall depend on the specific circumstances. Individuals’ income from compensation for expropriated houses is tax-free.
The liquidated damages (compensation) paid by the enterprise can be deducted before tax. Liquidated damages are a certain amount of money that the party in breach of contract shall pay to the other party when one party fails to perform the contract or does not fully perform the contract. Liquidated damages are paid between enterprises in accordance with the provisions of economic contracts. They are not administrative fines and can be deducted before tax. Compensation is a certain amount of currency paid by one party to the other party to compensate for the shortfall in liquidated damages when its breach of contract causes losses to the other party. Compensation damages are of the same nature as liquidated damages and can also be deducted before tax.