Enterprise Income Tax

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6 Enterprise Income Tax

This tax is levied on the income of various domestic enterprises. The Provisional Regulations of the People's Republic of China on Enterprise Income Tax currently in force were promulgated by the State Council on December 13, 1993, and came into effect on January 1, 1994.

Enterprise Income Tax is administered by the State Administration of Taxation (SAT) and collected by the local tax bureaus. The revenue collected is shared between the Central Government and the local governments. In 2003, revenue from Enterprise Income Tax amounted to 234.22 billion yuan, accounting for 11.6% of the country's total tax revenue.

TAXPAYERS

Entities and Activities Subject to Tax

Enterprises and organizations that prepare independent financial accounts within China pay Enterprise Income Tax. They include the following:

State-owned enterprises (SOEs).
Collectively-owned enterprises.
Privately-owned enterprises (excluding individual single proprietorships and partnerships, which pay Individual Income Tax).
Joint-operation enterprises.
Joint-stock enterprises.
Other organizations (e.g., institutional units, and social organizations registered by law and approved by the relevant department of the State, excluding individual single proprietorships and partnerships).

These enterprises and organizations should be able to open settlement accounts in banks, independently set up accounting records and prepare financial accounting statements, and independently compute losses and gains.

Enterprises with foreign investment and foreign enterprises are subject to Income Tax on Enterprises with Foreign Investment and Foreign Enterprises.

Enterprise groups should regard the core enterprises and other member enterprises that carry out independent accounting as the taxpayers.

All income derived from production and business operations, and other income derived from sources both within and outside the People's Republic of China shall be subject to Enterprise Income Tax. The terms are defined below:

Income from production and business operations: Income from production and business operations in manufacturing, communications, transportation, commodity circulation, services industries, and other profitable trades as specified by the relevant departments.
Other income: Dividends, interest (excluding interest from State bonds), rental, income from the transfer of assets, royalties, and other non-business income.

Revenue Breakdown

At present, tax revenue comes mainly from SOEs, collectively-owned enterprises, private enterprises and joint-equity enterprises that are engaged in the following activities:

Manufacturing (mainly tobacco production, textiles, the production of chemicals and raw chemical materials, ferrous metal smelting and extension, non-ferrous metal smelting and extension, equipment production).
Mining and digging.
Power generation and supply.
Construction.
Transportation.
Wholesaling and retailing.
Finance.
Telecommunications.
Commercial services.

COMPUTATION METHODS

General Framework

For Enterprise Income Tax, taxable income is the total income earned by the taxpayers in a tax year less deductible items for that tax year.

Year of Assessment

In general, the tax year starts from January 1 and ends on December 31.

Where taxpayers start their businesses at some other point in the year, or where the tax year does not add up to a full 12 months because the businesses underwent mergers or terminations during the year, the period during which business operations were actually conducted shall be taken as one tax year.

Income Earned

The following items may constitute taxable income:

Production and business income: Income earned through core business activities, including sales revenue from commodities/products; service income; operational income; project earnings; industrial work income; and other business income.
Where commodities sold are returned, their value may be offset against income earned, if there is proper supporting evidence.
Income from property transfers: Chargeable transfers of fixed assets, marketable securities, share rights, and other property.
Interest income: Interest paid on marketable securities such as bonds purchased by taxpayers (excluding State bonds), interest paid by other units on money owed, and other interest income.
Interest receivable: For loans made by financial enterprises that have not been recovered and are at least 90 days overdue, any interest receivable arising before the loans became overdue should be included in the taxable income for the current period, in accordance with the prevailing regulations.
Interest receivable arising after the loans became overdue should not be included in the taxable income for the period. It should be added to the taxable income when recovered.
Where they have already paid the tax, the sum may be offset against the taxable income for the current period.
Rental income: Rental received from the leasing of fixed assets, packaging material, and other property.
Royalties: Income earned from the provision or transfer of patents, non-patented technical know-how, trademarks, copyright, and other rights.
Dividend income: Dividends and bonuses earned from outward investments in stock.
Gifts received: Gifts of monetary assets should be treated as taxable income.
Non-monetary assets should be valued for accounting records when received, and included in the taxable income for the current period. Where the sum is large, and the taxpayers have difficulty paying the tax within the same tax year, they may reschedule the payment (i.e., split the sum into smaller portions) over several years (maximum: 5), upon verification by the tax department.
Employee-related items: Besides the use of the commodities or products of their own in the basic construction, special projects, and welfare of employees by the taxpayers should be treated as income.
Materials for contract processing and assembly: Materials saved from contract processing and assembly that have been left with the enterprises for their own use, as provided under the contracts, should also be treated as taxable income.
Other income: Inventory income from fixed assets; income from fines collected; payables due to creditors that cannot be paid; gains from materials and cash; rebates on educational surtax; deposits for packaging services, and other income (e.g., fund and charge income, subsidy income, gifting income, reductions of or rebates on indirect taxes).

Items that can be Offset against Income Earned

Deductible items include normal costs, expenses, taxes, and losses incurred that are necessary and relevant to the generation of income during the current tax year.

Costs: Manufacturing and business operational costs, including various direct and indirect expenses incurred in the course of manufacturing and dealing in commodities, and providing labor services.
Expenses: Selling (business operation) expenses, overhead expenses and financial expenses (excluding those already included under costs) incurred in the course of manufacturing and dealing in commodities, and providing labor services.
Taxes: Consumption Tax, Business Tax, Customs Duty, Resource Tax, City Maintenance, and Construction Tax, as applicable under prevailing regulations.
Charges: Educational charges paid by taxpayers are deemed as taxes paid.
Losses: Non-business expenditures incurred in the process of production and business operations; operational losses; investment losses; and other losses.

Where deductions allowable for a tax year are not deducted within that year, the taxpayers shall not be allowed to carry them forward to the following year.

Accrual-Based Computation

Taxable income is computed on an accrual basis, i.e., income is charged to the period during which it was earned, whether or not money has been received, rather than on a cash basis (where income is charged to the period during which it was actually received).

The period to which income should be charged varies, depending on the nature of the business.

Sales of products or commodities: Where payments are made in instalments, revenue may be realized on the dates agreed upon in the contracts for the purchasers to make payment.
Construction/installation/assembly and provision of labor services: Where the projects last more than one year, revenue may be realized based on the progress of the projects or the amount of work completed.
Processing and manufacturing of large machinery or equipment, or vessels for others: Where the projects continue consecutively for more than one year, revenue shall be realized based on the progress of the projects or the amount of work completed.
Leasing charges: Where such charges stretch over one year but are collected in one payment, the lessors should use a period that is in accordance with the leasing terms, as agreed upon in the contracts, and the lessors should amortize the charges in a different period.
Liquidation income: This refers to the balance of the proceeds received after various liquidation expenses, losses, debts, undistributed profits, and public reserves and house reserves in excess of the paid-in capital that have been deducted from the total assets or property realized. Such income is taxable.

Deductible Items

Wages

Wages paid by taxpayers to their employees may be deducted if such wages can be classified as tax wages. The following items constitute tax wages:

Basic wages.
Performance-based variable wages.
Overtime pay.
Year-end wage increments.
Bonuses.
Allowances.
Subsidies in whatever form.

Stipulated Caps on Deductions

Deductions must fall within the range specified by the Ministry of Finance. At present, the maximum allowable deduction is normally 800 yuan per person per month, 960 yuan in some developed areas, and 1,200 yuan in Heilongjiang, Jilin, and Liaoning Provinces.

However, the People's Government at the provincial level may stipulate local standards, as long as these standards fall within the specified range. For example, Beijing stipulates a maximum wage deduction of 960 yuan per person per month.

Taxpayers may deduct wages on an actual basis, up to the stipulated limits. Any sum in excess of the limit shall not be allowed for deduction.

The Ministry of Finance shall adjust the limits from time to time, to keep them in line with the price index. At such times, different locations may make their adjustments accordingly.

Some Special Instances

Enterprises that match total wages with economic output: The wages actually paid may be deductible if the increase in total wages is less than the increase in economic output, and the increase in the average wage is less than the increase in production output.
Catering services enterprises: The percentage used for deduction must be in line with State regulations.
Software production enterprises: Wages and training expenses may be deducted on an actual basis.
Institutional units: Where the units follow the wage standards set by the State, wages paid may be deductible.
Employee-related expenses: Where the taxpayers pay the workers' union expenses, the employee's welfare expenses, and the employee's education expenses, these may be deducted at 2%, 14%, and 1.5%, respectively, of the total tax wages.
Employee-compensation items: Where the taxpayers pay compensation to employees because work contracts have been infringed or terminated, the sums paid may be deductible.

Interest Expenses from Borrowing

Loans for Production and Business Operations

Interest expenses arising from loans taken from financial institutions (e.g., banks, insurance companies, non-bank financial institutions approved by the People's Bank of China for engagement in financial businesses) in the course of production and business operations may be deductible on an actual basis.

Deductions from non-financial institutions shall be capped, based on what the interest expenses would have been if the loans had been obtained from a financial institution (i.e., based on the rate that a financial institution would charge for a loan of the same term and type).

Loans for Acquisition/Construction/Production of Assets

Interest expenses arising from such loans (excluding investment in other enterprises) during the acquisition, construction or production of fixed or intangible assets should be accounted into the costs of the assets as capital expenses.

Interest expenses arising after the assets have been used may be charged to the period during which the expenses were incurred, for the purposes of deduction.

Where the taxpayers do not indicate how the loans are to be used, the expenses should be broken down for calculation: expenses that should be accounted into the cost of the assets, and expenses that may be deducted directly, based on the proportion of the loan that was used for necessary capital expenditure and operational activities.

Loans from Approved Funding Pools

Deductions shall be capped, based on what the interest expenses would have been if the loans had been obtained from a commercial bank (i.e., based on the rate that a commercial bank would charge for a loan of the same term and type).

Loans from Associates

Where these loans exceed 50% of the registered capital, no deduction shall be allowed for interest expenses arising from that portion of the loans in excess of 50%.

Rental Expenses on Leased Fixed Assets

Where taxpayers obtain the fixed assets by way of operational leasing, they may deduct rental expenses that are in line with the arm's length principle by rescheduling the deduction into smaller, equal portions over the beneficial period.

Where the taxpayers obtain the fixed assets by way of financial leasing, the rental expenses cannot be deducted. However, the taxpayers may claim depreciation expenses.

The leasing is considered financial leasing if any of the following conditions applies:

The ownership of the leased property is transferred to the lessees when the leasing term expires.
The leasing term represents 75% or more of the useful life of the assets.
The minimum rental payment during the leasing term is greater than or fundamentally equivalent to the public accepted value of the assets at the date the leasing began.

Technology Development Expenses

Such expenses (which include expenses on the research and development of new products, new technology, and new technical crafts) may be deducted on an actual basis.

The following enterprises may deduct an additional 50% of their technology development expenses for the current year if these expenses have increased by 10% or more since the preceding year:

State industrial enterprises and collective industrial enterprises.
State enterprise controlled enterprises, or collective enterprise controlled joint-equity enterprises and joint operational enterprises engaged in industrial production and operations.
Industrial enterprises with perfect accounting systems and that pay tax based on accounting records.
Key leading enterprises of the State engaged in agricultural industrialization.

Business Reception Expenses

Such expenses incurred in the course of business operations may be deducted up to the limits specified below:

Where the net sales/business revenue for the whole year does not exceed 1.5 million yuan, the deduction may not exceed 0.5% of this revenue.
For the portion of the net sales/business revenue for the whole year that exceeds 1.5 million yuan, the deduction may not exceed 0.3% of that portion.
Enterprises without sales or key business revenue as specified under industrial financial accounting rules may deduct business reception expenses as part of the overhead expenses. Deductions are capped at 2% of the various earnings obtained.

Advertising Expenses

Where such expenses are equivalent to less than 2% of the sales/business revenue for 1 tax year, they may be deducted on an actual basis. The portion in excess may be carried forward to succeeding years without limitation.

Some Special Instances

For some enterprises that meet State regulations, the percentage may be raised (e.g., the maximum rate allowed for pharmaceutical factories is 25%), or the expenses may be deducted periodically on an actual basis.

Such enterprises include those engaged in the production of food, medicines, daily-use chemicals, home appliances, and integrated circuits; software development; telecommunications; realty development; cultural and sports activities; Internet websites; home furniture; and construction materials.

For high and new technology enterprises engaged in software development, integrated circuit production and other businesses; Internet websites; and risk investment enterprises engaged in high and new technology business investment, the expenses may be deducted on an actual basis within 5 years of the date that the establishment was registered.

For the high and new technology enterprises, and risk investment enterprises described above; and newly set-up enterprises, the deduction percentage for expenses incurred during special marketing periods may be raised. In certain cases, full deduction may be allowed.

Business Marketing Expenses

Such expenses (including expenses on advertising not circulated through the media) incurred in 1 tax year may be deducted up to a limit of 0.5% of the sales/business revenue.

The following conditions have to be met before taxpayers can claim for deductions:

The advertisements are executed by special institutions approved by the Industrial and Commercial Administration Department.
The expenses have already been paid and the invoices obtained.
The advertisements have been circulated through various media.

No deduction is allowed for advertising expenses on white grain spirits.

Overhead Expenses

Where such expenses are paid by the headquarters in the course of production and business operations, in accordance with prevailing regulations, they may be deductible after examination and approval by the tax department. However, the taxpayers should provide documents issued by the headquarters that provide the following details:

The consolidated scope of the expenses.
Applicable quotas.
The split between the enterprises and the headquarters.
The method to be used.

Without the approval of the SAT or the authorized tax department, the taxpayers should not deduct the overhead expenses paid to the associated enterprises.

When requested to do so by the tax authorities, the taxpayers should provide evidence that substantiates the validity of the legal documents used to support claims for reasonable travel expenses, conference expenses, and expenses by the board of directors incurred in the course of business operations. Otherwise, the expenses shall not be allowed for deduction.

Commissions Paid

Such commissions may be included as sales expenses if the following criteria are met:

The taxpayers can provide legal and truthful documents.
The recipients of the commissions have to be independent taxpayers or individuals (excluding employees) that have the right to conduct intermediary services.
The sum paid does not, in general, exceed 5% of the service value.

Other Items

Indemnities (including fines imposed by banks on interest arrears), fines, and expenses incurred on lawsuits that have been paid in accordance with economic contracts.
Fees paid to associations, institutes and other social organizations that have been set up with the approval of the Civil Affairs Department, Price Department, and Financial Department.
Fees for joining industrial and commercial associations.

Worker-Related Expenses

The following worker-related expenses may be deductible:

Insurance: Premiums for basic pension insurance, basic medical insurance, unemployment insurance, supplementary pension insurance, supplementary medical insurance, and house reserves that have been paid on behalf of employees in accordance with prevailing regulations.
Housing: Allowances allocated to cover housing, house rental and housing difficulties that have been paid in accordance with methods approved by the People's Government at the provincial level.
Benefits for the handicapped: Insurance premiums paid for handicapped workers following standards set by the tax departments at the provincial level.
Work protection: Expenses incurred on reasonable work protection (e.g., work suits, gloves, safety protection articles, articles for lowering high temperatures).

Insurance-Related Expenses

The following insurance-related expenses may be deductible:

Property, transportation: Insurance premiums paid for participating in property insurance and transportation insurance in accordance with prevailing regulations.
High-risk tasks: Premiums paid for insurance to cover the life and safety of employees undertaking special types of work (such as high-altitude, underground wells, and undersea work).
Rewards offered by insurance companies to the taxpayers with respect to no-compensation cases should be accounted into the taxable income for the year.

Bad Debts

Taxpayers may deduct bad-debt losses incurred on an actual basis.

Alternatively, they may make up the losses by withdrawing the relevant bad-debt provisions. The scope for withdrawal should satisfy the enterprise accounting rules laid down by the Ministry of Finance; the withdrawal percentage does not normally exceed 0.5%.

Where the taxpayers have withdrawn the provisions, the losses should be offset against the provisions. The portion of the losses in excess of the provisions may be deducted directly.

The bad debts already offset should be added back to the taxable income for the current period when recovered.

What Constitute Bad Debts

The accounts receivable of taxpayers that are caught in any of the following scenarios may be treated as bad debts:

The debtors have been pronounced bankrupt, the loans have been canceled, and the remaining assets are insufficient to settle the accounts receivable.
The debtors have died, or have been pronounced dead or missing by law, and their assets or remaining assets are not enough to settle the accounts receivable.
The debtors have suffered such heavy losses arising from natural disasters or unexpected accidents that they are unable to use their assets (including insurance compensation) to settle the accounts receivable.
The debtors have failed to pay the debts overdue, and have been adjudged by the courts to be incapable of actually settling the accounts receivable.
The accounts receivable that have not been recovered are at least three years overdue.
The accounts receivable have been approved by the SAT for cancellation.

Associated Parties

Taxpayers are not allowed to withdraw bad-debt provisions for the receivables of non-purchase and sales activities, or the flow of funds between associated parties.

The flow of funds between associated parties cannot normally be regarded as bad debts. However, where the assets of the debtors are insufficient to settle the debts owed, accounts receivable between associated parties may, if so ruled by the bankruptcy court, be deducted as bad-debt losses by the creditor enterprises, after examination by the tax department.

Financial Enterprises

For bad-debt provisions withdrawn by financial enterprises in accordance with prevailing regulations, 1% of the value of the assets at the end of the period, on which bad-debt provisions have been withdrawn may be deductible.

Where financial enterprises satisfy the criteria stipulated for offsetting, the enterprises shall first offset the bad-debt losses against the bad-debt provisions. Then, the portion in excess may be deducted on an actual basis.

Where the financial enterprises manage to recover bad-debt losses that have already been offset, they should adjust up their taxable income accordingly.

Inventory and Stock Losses

Net losses (i.e., inventory losses, and losses arising from the scrapping of fixed assets and movable assets, less the insurance indemnity and the indemnity of the responsible persons) may be deductible, after examination by the tax department.

Input tax that is not allowed for deduction from the output tax arising from inventory loss, damage to stock, or the scrapping of stock may be deducted together with stock losses as property losses.

Fixed-Asset Transfers

Expenses incurred while transferring any kind of fixed asset may be deductible.

Foreign Exchange Gains and Losses

Such gains and losses should be treated in the following manner:

Losses/gains from preparation: If the losses incurred in the course of preparations to open the business are net losses, they should be included in the expenses incurred during preparations to open the business and should be deducted over at least 5 years, using the straight-line method, starting from the month following the commencement of production or business operations.
If the gains made during the preparation period are net gains, they should be included in the taxable income within 5 years, using the straight-line method, starting from the month following the commencement of production or business operations.
Losses/gains from operations: Where the gains or losses arise in the course of production or business operations, they should be accounted into the taxable income for the current period.
Where the gains or losses are incurred in the course of liquidation, they should be accounted into the taxable income for the liquidation period.
Losses/gains from fixed-asset acquisitions/construction: Where the gains or losses are directly relevant to the acquisition or construction of fixed assets, they should be accounted into the value of the assets before the assets are handed over for use, or before the accounting for the completion of the construction is finalized, even though the assets have already been handed over for use.

Opening Expenses

Such expenses incurred during the preparation period should be deducted within 5 years, starting from the month following the commencement of production or business operations.

The following items may be deductible:

Staff wages.
Office expenses.
Training expenses.
Travel expenses.
Registration expenses.
Foreign-exchange losses and gains not accounted into the costs of fixed assets and intangible assets.
Interest expenses.

Donations

Donations to public benefit causes in the civil affairs and cultural arenas, and to the alleviation of natural disasters and poverty through non-profit social organizations¹ within China and government bodies may be deducted up to a maximum of 3% of the taxable income for the year. For financial and insurance enterprises, the maximum is 1.5%.
Donations to specified cultural causes (e.g., some arts performance groups, libraries, museums, science halls, art galleries, memorial halls, antique protection units, cultural halls) may be deducted up to a maximum of 10% of the taxable income for the year.
Donations to educational causes, the China Red Cross, public youth activity places and welfare, non-profit service institutions for the aged, the Song Qingling Fund, the China Poverty Support Fund, the China Health Express Fund, the China Environment Protection Fund, the Sun Yefang Economic and Science Fund, the China Welfare Institute, and the China Charity Association may be all deducted.
No deductions are allowed for direct donations to recipients.

¹ Such organizations include the China Red Cross, the China Association of the Handicapped, the China Youth Volunteers Association, the China Old Area Promotion Association, the State Disaster Relief Committee, the China Population Welfare Fund, the China Youth Development Fund, the China Aged Cause Development Fund, the China Women's Development Fund, the China Glorious Cause Fund, the China Primary Health Fund, the China Cancer Research Fund, the China Greening Fund, the China Art Fund, the China Social Culture Development Fund, the China International Science Exchange Fund, the China Nationality Unity and Progress Association, and other non-profit public-benefit organizations approved by the civil affairs department.

Research and Development Expenses

The following items may also be deductible:

Expenses incurred to support science research institutions, and universities not associated with the taxpayers (i.e., institutions and universities not belonging to or invested in by the supporting enterprises, and whose research achievements are not only for the use of the supporting enterprises).
Expenses incurred in the research and development of new products, new technology, and new technical crafts through non-profit social organizations and government organs.

Asset Depreciation

The depreciation of fixed assets or amortization of intangible assets is addressed later in separate sections on the treatment of fixed and intangible assets.

No income tax is levied on the various funds beyond prices (fund, surcharge, fees) collected and paid by enterprises, and approved by the State Council, the Ministry of Finance, by the Ministry of Finance with other departments and the People's Government at provincial level and included in the financial budget of the same level or in the special financial accounts for the out-of-budget fund for the management of revenue and expenditure.

Non-Deductible Items

The following items shall not be deductible in calculating taxable income for the year:

Expenditure of a capital nature: Expenses incurred on the purchase or construction of fixed assets, or on outward investments.
Expenditure on the acquisition or development of intangible assets: Expenses incurred in the course of acquiring or self-developing such assets. However, deductions shall be allowed for that portion of the expenses incurred on developing the assets during the period before they are transformed into assets.
Fines paid in relation to illegal business operations, or losses incurred on the confiscation of property.
Payments of fines, penalties, or interest arising from late settlements, in relation to various types of taxes.
That portion of losses arising from natural disasters or accidents that has been covered by compensation receivable (i.e., compensation obtained by the taxpayers from insurance companies with whom they have taken out insurance coverage).
Donations made for the benefit of the community, and other charitable donations that exceed the deductible amounts specified by the State; and donations outside these categories.
Expenditure on any sponsorship of a non-advertising nature.
Expenditure on items that do not help generate income for the taxpayers.
Expenses incurred on bribes or other illegal items.
Payments of fines, penalties, or interest arising from late settlements in relation to the violation of laws or administrative regulations.
Provisions for inventory devaluation, short-term investment devaluation, long-term investment devaluation, and reserves for risks, and other provisions that are beyond the provisions that may exceed the limits stipulated under State tax laws.
Any portion of actual expenses that exceeds the scope and standards specified under State tax laws.

Fixed Assets

Under the Provisional Regulations, fixed assets refer to houses, buildings, and structures; machinery, mechanical apparatus, means of transport, and other such equipment; and appliances and tools related to production and business operations that have a useful life of 1 year or more.

Items that cannot be classified as major equipment but that are used in the course of reproduction or business operations, that have a unit value of more than 2,000 yuan, and that have a useful life of more than 2 years shall also be treated as fixed assets.

Depreciable Assets

Houses and buildings.
Machinery and equipment; vehicles for transportation; and appliances and tools used in the course of operations.
Machinery and equipment out of operation in certain seasons, and those out of operation for general check-ups and repair.
Assets leased out by way of business leasing.
Assets leased by way of financial leasing.
Other assets as stipulated by the Ministry of Finance.

Non-Depreciable Assets

Land.
Assets that are not used, that do not need to be used, or that are sealed up, with the exception of houses or structures.
Assets leased by way of operational leasing.
Assets that continue to be used after they have been fully depreciated.
Assets for which repair fees should be drawn.
Assets formed for which deduction has already been made through a lump-sum deduction accounted under costs.
Assets of enterprises that have been declared bankrupt or shut down.
Assets that had been scrapped previously.
Other assets as stipulated by the Ministry of Finance.

Special Instances

Costs of outward investment: Such costs cannot be depreciated or amortized, or deducted directly as current expenses of investment. However, they may be deducted from the transfer proceeds when the relevant investment assets are transferred or disposed of.
Tools/apparatus not managed as fixed assets: Such items can be regarded as low-value consumption articles, and may be deducted once or by instalment.

Valuation Principles

The following assets should be valued or priced in the manner described below:

Assets finished and handed over for use by construction units: At the value specified in the property list provided by the construction units.
Self-made/self-constructed assets: Based on the actual cost when the construction is finished and the assets are ready for use.
Acquired assets: At the purchase price, plus packaging fees, freight, installation charges, and taxes.
Equipment imported from abroad: At the purchase price, plus taxes on importation, domestic freight, and installation charges.
Assets leased by financing: At the price agreed in the leasing agreement or contract, plus the freight, insurance premiums for goods en route, installation and test charges, and interest expenses and foreign-exchange losses/gains incurred before the assets are used.
Assets received as gifts: At the value listed in the invoice, plus the freight, insurance premiums, and installation and test charges borne by the enterprises. Where there is no invoice, they should be valued at the market price for similar equipment.
Assets with inventory gains: Based on the value of the complete replacement cost.
Assets received as investments: At the reasonable price indicated in the contract/agreement, or at the appraised price based on depreciation.
Assets rebuilt/expanded on the basis of previous assets: At the original value of the previous assets, plus expenses on rebuilding and expanding, less price-changing gains in assets during rebuilding/expanding.

Valuation Adjustments

Once determined, the value of the assets should not be changed, except in the following situations:

The State carries out uniform classification and examination of assets and funds.
A portion of the assets is removed.
The assets are damaged permanently. Where the losses are confirmed, adjustments may be made to reprice the assets at the recoverable value, after examination by the tax authorities. Adjustments are made to the previous valuation based on the real value of the assets, or errors are discovered in the previous valuation.

Depreciation Principles

For fixed assets that can be depreciated, the depreciation should start from the month following the month in which the assets are first used. For assets that cease to be in use, the depreciation should stop in the month following the month in which the assets cease to be used.

Before depreciation is undertaken, the residual value of the assets should be estimated, at 5% of the original value, and this value should be deducted from the original value.

Accounting Methods

The two depreciation methods most commonly used are the average method (i.e., straight-line method) or the output method. Where approval is obtained from the tax authorities, the accelerated method may be used. The double-declining balance method and the sum-of-the-years' digits method fall into this category.

For assets eligible for accelerated depreciation, the enterprises may choose either the declining balance method or the sum-of-the-years' digits method, and record their choice with the tax authorities.

Below are shown the computation formulas used for the various methods:

Average method

Annual depreciation rate = {(1 − Expected net residual ratio) ÷ Number of years of depreciation} × 100%
Monthly depreciation rate = Annual depreciation rate ÷ 12
Monthly depreciation = Original value of fixed assets × Monthly depreciation rate

Output method

Depreciation per kilometer (per work-hour) = {Original value of fixed assets × (1 − Expected residual)} ÷ Expected total kilometers (total work-hours)
Monthly depreciation = Total kilometers (work-hours) per month × Depreciation per kilometer (per work-hour)

Double-declining method

Annual depreciation rate = (2 ÷ Number of years of depreciation) × 100%
Monthly depreciation rate = Depreciation per kilometer (per work-hour) ÷ 12
Monthly depreciation = Recorded net value of fixed assets × Monthly depreciation rate

Sum-of-the-years' digits method

Annual depreciation rate = (Number of years of depreciation − Number of years in use) ÷ Number of years of depreciation ÷ (Number of years of depreciation + 1) × 2 × 100%
Monthly depreciation rate = Annual depreciation rate ÷ 12
Monthly depreciation = (Original value of fixed assets − Expected net residual) × Monthly depreciation rate

Depreciation Period

The number of years used for depreciation should in principle conform with the financial accounting system stipulated for various sectors formulated by the Ministry of Finance, but they should not be shorter than the lengths indicated below:

Houses and buildings: 20 years.
Trains, ships, machinery, mechanical apparatus, and other production facilities: 10 years.
Electronic facilities, other transportation tools, and appliances, tools and furniture related to production and business operations: 5 years.
Electronic equipment and software purchased that constitute either fixed or intangible assets: 2 years.
Production facilities of integrated circuit enterprises: 3 years.

Special Instances

Repair expenses on fixed assets may be deducted directly in the period during which they were incurred.
Renovation expenses on fixed assets may increase the value of the assets if the assets have not been depreciated yet. Such expenses may be amortized over a period of at least 5 years as deferred expenses if the assets have already been fully depreciated.
Repair expenses on fixed assets should be regarded as renovation expenses if either of the following conditions applies:
- The expenses amount to 20% or more of the original value of the assets, and the life of the assets is extended at least 2 years after the repair.
- The assets are put into new use after the repair.

Intangible Assets

Intangible assets are non-physical assets utilized by the taxpayers on a long-term basis. They include patents, trademarks, rights of works, land-use rights, non-patented know-how, and goodwill.

Valuation Principles

Such assets should be valued at their actual cost at the time they were obtained.

Assets contributed by investors as capital in cooperation: At the value confirmed through appraisal or as agreed in the contract/agreement.
Acquired assets: Based on the actual payment.
Self-developed and applied assets: Based on the actual expenses incurred in the course of development.
Assets received gifts: At the value indicated in the invoice, or based on the market value of similar assets.

Amortization Principles

Intangible assets are amortized using the straight-line method.

Alienated or invested assets whose useful life is stipulated by law² or contract, or whose beneficial period is specified by the use of the assets by the enterprise (enterprise application), shall be amortized over the statutory useful life, or the beneficial period stipulated in the enterprise application, whichever is shorter.

Where the useful life is not stipulated by statute, the assets shall be amortized over the beneficial period, as stipulated by contract or as specified in the enterprise application.

Where the useful life is not stipulated by statute or contract, where the beneficial period is not specified in the enterprise application, or where the assets are self-developed, the assets shall be amortized over a period of not less than 10 years.

² For example, inventive patents have a statutory useful life of 20 years, whereas practical new-type patents, appearance design patents, and registered trademarks have a useful life of 10 years.

Payments for the transfer of land-use rights should be deemed as intangible assets for tax administration purposes, and should be amortized within the period stipulated under the contract at the shortest period agreed in the contract.

Goodwill built up or acquired by the taxpayers is normally not amortized.

Special Regulations Governing Computation

Below are listed some special scenarios under which computation may have to be adjusted:

Where the taxpayers adopt financial and accounting bases that contravene tax provisions, the taxable income shall be computed in accordance with the provisions.
Where taxpayers fail to provide complete and accurate vouchers stating revenue, costs, and expenses, and where they are unable to compute the taxable income correctly, the tax authorities have the right to assess the income.
Business transactions between a taxpayer and its associated enterprises should be conducted in the same manner as those between independent enterprises with respect to receipts or payments.
Where the transactions that give rise to receipts or payments are not carried out on the same basis as those between independent enterprises, and result in a reduction of taxable income for the taxpayers, the tax authorities shall have the right to make reasonable adjustments.
Losses incurred in a tax year may be offset against income earned in the following tax year. Should the income for the following tax year be insufficient to absorb the said losses, the balance may be carried forward. Losses in a particular tax year can be carried forward for a maximum of five tax years.
Where taxpayers have both taxable items and tax-exempt items, and where annual losses are incurred with respect to the taxable items, the losses that may be carried forward under tax law shall be the losses related to the taxable items less the income relating to the tax-exempt items. Where the income relating to the taxable items is insufficient to offset the losses of previous years, the income relating to the tax-exempt items should also be used to offset the losses of previous years.

Example

An enterprise had losses of 1.7 million yuan in 1999 and 0.6 million yuan in 2000. From 2001 to 2004, it made profits of 1.6 million yuan, and did not offset the losses in 1999 and 2000.

By 2004, the 1999 losses had already been carried forward for 5 years. The enterprise could choose to offset these losses against the profits of 1.6 million yuan. However, the remaining 100,000 yuan could not be carried forward to 2005 for offsetting.

The 2000 losses of 0.6 million yuan may be offset against any profits earned in 2005. If the enterprise makes profits of 0.5 million yuan in 2005, only 0.5 million yuan may be offset. The remaining 100,000 yuan cannot be carried forward to 2006 as the 5-year limit would be exceeded.

Tax Rates and Computation of Tax Payable

The tax payable is generally computed at 33% of the taxable income.

Tax payable = Taxable income × 33%

Example

A company's total income for the tax year is 12 million yuan. Costs, expenses, and tax expenditure amount to 10 million yuan.

Taxable income = 12 million − 10 million = 2 million yuan
Tax payable = 2 million × 33% = 0.66 million yuan

Special Instances

Two reduced tax rates are being granted temporarily to some enterprises whose annual taxable income falls into the following brackets:

Below 30,000 yuan: 18%.
Between 30,000 yuan and 100,000 yuan: 27%.

The 33% rate still applies where the annual taxable income exceeds 100,000 yuan.

Example

A township enterprise has taxable income of 60,000 yuan for the current year. The applicable tax rate is 27%.

Tax payable = 60,000 yuan × 27% = 16,200 yuan

Exchange Rate Conversions

Enterprise Income Tax is computed in yuan terms. Where income is earned in foreign currencies, the amounts should be converted into yuan at the basic exchange rate (or at the rate derived in accordance with the relevant regulations) quoted by the People's Bank of China on the last day of the month for taxpayers that make monthly prepayments, and on the last day of the quarter for taxpayers that make quarterly prepayments.

At the year-end, when final settlement of income is made, the prepayments should not be converted again. Only the portion of the foreign currencies not yet converted should be converted into yuan, at the exchange rate on the last day of the tax year.

Where the income comprises non-monetary assets or equity, these items should be computed and valued based on market prices.

Collection Based on Assessment

Where any of the following scenarios applies, the tax authorities should adopt the assessment method for collecting tax:

The taxpayers do not set up acceptable accounting records as stipulated by tax laws and regulations, or the taxpayers fail to set up accounting records even though they are required to under tax laws and regulations.
It is only possible to determine or to give a precise account of the total income, but the individual costs and expenses cannot be accurately accounted for.
It is only possible to determine or to give a precise account of the costs and expenses, but not the total income.
It is not possible to determine the computation of the total income, costs, and expenses, and the taxpayers are unable to provide real, accurate, and complete tax documentation for the tax authorities.
The setting up of the accounting records and accounting are satisfactory, but the relevant accounting books, vouchers, and tax payment documentation are not maintained as specified under prevailing tax rules.
The taxpayers fail to fulfill their tax obligations within the time limits specified under prevailing tax laws and regulations, and fail to report to the tax authorities even after being notified by the authorities.

Basis of Collection

Collection can be made based on fixed amounts, assessed income rates, or other reasonable methods that are acceptable to the tax authorities.

Fixed amount: The tax department directly assesses the tax payable for the tax year in line with certain standards, procedures, and methods; and the taxpayers report and pay the tax accordingly.
Assessed income rate: The tax department pre-assesses the taxable income rate for the taxpayers in line with certain standards, procedures, and methods; and the taxpayers compute and pay tax by applying the pre-assessed rate to actual total income, costs, and expenses for the tax year.

Determining the Collection Method

Which collection method would be most appropriate for a particular taxpayer is decided based on the following procedure.

The taxpayer fills in the “Form of Collection Method of Enterprise Income Tax” (hereafter referred to as the form of collection), and files the application with the tax authorities to begin the determination process.
The form of collection lists five criteria. The tax office determines the appropriate collection method based on the extent to which the taxpayer satisfies these criteria.
After examining the form of collection, the tax office submits it to the tax authorities at the county level for confirmation.

The Qualifying Criteria

Item 1: “Books setting.”
Item 2: “Accounting of total income.”
Item 3: “Accounting of costs and expenses.”
Item 4: “Storage of books and vouchers.”
Item 5: “Tax obligation performance.”

Based on the details provided by the taxpayer under these five items, the tax office decides which collection method is most appropriate.

Where the taxpayer satisfies all five criteria, the taxpayer may opt for self-assessment, and the tax authorities shall collect the tax based on the taxpayer's accounting records.
Where the taxpayer fails to satisfy one of the criteria laid out under Items 1–5, the pre-assessment method should be adopted.
Where the taxpayer fails to satisfy one of the criteria laid out under Item 1, Item 4, and Item 5, or where the taxpayer fails to satisfy both Item 2 and Item 3, the fixed amount method may be chosen.
Where the taxpayer satisfies either Item 2 or Item 3, but not both, the pre-assessment method may be adopted.

The process is conducted once a year from January to March. New enterprises should be able to complete the process within 3 months of receiving their tax registration certificates.

Once chosen, the collection method should not be changed for 1 tax year unless the taxpayer can offer some special reason. Where the taxpayer infringes any tax rules while using the self-assessment method, the tax authorities may at any time switch the taxpayer over to the pre-assessment method.

Governing Principles

In determining the appropriate collection method, the tax authorities shall consider the following factors.

Pre-assessment method: The tax authorities should check into the tax payable and taxable income rate for each taxpayer based on sector characteristics, tax payments, financial management, accounting, and profit levels in the context of local conditions, while bearing in mind the need to abide by principles of equity, fairness, and transparency.
Fixed amount method: The tax authorities should study the relevant information provided by the taxpayers, classify the taxpayers, and make careful analysis, and, on that basis, directly assess the annual tax payable at the highest tax possible under the tax laws if there is any flexibility.

Pre-Assessed Rates

Where the assessed income rate method is chosen, the tax payable is computed in the following manner:

Tax payable = Taxable income × Applicable tax rate
Taxable income = Total income × Taxable income rate

Sectoral Rates

The rates vary depending on the sector.

Industries, transportation, and commerce: 7% – 20%.
Construction and realty development: 10% – 20%.
Catering services: 10% – 25%.
Entertainment: 20% – 40%.
Others: 10% – 30%.

Where taxpayers are engaged in several sectors, the tax authorities shall apply a single rate, namely, the rate for the sector that forms the taxpayers' key business, whether or not the taxpayers carry out separate accounting for other sectors.

Example

An enterprise has a total income of 1 million yuan for the current year. The local tax office assesses the taxable income rate at 10%.

Taxable income = 1 million yuan × 10% = 100,000 yuan
Tax payable = 100,000 yuan × 27% = 27,000 yuan

Example

An enterprise has total costs and expenses of 170,000 yuan for the current year. The local tax office assesses the taxable income rate at 15%.

Taxable income = {170,000 yuan ÷ (1 − 15%)} × 15% = 30,000 yuan
Tax payable = 30,000 yuan × 18% = 5,400 yuan

Changing the Rate

Once assessment has been conducted, the tax payable or taxable income rate should not be changed for 1 tax year, unless the following conditions apply:

The taxpayer is undertaking restructuring.
The taxpayer significantly changes the production/business scope or the key business.
The taxpayer suffers natural disasters such as earthquakes.

Joint Operational Enterprises

Joint operational enterprises should pay tax on their production and business income locally, and then divide the tax between the cooperative parties. Losses incurred should be offset locally.

After-tax profits received by the investing party should be first offset against the losses of the investing enterprise. Where there are gains after offsetting, taxes should be paid on the gains.

Rate Disparities

Where the tax rate applied to the investing enterprise is lower than the rate applied to the joint enterprises, the difference will not be rebated. Conversely, after-tax profits shared by the investing party should be subject to tax as stipulated by tax rules.

Where the tax rates are the same, but the effective tax rate of the joint enterprises is lower than that of the investing party because of tax incentives given to the joint enterprises the taxes need not be made up.

Investment Income

Where dividends and bonuses arising from outward investment are received by the enterprises, tax adjustments shall be made with reference to the principles outlined above.

Enterprises with Foreign Investment

Enterprises with foreign investment that have been set up in Special Economic Zones shall pay tax at 15% or 24%.

The rate applied, and the profits shared and received by the Chinese investing party shall be computed as for joint operational enterprises.

Foreign Tax Credits

Where taxpayers derive income from sources outside China and file a consolidated income tax return, the taxpayers may credit against the amount of income tax payable, the foreign income tax already paid abroad (including the taxes actually paid and the taxes deemed paid, but excluding the compensation obtained after factoring in tax payments and taxes borne by others on behalf of the taxpayers.

However, the creditable amount may not exceed the amount of income tax otherwise payable under Chinese tax laws.

Credit Methods

Two methods are commonly used to compute the creditable amount.

By Country

Where taxpayers are able to fully provide tax completion documents for overseas tax payments, the taxpayers may compute the creditable amount on a per-country rather than a per-item basis.

Maximum creditable amount for foreign income tax paid in country A = (Total income tax payable computed according to Chinese tax law on worldwide income × Income from sources in country A) ÷ Total income from worldwide sources

The 33% statutory tax rate shall apply when computing the total income tax payable computed according to Chinese tax law on worldwide income.

Foreign income tax actually paid by the taxpayers on income from outside China may be credited against the income tax payable unless the amount exceeds the limit prescribed by the formula provided above.

Where the amount exceeds the limit prescribed, the excess portion cannot be credited against the tax payable or deducted from the taxable income. However, the excess may be carried forward to subsequent years (maximum: 5).

By Item

To simplify computation and collection, the taxpayers may apply for approval from the tax authorities to deduct the foreign tax paid at a uniform rate of 16.5% of the taxable income, without differentiating between exempt and non-exempt items.

Income from outside China shall be computed in accordance with Chinese tax laws. The gains and losses of overseas businesses may be offset against each other. However, offsetting is not allowed for transactions between the overseas business and the domestic business.

TAX REDUCTIONS AND EXEMPTIONS

Reductions and exemptions should be examined and approved by tax departments at or below the provincial level.

Taxpayers paying the tax assessed by the tax authorities cannot enjoy the various preferential treatments allowed under the tax provisions.

Where the taxpayers encounter any special circumstances as specified under the provisions during the preferential period or within 3 years of the date that the tax holidays expire, they may seek the reinstatement of reductions or exemptions accorded under the preferential policy, after the validity of their circumstances has been verified. Those taxpayers whose tax holidays have not expired shall resume tax payments under the assessment method of collection.

The main tax reductions and exemptions granted are discussed below.

Enterprises in Special Regions, Zones, or Areas

Autonomous Regions

Reductions or exemptions may be granted for specified periods to enterprises operating in autonomous regions that require special incentives and encouragement, upon approval by the People's Government at the provincial level.

High-Tech Development Zones

High-technology enterprises located in the High-Tech Development Zones that have been approved by the State Council, and enterprises that produce integrated circuits in accordance with State rules may pay tax at a lower rate of 15%.

High-tech enterprises newly established in the Zones may be exempt from tax for 2 years, starting from the day that production and business operations commence.

Specially Designated Areas

Enterprises newly set up in State-specified old revolutionary bases, minority areas, remote areas, or poor areas may, upon approval by the tax authorities, be granted reductions or exemptions for 3 years, starting from the date that the production or business operations commence.
Enterprises operating in industries encouraged by the State that are set up in the western areas and other areas in accordance with State rulings may enjoy a reduced tax rate of 15% from 2001 to 2010 if their key business income constitutes more than 70% of total income for the current year.
For newly set-up enterprises in the transportation, electrical power, water conservation, postal services, and television and radio broadcasting industries whose key income represents more than 70% of total income, they may, upon approval by the tax authorities, be granted exemptions in the 1st and 2nd years, starting from the date that production and business operations commence. They may also be granted 50% reductions from the 3rd year to the 5th year.

Countryside Credit Cooperatives

Exemptions may be granted for specified periods to such cooperatives in poor counties as verified by the State.

Such cooperatives generating thin profits in other areas may be taxed at rates lower than those applied to normal thin-profit enterprises.

From 2004 to 2006, such cooperatives in the countryside credit cooperatives reform experiment areas in the western and middle parts of China may be granted temporary exemptions.

Such cooperatives in the countryside credit cooperatives reform experiment areas in other parts of China may enjoy 50% reductions.

Enterprises Employing Retrenched Workers

Services Enterprises

New city and township labor employment settlement service enterprises may, upon approval by the tax authorities, be granted exemptions for 3 years, starting from the date that production and business operations commence, if retrenched city/township workers account for more than 60% of their total staff.
When the 3-year tax holiday expires, the enterprises may, upon approval by the tax authorities, be granted 50% reductions for 2 years, if newly retrenched workers account for more than 30% of the previous employment in the year.
After verification by the labor department, new services enterprises (excluding those engaged in advertising, saunas, massage parlors, Internet cafes, oxygen bars) may, upon approval by the tax authorities, be granted exemptions for 3 years, if newly employed retrenched workers account for more than 30% of their total staff for the year, and if the work contracts signed are for at least 1 year.
Where newly employed retrenched workers account for less than 30% of their total staff for the year, the enterprises may be granted reductions for 3 years, at a rate computed using the formula provided below.
Reduction percentage = New employment of retrenched workers ÷ Total employment × 100% × 2
After verification by the labor department, new commercial retailing enterprises engaged in commodity retailing may, upon examination by the tax authorities, be granted exemptions for 3 years, if newly employed retrenched workers account for more than 30% of their total staff for the year, and if the work contracts signed are for at least 1 year.
Where newly employed retrenched workers account for less than 30% of their total staff for the year, the enterprises may be granted reductions for 3 years, at a rate computed using the formula provided below.
Reduction percentage = New employment of retrenched workers ÷ Total employment × 100% × 2
After verification by the labor department, existing services enterprises (excluding those engaged in advertising, saunas, massage parlors, Internet cafes, oxygen bars) and commercial retailing enterprises may, upon examination by the tax authorities, be granted exemptions for 3 years, if newly employed retrenched workers account for more than 30% of their total staff for the year, and if the work contracts signed are for at least 1 year.
Where commercial retailing enterprises concurrently engaged in wholesaling employ retrenched workers and the contracts signed are for at least 1 year, upon verification by the labor department and approval by the tax department, 2,000 yuan may be deducted from the income tax payable each year for the employment of each retrenched worker until the end of 2005.
Where the income tax payable for the current year is insufficient for the deduction, it may be carried forward to the following year.

Enterprises Engaged in Processing

Where the processing enterprises of labor employment services enterprises or small enterprises of a processing nature in the neighborhood employ retrenched workers and the contracts signed are for at least 1 year, upon verification by the labor department and approval by the tax department, 2,000 yuan may be deducted from the income tax payable each year for the settlement of each retrenched worker.

Where the income tax payable for the current year is insufficient for the deduction, it may be carried forward to succeeding years (maximum: 2).

State Entities Set Up to Absorb Additional Workers

Upon verification by the labor department and approval by the tax department, exemptions may be granted for 3 years to economic entities set up by large and medium-sized State enterprises to settle the additional workers through separation of key business and supplement business and system reform of supplement business, if they meet the following criteria:

They utilize non-key business assets, idle assets of previous enterprises, or the effective assets of shutdown or bankrupt enterprises.
They carry out independent accounting, show clear ownership, and adopt various types of ownership.
They absorb the additional workers of previous enterprises, these workers amount to 30% or more of their total staff, and they modify existing or sign new work contracts with the newly employed workers.

The following entities are excluded from the category: those engaged in the financial and insurance sector; those engaged in postal or telecommunications services; those engaged in construction; those engaged in entertainment; those engaged in sales of immovable property or transfers of land-use right; those engaged in advertising; those engaged in saunas, massage parlors, Internet cafes, oxygen bars; trade enterprises engaged in wholesaling; those engaged in retailing or wholesaling; and those engaged in other non-retailing businesses.

Technical Service Income

Temporary exemptions may be granted for income arising from the provision of technical services or labor services by agricultural technology education stations, plant protection stations, water conservancy stations, forestry stations, animal husbandry veterinary stations, aquatic product stations, seed stations, farming machinery stations, meteorological observatories.
Temporary exemptions may be granted for technical service income earned by science and research units, and universities for the transfer of technology achievements, technical training, technical consultation, technical services, or technical subcontracts.

Technology Transfer/Development Income

Exemptions may be granted on income earned by non-profit science and research institutions from engagement in technology development or technology transfers, and the related provision of technical consultation or technical services. Where such institutions earn income from activities not relevant to their science and research business, that portion of the income invested to improve conditions for research and development may, upon approval by the tax authorities, be deducted from the taxable income.
Temporary exemptions may be granted on income earned by enterprises and institutional units from the transfer of technology, and from relevant technical consultation, services and training, on that portion of the income under 300,000 yuan.

Enterprises Engaged in Agriculture

Temporary exemptions may be granted on income earned by State agricultural enterprises and institutions (including those involved in agriculture, farming, animal husbandry, fisheries, forestry, water supply and irrigation, meteorology, and overseas Chinese farms) that are engaged in planting, breeding and/or primary processing of agricultural and forestry products.
Temporary exemptions may be granted on income derived by enterprises and institutions from planting trees, tree seeds, or nursery stock, or from the primary processing of tree and wood products.
Temporary exemptions may be granted on income earned by ocean fishery enterprises holding the Ocean Fishery Enterprise Qualification Certificate issued by the Ministry of Agriculture, from engagement in ocean fishing, and on income earned by fishery enterprises holding the Fishery Fishing Certificate issued by the competent fishery administration department at any level, from engagement in ocean fishing.

Public Benefit/Welfare

Temporary exemptions may be granted to public places that are run or used for the benefit of the young.
Social welfare production units run by street committees and welfare factories run by the civil affairs department may enjoy 50% if handicapped employees account for 10%–30% of total staff. They may be exempt if the percentage exceeds 35%.
Temporary exemptions may be granted to welfare and non-profit service institutions for the aged set up by government organs and enterprises, institutional units, social organizations, and individuals.
Temporary exemptions may be granted on income derived by welfare lottery ticket-issuing institutions from the issuance of tickets.

Technology Renovation

Where enterprises invest in technology renovation projects that qualify for incentives offered under State industrial policy within China, 40% of their investment into the home-made equipment needed for the projects may be credited against the tax payable.

The creditable amount may not exceed the increase in tax payable between the year of investment and the preceding year.

Where the increase is insufficient to allow a tax credit, the balance may be carried forward and used to offset increases (relative to the year preceding the investment) in subsequent years (maximum period: 5 years).

Where the enterprises lease out or transfer the equipment, and where they have already enjoyed tax credits in the 5 years following the investment, the enterprises should refund the credits.

Exemptions may be granted for government funds, capital, and surcharges approved by the State Council or Ministry of Finance to set up the fund and charge fees, and will be included in the financial budget management or in the special accounts for out-of-budget funds.
Exemptions may be granted for administrative charges approved by the State Council or the People's Government at the provincial level, and included in the financial budget management or in the special accounts for out-of-budget funds.
Exemptions may be granted for out-of-budget funds verified by the Ministry of Finance and not to be handed over to the special financial accounts.

Re-Investment of Profits

Where domestic economic organizations acting as investors use their after-tax profits (i.e., after Enterprise Income Tax) as capital to invest in the western part of China to open enterprises producing integrated circuits, or packaging or software enterprises with operational periods of not less than 5 years, rebates of 80% of the tax paid on the re-investments may be granted.

Where the enterprises withdraw the investments within 5 years, the tax authorities shall claim back the tax rebated.

These concessions shall apply till the end of 2010.

Medical Services

Exemptions may be granted on medical service income earned by non-profit medical institutions, disease control institutions, women's health institutions and infant health institutions that charge for their services using prices stipulated by the State.

Income earned by these institutions from other businesses that is used to improve the medical conditions of the institutions may be deducted from their taxable income, upon approval by the tax authorities.

Others

New software enterprises and enterprises producing integrated circuits in accordance with State rules may, after confirmation from the tax authorities, be exempt from income tax for the 1st and 2nd years of operation. Once their businesses turn profitable, their tax rate shall be halved for the 3rd, 4th, and 5th years following the year in which they begin making profits.
Where qualified science and research institutions become enterprises, or join in enterprises, they may be exempt from tax for 7 years, starting from the date the change is registered.
Tax exemptions may be granted for 2 years, starting from the day that production and business operations commence, for new enterprises and units engaged in consultation (on areas such as science, legislation, accounting, auditing, or taxation), information technology (in areas such as the collection, dissemination, processing and analysis of statistical data; scientific, technological and economic information; advertising; and computer application services), or technical services.
New enterprises and units engaged in transportation, postal and telecommunications services may be exempt in the 1st year and enjoy a 50% tax reduction in the 2nd year, starting from the day that production and business operations commence.
New enterprises and units engaged in public causes, commerce, materials, foreign trade, tourism, warehousing, residential services, catering, education and culture, or health causes may, upon approval by the tax authorities, be exempt from tax or granted tax reductions for 1 year, starting from the day that production and business operations commence.
Where enterprises engage in production using waste water, gas, and/or residue as their main raw materials, they may be granted reductions or exemptions for 5 years, starting from the date that the production or business operations commence.
Enterprises may be granted reductions or exemptions for 1 year if they suffer natural disasters such as typhoons, fires, floods, or earthquakes.
Exemptions may be granted to high schools, middle schools, and primary schools run by the government on income derived from training courses or vocational training courses if the income all belongs to the schools.
Exemptions may be granted on special subsidy income obtained by institutional units from the competent departments or units of a higher level, or on income obtained by institutional units from the after-tax profits of subsidiary units that carry out independent accounting.
Exemptions may be granted on assistance funds obtained by social organizations from the People's Government at various levels, and on union charges as specified by the civil affairs department or the financial department at or above the provincial level.
Exemptions may be granted on financial allocations and donation income obtained by institutional units, social organizations, or private non-enterprise units.
Under State compensation law, where State organs and their staff illegally exercise their powers, or infringe on the legal rights and interests of enterprises resulting in damages, compensation paid to the sufferers is by law exempt from tax.
Tax payable by township enterprises may be reduced by 10%. Savings from the reduction shall be used to provide subsidies for social expenditure.

TIME LIMIT AND PLACE FOR TAX PAYMENT

Time Limits for Payment

When Prepayments are Due

The tax payable is calculated on an annual basis, and prepaid on a monthly or quarterly basis. Monthly prepayments should be made within 15 days of the end of each month; and quarterly payments, within 15 days of the end of each quarter.

The final settlement should be made within 4 months of the end of the year. At this time, any excess payment will be refunded, and any deficiency repaid. Taxpayers also have the option to credit any excess payment against fresh liability in the following tax year.

When Returns are Due

Taxpayers prepaying on a monthly basis should submit accounting statements and provisional tax returns to the tax offices within 15 days of the end of each month; and those prepaying on a quarterly basis, within 15 days of the end of each quarter.

Final accounting statements and income tax returns should be submitted within 45 days of the end of the year (whether the businesses made gains or losses).

Computing Prepayments

Taxpayers prepaying on a monthly basis should make the payments based on their actual monthly profits; and those prepaying on a quarterly basis, on their actual quarterly profits.

Where the method of collection is based on the assessed taxable income rate, the actual tax repayable should be computed based on the taxable income rate as assessed.

Where taxpayers have difficulties meeting the payments, those prepaying on a monthly basis may base their monthly prepayment on one-twelfth of the tax payable in the previous year; and those prepaying on a quarterly basis may prepay the tax by one-fourth of the tax payable. They may also be allowed to prepay following some other method if the method is acceptable to the tax authorities.

Once determined, the prepayment method cannot be changed at the taxpayer's whim.

Some Special Instances

Fixed-sum collections: The tax department should split the assessed tax payable into monthly or quarterly portions, and the taxpayers should fill in their tax returns accordingly.
Tax payable on income sourced from outside China: The tax may be computed and prepaid on a biannual or annual basis (the prepayment dates and amounts shall be determined by the tax authorities). At the end of each year, this income should be integrated with income from within China for the final tax settlement.
Mergers, splits, or terminations during the year: The taxpayers should make the final settlement to the tax authorities within 60 days of the termination of production or business operations.
Joint operational enterprises: These enterprises should first pay the tax locally and then make the profit distribution.

Places for Payment

In general, taxpayers should pay tax to the tax authorities in the locales where the enterprises are located.

Consolidated Payments

The State allows some sectors, enterprises, and experimental enterprise groups to pay tax on a consolidated basis, to encourage enterprises to expand their businesses or to improve their overall competitive capacity. The State also recognizes that special circumstances prevail in some sectors and enterprises.

For example, the Ministry of Railway consolidates and pays the tax in Beijing on behalf of the transportation enterprises directly under its purview; the State Post Administration does likewise for its wholly held enterprises; the China Aviation Company does likewise for its wholly held enterprises.

Under consolidated payment, the income generated by the headquarters of the enterprises or parent companies (hereafter referred to as consolidated enterprises), and the income generated by their branches or subsidiaries (hereafter referred to as member enterprises) are consolidated into a single tax return by the consolidated enterprises for uniform payment. Consolidated payment has to be approved by the SAT.

At present, enterprises making consolidated payment include the railway transportation enterprises consolidated by the Ministry of Railway; the postal enterprises consolidated by the State Post Administration; the branches consolidated by China Industrial and Commercial Bank, China Agriculture Bank, China Construction Bank and the Bank of China; the subsidiary companies consolidated by the China People's Property Insurance Company and China Life Insurance Company; and other enterprises as specified by the SAT.

Where approval has been obtained for payment on a consolidated basis (hereafter referred to as consolidated payment), the consolidated enterprises and member enterprises shall all abide by regulations governing uniform computation, administration by levels, local prepayment and consolidated final settlement, unless otherwise specified by the State.

Terms and Definitions

Uniform computation: The consolidated enterprises uniformly compute the taxable income and the tax payable for the year based on the annual tax returns of the member enterprises, in accordance with the provisional regulations and detailed rules governing Enterprise Income Tax.
Administration by levels: The tax is administered and monitored by the local tax departments in the locales where the consolidated enterprises and the member enterprises are situated.
Local prepayment: The member enterprises should, in accordance with the provisional regulations and detailed rules governing Enterprise Income Tax, compute the taxable income and the tax payable for the assessment year, and prepay whatever proportion of the tax has been specified by the local tax offices. They then finalize the tax payment at year-end.
Consolidated settlement: At the end of each year, the consolidated enterprises compute on a consolidated basis the taxable income and the tax payable for the year. They then offset the tax prepaid by the member enterprises during the year, and finalize the annual tax settlement based on the annual tax returns of the member enterprises.

Classifying Consolidated and Member Enterprises

Parent/subsidiary enterprise groups: The head offices shall take the parent companies and the subsidiary companies as the member enterprises for local prepayment.
Headquarters/subsidiaries enterprise groups: They shall take the headquarters and the independently accounting subsidiaries as the member enterprises for local prepayment.
Banks and insurance companies: They shall take their branch banks (branch companies), sub-branches and offices equivalent to sub-branches as the member enterprises for local prepayment.
Other enterprises, as approved by the SAT: The member enterprises specified should prepay the tax locally.

Determining Local Prepayment Contributions

In general, unless otherwise specified, the member enterprises contribute 60% of the annual tax payable for local prepayment.

Member enterprises in the Special Economic Zones, Shanghai Pudong Xin Qu, and the western part of China that are encouraged by the State may contribute 15% for local prepayment.

Rationalizing Losses and Gains Across Member Enterprises

Where there is a huge disparity between the member enterprises in terms of gains and losses, local prepayment, and consolidated settlement, the headquarters may apply to the SAT for approval to adjust the local prepayment percentage for member enterprises that make significant contributions to the business.

Local prepayment by the member enterprises should be made in installments and finalized at the year-end. The actual tax prepaid during the year should be equal to the tax that should be prepaid locally at the specified percentage.

At the year-end, the member enterprises should hand over to the local tax offices the Enterprise Income Tax Return and relevant financial statements and reports within the time limit specified, and pay fully the tax that should be prepaid locally.

Where the member enterprises incur losses during the year in which the headquarters makes consolidated settlement, the headquarters shall uniformly offset the losses against the gains at the year-end final settlement. The headquarters may also defer the losses in accordance with prevailing tax regulations. The member enterprises should not offset the losses against the taxable income for subsequent years.

Member Enterprises Operating on Multi-Levels

Where the member enterprises are divided into different levels, and located in one province/autonomous region/municipality directly under the State Council/special city, the local prepayment percentage shall be the figure reached after the member enterprises at the secondary level consolidate the tax locally prepaid by the enterprises under their purview. Where this percentage is higher than the specified percentage, the tax authorities at the provincial level may adjust the percentage for the enterprises under the purview of the member enterprises at the secondary level.

The consolidated enterprises should hand over to the local tax offices the consolidated Annual Enterprise Income Tax Return and relevant financial accounting statements, together with the Annual Enterprise Income Tax Return of the member enterprises at the secondary level, within 4 months of the year-end, and uniformly compute and settle the tax.

If the tax as computed on the basis of the consolidated Annual Enterprise Income Tax Return exceeds the tax prepaid locally by the member enterprises, the balance shall be paid by the consolidated enterprises within the specified time limits. If the tax as computed falls short of the prepaid tax, the balance shall be used to offset the tax payable by the consolidated enterprises for the subsequent year.

Whether the consolidated enterprises and member enterprises located in one province/autonomous region/municipality directly under the State Council/special city should abide by the rules governing uniform computation, administration by levels, local prepayment and consolidated final settlement, shall be decided by the tax authorities of the province/autonomous region/municipality directly under the State Council/special city.

Chain Enterprises

Where the chain enterprises set up cross-area direct-business stores within one province/autonomous region/municipality directly under the State Council/special city, the headquarters shall report and pay tax on a consolidated basis to the tax authorities in the locales where they are situated if the following criteria are met:

The stores are under the uniform management of the headquarters.
The stores are connected by a computer network to the headquarters.
The headquarters provide uniform procurement and supply, accounting and management for the stores, the stores do not have bank settlement accounts, and do not prepare accounting statements and accounting records.

Taxation in China