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According to the Circular of the Leading Group Under the State Council for the Reform in the Administrative Examination and Approval System Concerning the Opinions on the Follow-up Work for the Items the Readjustment of Administrative Examination and Approval Procedures, and for the implementation of the Decision of the State Council on Lifting the Administrative Examination and Approval Procedures for the Second Batch of Items and Changing the Administrative Manners for A Batch of Items, the present Circular is hereby issued for the follow-up control of certain income tax treatment of enterprises with foreign investment and foreign enterprises (hereinafter referred to "enterprise(s) ") after the administrative examination and approval procedures for such treatment is lifted by the State Council. 1. WAGES AND WELFARE FUNDS According to Article 24 of the Rules for the Implementation of the Income Tax Law of People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (hereinafter referred to "Rules for the Implementation of the Income Tax Law"), the standard for the itemization of wages of and welfare fund for the workers and staff of an enterprise should, together with the documents applied for determining such standard and other relevant materials, be subject to the examination and approval of the local tax authorities. After the lifting of such examination and approval procedures, the enterprise shall, when submitting its annual income tax returns, concurrently submit the standard for itemized wages and welfare fund and the relevant materials such as application documents for determining such standard to the competent tax authorities for archival purposes. No further submission is required if there is no change afterwards in the standard of wages and welfare fund; in the case of any change in the standard, the enterprise shall, when submitting its annual income tax returns, submit such change to the competent tax authorities for archival purposes. The local tax authorities shall carefully examine the materials submitted by enterprises with regard to the wages of and welfare funds for the workers and staff of the enterprises. The standard for itemizing the welfare funds shall be that specified in the Circular of the State Administration of Taxation Concerning the Tax Treatment of the Funds for Medical Insurance Other Than the Three Reserves as Retained by Enterprises with Foreign Investment and Foreign Enterprises for Their Employees. 2. BAD DEBT RESERVES According to Article 25 of the Rules for the Implementation of the Income Tax Law, an enterprise engaged in the credit and leasing business may, in the light of the actual conditions and subject to the prior approval of the local tax authorities, provide a bad debt reserve not exceeding 3% of the amount of its year-end loan balance (not including inter-bank short-term loans) or the amount of its year-end accounts receivable and bills receivable, which may be deducted from the taxable income for the year. The enterprises engaged in the above-mentioned business may provide bad debt reserves according to the relevant provisions after the above-mentioned approval procedure is lifted. Local tax authorities shall examine the annual income tax returns, and the items of "loan balances", "accounts receivable" and "bills receivable" in the accounting statements submitted by the enterprises engaged in the above-mentioned business, and confirm the bad debt reserves. Enterprises engaged in any business other than credit and leasing are generally not allowed to provide bad debt reserves, unless they have a relatively large balance of accounts receivable and there is a need to provide bad debt reserve, such provision shall still be handled in accordance with Article 9 of the Circular of the State Administration of Taxation Concerning Certain Tax Treatment in the Implementation of the Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises. 3. ACCELERATED DEPRECIATIONS OF FIXED ASSETS OF CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES According to Item (3) of the second paragraph of Article 40 of the Rules for the Implementation of the Income Tax Law, a Chinese-foreign contractual joint venture may make provisions for depreciation based on its duration of operation if the duration is shorter than the depreciable life specified in Article 35 of the Rules for the Implementation of the Income Tax Law and the fixed assets are to be owned by the Chinese side after the duration of operation of the Chinese-foreign contractual joint venture. After the lifting of the examination and approval procedures for the above-mentioned accelerated depreciation, a Chinese-foreign contractual joint venture may make provisions for depreciation of its fixed assets based on its duration of operation or the remaining duration of operation if the duration is shorter than the depreciable life specified in Article 35 of the Rules for the Implementation of the Income Tax Law and the fixed assets are to be owned by the Chinese side after the duration of operation of the Chinese-foreign contractual joint venture. The enterprise shall submit the information concerning purchasing price, time of purchase, purpose of use and provisions for depreciation of the above-mentioned fixed assets to the competent tax authorities for archival purposes. 4. RETAINING OF LOWER OR NO SCRAP VALUE OF FIXED ASSETS According to Article 33 of the Rules for the Implementation of the Income Tax Law, in calculating the depreciation of fixed assets of an enterprise, a scrap value of the fixed assets should be estimated and deducted from the cost price of the fixed assets. The scrap value should not be less than 10% of the cost price; any treatment as retaining lower or no scrap value should be subject to the approval of the local tax authorities. After the lifting of the above-mentioned examination and approval procedure, the scrap value of the fixed assets newly purchased and put into operation by an enterprise shall be temporarily determined as 10% of the cost price for the purpose of depreciation. If it is foreseeable that any fixed asset of an enterprise cannot be sold off or have no value of selling-off after its service life, the enterprise may retain no scrap value. 5. REDUCTION OF INCOME TAXES PAYABLE BY EXPORT-ORIENTED ENTERPRISES According to Article 75 (7) of the Rules for the Implementation of the Income Tax Law, an export-oriented enterprise with foreign investment may further enjoy a reduction of income tax by 50% after the period of reduction or remission of its income tax under the tax law has expired, if the enterprise has exported its products up to 70% of its total value of products for the year, the enterprise shall submit a certification issued by the competent authorities to the local tax authorities for examination and approval. After the lifting of the above-mentioned examination and approval procedures, the enterprises entitled to the above-mentioned preferential treatment shall concurrently submit the following certifications when submitting their annual income tax returns: (1) a valid certificate issued by the competent authorities certifying that the enterprise is an export-oriented enterprise for the year; and (2) a certification issued by the relevant authorities certifying that the enterprise has exported its products up to 70% of its total value of products for the year. The competent tax authorities shall strictly verify the total value of products and the export value of the enterprise, cooperate with other departments concerned, establish a system of information exchange, strengthen coordination and agree on a uniform standard. 6. PROCEEDS FROM THE INVESTMENT OF NON-MONETARY ASSETS OF ENTERPRISES WITH FOREIGN INVESTMENT According to Article 2 of the Circular of the Ministry of Finance and the State Administration of Taxation Concerning Certain Problems of Taxation Relating to the Business of Investment by Enterprises with Foreign Investment, where any enterprise with foreign investment makes investment by physical goods, intangible assets or other non-monetary assets to any other enterprise, the balance between the price of the assets appraised for the investment and the original net book value of the assets shall be treated as proceeds from a transfer of property and be included in the period taxable income. If the amount of the net proceeds is relatively large and it is difficult for the enterprise to pay tax on such proceeds in the current period, the enterprise may, subject to approval of the local tax authorities, carry forward the proceeds in equal installments to the taxable incomes over a maximum period of five years. After the lifting of the above-mentioned examination and approval procedures, in the case of the above-mentioned proceeds, if the amount of the net proceeds is relatively large, the enterprise may, at its own discretion, decide to carry forward the proceeds in equal installments to the taxable incomes over a maximum period of five years, and the amount of the proceeds and the carry-forward thereof shall be stated by the enterprise in its relevant annual income tax returns. No change may be made to the period for carrying forward the proceeds once it is decided by the enterprise. 7. DEDUCTION OF EXPENSES FOR TECHNOLOGICAL DEVELOPMENT FROM THE TAXABLE INCOMES OF ENTERPRISES WITH FOREIGN According to the Circular of the State Administration of Taxation Concerning the Deduction of Expenses for Technological Development from Taxable Incomes of Enterprises with Foreign Investment (No. [1999] 173 of the State Administration of Taxation), where an enterprise with foreign investment incurs in a year expenses for technological development which increase at least by 10% compared to those of the last year, a further deduction of 50% of such expenses may, after being examined and approved by the tax authorities, be made from the taxable income of the enterprise for the current year. After the lifting of the above-mentioned examination and approval procedures, enterprises entitled to the above-mentioned preferential policy shall concurrently submit the following materials when submitting their annual income tax returns: (1) the technological development plan and budget program prepared for the year by the enterprise with foreign investment; (2) information about the technological research personnel of the enterprise with foreign investment; (3) expenses incurred for the technological development to the enterprise with foreign investment; (4) expenses incurred in the last year for the technological development to the enterprise with foreign investment; and (5) other materials that may be required by the tax authorities. The competent tax authorities shall examine the above-mentioned materials strictly according to the document No. [1999] 173 of the State Administration of Taxation and the supplementary provisions thereof. No deduction of expenses for technological development may be made from the taxable income unless conforming to the relevant provisions and with the above-mentioned materials submitted. 8. CARRY-FORWARD IN EQUAL INSTALLMENTS OF A LARGE AMOUNT OF NON-MONETARY ASSETS RECEIVED BY AN ENTERPRISE AS DONATION TO THE TAXABLE INCOMES OVER A MAXIMUM PERIOD OF FIVE YEARS According to the Circular of the State Administration of Taxation Concerning the Tax Treatment of Donations Received by Enterprises with Foreign Investment and Foreign Enterprises, non-monetary assets received by an enterprise as donation shall be entered into the relevant account at a price reasonably appraised and be included in the taxable income of the enterprise for the year. Where the donation is in relatively large amount and it is difficult for the enterprise to include it all in the taxable income for the current year, the enterprise may, subject to the approval of the local tax authorities, carry forward the donation in equal installments to the taxable incomes of the enterprise over five years. After the lifting of the above-mentioned approval procedures, an enterprise may, at its discretion, decide to carry forward a donation of relatively large amount in equal installments to its the taxable incomes over a maximum period of five years, and the enterprise shall state such donation and the carry-forward thereof in its income tax returns for the relevant periods. No change may be made to the period for such carry-forward once it is decided by the enterprise. 9. EXEMPTION OF INDIVIDUAL INCOME TAX ON EXTERNAL SOCIAL INSURANCE EXPENSES FOR EMPLOYEES OF ENTERPRISES WITH FOREIGN INVESTMENT AND FOREIGN ENTERPRISES According to the Circular of the State Administration of Taxation Concerning the Income Tax Treatment of the External Insurance Expenses for Employees of Enterprises with Foreign Investment and Foreign Enterprises, the external insurance expenses paid by an enterprise for its employees working in China without being deducted from the taxable income of the enterprise may, subject to the approval of the local tax authorities, be excluded from the employees' individual taxable incomes, if such insurance expenses are of social security nature and must be borne by the employer according to the law of the country concerned. After the lifting of the above-mentioned approval procedures, in the case of the above-mentioned circumstances, the enterprise shall, when submitting the individual income tax withholding table, concurrently submit to the local tax authorities a copy of certificate of identity of the employee and the legal document of the country concerned requiring the employer to pay the expenses of social security nature. The local tax authorities shall examine the above-mentioned materials submitted by the enterprise and, if the relevant requirements are satisfied, allow the exclusion of the expenses from the employee's individual taxable income. 10. EFFECTIVE DATE The present Circular shall come into force as of January 1, 2003. |
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