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In order to implement the "Decision of the State Council on Canceling and Adjusting the Third Group of Administrative Approval Items" (No. 16 [2004] of the State Council), we hereby give our notice as follows regarding the follow-up management issues after canceling and delegating some taxation administrative examination and approval items relating to foreign-funded enterprises, foreign enterprises (hereinafter referred to enterprises) and foreign individuals, which is prescribed in Document No. 16 [2004] of the State Council: I. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE EXAMINATION AND APPROVAL OF THE APPLICATIONS FILED BY NON-LEGAL PERSON CHINESE-FOREIGN COOPERATIVE JOINT VENTURE ENTERPRISES FOR CONSOLIDATED CALCULATION AND PAYMENT OF ENTERPRISE INCOME TAX According to Article 7 of the "Detailed Rules for the Implementation of the Income Tax Law of the People's Republic of China for Foreign-funded Enterprises and Foreign Enterprises" (hereinafter referred to the Detailed Rules for the Implementation of the Tax Law), a non-legal person Chinese-foreign cooperative joint venture enterprise may apply to the local taxation organ for approval of consolidated calculation of the payable income tax according to the Tax Law. After the above mentioned application and approval have been cancelled, if the articles of association of any enterprise prescribe joint venture methods such as joint operation, consolidated accounting, sharing profits, losses and investment risks, etc., and the enterprise does adopt these methods, the enterprise may decide whether to file consolidated returns for payment of enterprise income tax on its own. If any enterprise decides to pay its enterprise income tax in a consolidated way, it shall, when filing the annual income tax return to the competent taxation organ for the first time, attach documents including its articles of association, the relevant resolution made by both the Chinese and foreign parties on consolidated return and payment of enterprise income tax. The competent taxation organ shall, after accepting the tax return, review whether the enterprise meets the conditions for consolidated return and payment. If the enterprise meets the prescribed conditions, the competent taxation organ shall ratify it, and grant taxation treatments according to the "Notice of the State Administration of Taxation on Implementing Some Issues concerning Income Tax of Foreign-funded Enterprises and Foreign Enterprises" (No. 165 [1991] of the State Administration of Taxation). If, however, upon review by the competent taxation organ, the enterprise fails to meet the conditions for consolidated return and payment of tax, the competent taxation organ shall notify each party to the cooperation to separately file new tax returns for payment. II. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL ON CHANGE OF DEPRECIATION METHODS BY ENTERPRISES According to Article 34 of the Detailed Rules for the Implementation of the Tax Law, the fixed assets of an enterprise shall be depreciated in the straight-line method. If the enterprise needs to adopt any other depreciation method, it shall apply to the local taxation organ for verification, and thereafter the application shall be reported to the State Administration of Taxation level by level for approval. After the above mentioned approval is cancelled, the enterprise shall, in principle, keep the stability of the existing depreciation method for the fixed assets which have been put into use. With respect to the newly purchased fixed assets, and the fixed assets which have been put into use and depreciated in a method prescribed in the Tax Law, if they really need to be calculated for depreciation in a method other than those prescribed in the Tax Law, the enterprise shall determine the method on its own, and shall, when filing its annual income tax return in the first tax year after the fixed assets have been put into use or the depreciation method has been changed, attach the statements on the adopted or changed method for depreciation of the fixed assets, the specific duration and the reasons thereof, etc. The competent taxation organ shall demonstrate the above statements submitted by the enterprise, and carry out on-site surveys when necessary. The competent taxation organ shall have the power to make adjustments, if the reasons are insufficient or the facts are untrue, and maintain the depreciation method prescribed in the Tax Law. III. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF BAD DEBT LOSSES OF ENTERPRISES According to Article 25 of the Detailed Rules for the Implementation of the Tax Law, if an enterprise actually suffers from bad debt losses from its accounts receivable, that must be verified and ratified by the local taxation organ. After the above mentioned verification and ratification have been cancelled, the enterprise's accounts receivable may, if the conditions prescribed in Article 26 of the Detailed Rules for the Implementation of the Tax Law are met, be deemed as its bad debt losses, and be deducted at the time of calculating its taxable income. The enterprise shall, when submitting the quarterly or annual enterprise income tax return, make additional statement on the reasons for the presently deducted bad debt losses and provide effective testimonials. The competent taxation organ shall, when verifying and evaluating the tax return, carefully check the above documents submitted by the enterprise according to the relevant prescribed conditions for dealing with tax issues concerning bad debt losses, and shall carry out on-site surveys on the tax returns with insufficient reasons and unclear facts to know about and verify the truth. When necessary, it may require the enterprise to provide new evidence, make statements or have them notarized. The competent taxation organ shall make tax payment adjustments on any enterprise whose deducted bad debt losses fail to meet the prescribed conditions, and who is unable to provide testimonials. IV. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF THE HEAD OFFICE'S MANAGEMENT FEE LISTED BY A FOREIGN ENTERPRISE AS EXPENDITURE According to Article 25 of the Detailed Rules for the Implementation of the Tax Law, if a foreign enterprise sets up an office or premises in China, it shall provide the relevant testimonials on the reasonable management fee related to the office or premises, which is paid to the head office. Such management fee may be permitted to be listed as the expenditure upon verification and consent of the local taxation organ. After the above mentioned verification and approval have been cancelled, if a foreign enterprise that has set up an office or premises in China lists its head office's management fee as its expenditure, it must produce the testimonials provided by the head office on the combined scope, total amount, basis and method of amortization, etc. of the management fee, and attach the report of a registered accountant on verification of the above testimonials. The competent taxation organ shall, when verifying and evaluating the tax return, verify the enterprise's testimonials according to the relevant provisions in the Tax Law. In case the testimonials are incomplete, or the enterprise is unable to explain the rationality for listing the management fee as expenditure, the competent taxation organ shall notify the enterprise to supplement the statements within a time limit. If the enterprise does not conform to the prescribed requirements, or is unable to provide effective testimonials, the competent taxation organ shall have the power to make taxation adjustments accordingly. A foreign bank's branch shall list the management fee of the head office as the expenditure strictly according to the "Notice of the State Administration of Taxation concerning the Relevant Issues on Amortization by Foreign Banks' Branches of the Management Fee of the Head Office" (Letter No. 11 [2002] of the State Administration of Taxation). V. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF CARRYING FORWARD OF EXPLORATION EXPENSES BY FOREIGN PETROLEUM COMPANIES BETWEEN CONTRACTUAL AREAS FOR EXPLOITATION IN OIL (GAS) FIELDS According to Article 48 of the Detailed Rules for the Implementation of the Tax Law, if a foreign petroleum company terminates its operation in its own contractual area due to finding no commercial oil (gas) field, and is no longer a party to the contract on exploitation of oil (gas) resources, nor does it reserve its management office inside China, the reasonable exploration expenses it has invested in the terminated area may, after being verified, confirmed and testified by the taxation organ, be permitted to be amortized among the production income of its new contractual area on condition that the company concludes a new contract on cooperative exploitation of oil (gas) resources within ten years as of termination of the original contract. After the verification and confirmation have been cancelled, if a foreign petroleum company's above mentioned exploration expenses need to be amortized in the new contract on future cooperative exploitation of oil (gas) resources, it must reserve the original accounts and documents on relevant exploration expenses. If the foreign petroleum company is indeed unable to reserve the relevant documents due to sufficient reasons, it may, within one year as of terminating the pre-stage contract, ask the competent taxation organ to pre-audit and confirm the exploration expenses to be amortized in the future new contract area mentioned above. VI. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF REGULAR DEDUCTION OR EXEMPTION OF TAXES OF CHINESE-FOREIGN EQUITY JOINT VENTURE HI-TECH ENTERPRISES According to Paragraph (6) of Article 75 of the Detailed Rules for the Implementation of the Tax Law, if the duration of operation of a Chinese-foreign equity joint venture enterprise established in a national hi-tech industry development zone and determined as a hi-tech enterprise is no less than ten years, the said enterprise may, if approved by the local taxation organ after filing the application, be exempted from enterprise income tax in the first and second years following the year when it begins to make profits. After the above mentioned approval has been cancelled, if the operational duration of any Chinese-foreign equity joint venture enterprise established in a national hi-tech industry development zone and ascertained by the relevant authority as a hi-tech enterprise is no less than ten years, it may be exempted from enterprise income tax in the first and second years. The enterprise shall, when filing the annual income tax return during the year of its exemption from tax, meanwhile attach its certificate and business license, etc. according to which it is ascertained as a hi-tech enterprise. The competent taxation organ shall, when verifying and evaluating the tax return, strictly verify the duration of the enterprise's certificate, the duration of operation indicated in its business license, and shall carry out on-site surveys, as well as verify whether the actual situation conforms to the ascertained hi-tech conditions. In case any certificate is ascertained to be in error, the competent taxation organ shall coordinate and check with the relevant ascertainment department, and make taxation adjustments accordingly. VII. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF INTEREST OF LOANS BORROWED BY ENTERPRISES According to Article 21 of the Detailed Rules for the Implementation of the Tax Law, if there is any reasonable interest of loans occurred in relation to an enterprise's production and management, the enterprise shall provide the testimonials on borrowing loans and paying interest. Upon verification and consent by the local taxation organ, the interest is permitted to be listed as the expenditure. After the above mentioned approval has been cancelled, the enterprise shall, with respect to each loan borrowed, attach the following documents when filing its annual income tax return: 1. A statement on comparison of the loan interest rate with the interest rate of general commercial loans at the time of conclusion of the loan contract; and 2. The capital verification report indicating that the registered capital has been fully contributed. If the enterprise borrows the loans from a non-associated bank financial institution, it may be exempted from providing the document required in the above Item 1. When the local taxation organ is verifying and evaluating the tax returns filed by an enterprise, it shall verify and analyze the documents on interest submitted by the enterprise. If any document submitted by the enterprise fails to meet the requirements or is unable to effectively explain the facts, the local taxation organ shall require the enterprise to re-submit the document within a limited time. In case any enterprise fails to provide the document on comparison and explanation of the interest rate, its interest expenditure shall not be deducted when its taxable income is calculated. In case any interest expenditure occurred to an enterprise is higher than the interest calculated from the current general commercial interest rate, the excessive amount shall not be deducted at the time of calculating the enterprise's taxable income. With respect to the loan interest of an enterprise whose registered capital has not been fully contributed, the enterprise shall strictly abide by the "Official Reply of the State Administration of Taxation on the Issue of Listing the Interest of Foreign-funded Enterprises as Expenditures" (Letter No. 326 [1991] of the State Administration of Taxation). VIII. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF DEPRECIATION OF THE USED FIXED ASSETS OF ENTERPRISES ON THE BASIS OF THE REMAINING UTILIZABLE PERIOD According to Article 42 of the Detailed Rules for the Implementation of the Tax Law, if an enterprise obtains any used fixed assets, whose remaining utilizable period is shorter than the depreciation period prescribed in the Detailed Rules for the Implementation of the Tax Law, it may, upon provision of documents of proof, and after verification and consent from the local taxation organ, calculate the depreciation on the basis of the remaining utilizable period. After the above mentioned approval has been cancelled, if an enterprise obtains any used fixed assets, and the remaining utilizable period is shorter than that prescribed in the Detailed Rules for the Implementation of the Tax Law, it may calculate the depreciation on the basis of the actual utilizable period. The enterprise shall, when filing annual income tax return, submit to the competent taxation organ the relevant statements with respect to the depreciated price of the fixed assets, which is calculated according to the above mentioned provisions, as well as the used period and utilizable period, etc. IX. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF THE CHANGE OF INVENTORY PRICING METHOD BY ENTERPRISES According to Article 51 of the Detailed Rules for the Implementation of the Tax Law, once the inventory pricing method of an enterprise is selected, it shall not be changed at will. If any enterprise needs to change its inventory pricing method, it shall report to the local taxation organ for approval prior to the beginning of the next tax year. After the above mentioned approval has been cancelled, if the enterprise needs to change its inventory pricing method, it shall, prior to the beginning of the next tax year, make a written statement to the competent taxation organ on the reasons for changing the inventory pricing method. The competent taxation organ shall analyze and verify the rationality of the reasons proposed by the enterprise for changing the inventory pricing method. In the event that the reasons of any enterprise for changing the inventory pricing method are ascertained to be insufficient, or the enterprise is suspected of delaying the payment of tax, the competent taxation organ may notify the enterprise to maintain the original inventory pricing method. X. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF ENTERPRISES' PRE-INCOME TAX DEDUCTION DUE TO PROPERTY LOSSES According to the "Notice of the State Administration of Taxation on the Administration of Approval of Pre-income Tax Deduction concerning Property Losses of Foreign-funded Enterprises" (No. 46 [2000] of the State Administration of Taxation), the property losses of an enterprise may, upon approval of the taxation organ after the enterprise has filed the application, be deducted at the time of calculating the payable enterprise income tax for the current period. After the above mentioned approval has been cancelled, the enterprise suffering from property losses shall, when filing annual income tax return to the competent taxation organ, make a written statement on the type, extent, amount and price of its property losses, the reasons thereof, the period for deductions, etc., and meanwhile attach the testimonials of the relevant internal department of the enterprise for authenticating the property losses. In case any property loss caused from outside the enterprise is involved, the enterprise shall also attach testimonials of the external relevant department or office for authenticating such property loss. A competent taxation organ shall, when inspecting the payment of enterprise income tax, emphatically inspect the property losses of the enterprise. With respect to the property losses listed by the enterprise as expenditures, if the enterprise provides no documents stating the circumstance, nor any evidence can be collected, the competent taxation organ may make tax payment adjustment. Document No. 46 [2000] promulgated by the State Administration of Taxation on March 13, 2000 shall be ceased from implementation simultaneously. XI. The follow-up administration after canceling the approval of offsetting income of foreign enterprises' representative offices with their respective expenditures for calculating the taxes payable According to the "Notice of the State Administration of Taxation concerning the Relevant Issues on Strengthening the Taxation Administration of Foreign Enterprises' Permanent Representative Offices" (No. 165 [1996] of the State Administration of Taxation), a foreign enterprises' permanent representative office that engages in taxable business may offset its income with expenditures for calculating the taxes payable, after its application reported level by level has been approved by the State Administration of Taxation. This Administration promulgated the "Notice of the State Administration of Taxation concerning the Relevant Issues on Taxation Administration of Foreign Enterprises' Permanent Representative Offices" (No. 28 [2003] of the State Administration of Taxation) on March 12, 2003, in which this Administration made adjustments to the scope and specific administrative requirements on offsetting the income of foreign enterprises' permanent representative offices with their respective expenditures for calculating the taxes payable, and cancelled the requirements for approval in this regard. After the State Council has cancelled this approval item, Document No. 28 [2003] promulgated by the State Administration of Taxation shall continue to apply in all regions. XII. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF EXEMPTING FOREIGN ENTERPRISES AND FOREIGN INDIVIDUALS FROM BUSINESS TAX ON THEIR INCOME OBTAINED INSIDE CHINA DUE TO TRANSFER OF TECHNOLOGIES According to Article 2 of the "Notice the Ministry of Finance and the State Administration of Taxation concerning Relevant Taxation Issues on Implementing the Decision of CCCPC and the State Council on Strengthening Technical Innovation, Developing Hi-techs, and Realizing Industrialization" (No. 273 [1999] of the Ministry of Finance), foreign enterprises and foreign individuals may be exempted from business tax on their income obtained inside China due to transfer of technologies once their applications reported level by level have been verified and approved by the State Administration of Taxation. After the above mentioned approval has been cancelled, a domestic transferee shall keep the following documents on payment of the said technology transfer fee for inspection by the taxation organ: 1. Technology transfer permit approved by the competent authority of the state; and 2. Technology transfer contract. Where a foreign enterprise or foreign individual simultaneously transfers the trademark use right when transferring a technology into China, it/he shall stipulate the technology transfer fee and the trademark royalty in the contract. If the trademark royalty is not stipulated, or is stipulated but obviously lower than it ought to be, the trademark royalty shall be verified to be no lower than 50% of the total contractual price for calculation of the payable business tax. With respect to a technology transfer contract not approved by the competent authority of the state, the expenses paid may not be deemed as technology transfer fee for tax exemption, but shall be deemed as common labor service fee and be governed by the relevant provisions on dealing with tax issues. XIII. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF INDIVIDUAL INCOME TAX RETURN FILED BY EACH FOREIGN TAXPAYER AT A FIXED LOCALITY According to Article 10 of the "Notice of the State Administration of Taxation on Printing and Promulgating the Provisions on Some Issues concerning Levying Individual Income Taxes" (No. 089 [1994] of the State Administration of Taxation), a foreign taxpayer who stays in China temporarily and works or provides labor services in several localities may, after the application filed by him is approved, file tax returns at one fixed locality. After the above mentioned approval has been cancelled, if a foreign taxpayer stays in China temporarily and works or provides labor services in several localities, his actual working locality at the date prescribed in the Tax Law for consolidated filing of tax return shall be deemed as the locality for filing tax return, that is to say, if he stays in a certain locality until the date for filing tax return, he shall file the tax return at this locality. XIV. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF EXEMPTION OF INDIVIDUAL INCOME TAX ON SUBSIDIES OF FOREIGN INDIVIDUALS IN RESPECT OF LODGING, BOARDING, ETC. According to Article 2 of the "Notice of the Ministry of Finance and the State Administration of Taxation on Some Individual Income Tax Policies" (No. 020 [1994] of the Ministry of Finance), and the "Official Reply of the State Administration of Taxation on Exemption of Individual Income Tax on the Relevant Subsidies Received by Foreign Individuals" (No. 54 [1997] of the State Administration of Taxation), if a foreign individual receives subsidies for lodging, boarding, laundering, moving, business travel, visiting families, language training, children's education, etc. by non-cash means or by means of having the actual amount reimbursed, the taxpayer shall provide the relevant documents for the competent taxation organ to ratify, and may, upon ratification, be exempted from individual income tax. After the above mentioned approval has been cancelled, if a foreign individual receives the above mentioned subsidies and income, he shall, when filing individual income tax return or having the individual income tax withheld, provide the relevant effective documents and testimonials according to Document No. 54 [1997] promulgated by the State Administration of Taxation. The competent taxation organ shall, pursuant to the requirements of Document No. 54 [1997] of the State Administration of Taxation, verify the relevant subsidies and income item by item which are declared by the taxpayer or withholding agent. If the taxpayer or withholding agent cannot prove the rationality of the tax-exempted subsidies by the relevant documents and testimonials, the competent taxation organ shall require the taxpayer or withholding agent to, within a limited time, re-provide the testimonials. In case of failure to provide any effective document or testimonial on the subsidies and income, the competent taxation organ shall have the power to make tax payment adjustments. XV. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF TAX EXEMPTION ON FOREIGN INDIVIDUALS' WAGE AND SALARY INCOME WHICH OCCURRED PRIOR TO BUT OBTAINED DURING THEIR STAY IN CHINA According to Article 1 of the "Official Reply of the State Administration of Taxation concerning the Issue of Determining the Tax Payment Obligation of the Foreign Employee of xxx Dalian Office Who Obtained Bonuses for Several Months" (Letter No.546 [1997] of the State Administration of Taxation), if any individual who has no domicile inside China obtains bonuses for several months in a lump sum after coming to China, and is able to provide the provisions of relevant encouragement systems of the employing entity to prove that the said previously obtained bonuses for several months include the bonuses for the months prior to his coming to China, he may be exempted from individual income tax regarding such bonuses upon ratification by the local competent taxation organ. After the above mentioned approval has been cancelled, if an individual who has no domicile inside China obtains the said bonuses for the abovementioned several months, he shall, when filing the tax return, make a statement on the bonuses exempted from tax, and attach the relevant documents of the encouragement systems of the employing entity. If it is proved that the bonuses include those for the months prior to his coming to China, the included part of bonuses may be deducted and exempted from tax. Otherwise, the taxation organ shall have the power to make tax payment adjustments. XVI. THE FOLLOW-UP ADMINISTRATION AFTER CANCELING THE APPROVAL OF TAX PAYMENT ON AN INSTALLMENT BASIS BY INDIVIDUALS WHO SUBSCRIBE STOCKS OR OTHER SECURITIES According to Article 2 of the "Notice of the State Administration of Taxation concerning the Issue of Levying Individual Income Tax on Individuals Who Subscribe Stocks or Other Securities and Obtain Discount or Subsidy Income from Their Respective Employers" (No. 009 [1998] of the State Administration of Taxation), under the circumstance that an individual subscribes stocks or other securities and obtains discount or subsidy income from his employer, if it is difficult to calculate the payable individual income tax by including the discount or subsidy into the wage and salary income of the present month due to excessive amount of lump-sum income, that may be reported at the time of calculating the payable tax to the competent taxation organ for approval, upon approval and within no more than 6 months, his payable income tax shall be averagely calculated by month. After the above mentioned approval has been cancelled, an individual who obtains a large amount of the above said income may choose on his own to, within no more than 6 months, averagely calculate his payable individual income tax by month by including the discount or subsidy into the wage and salary income of himself, and meanwhile make a statement at the time of filing tax return. Once the individual has selected the time limit for calculation of the payable tax, he may not change it. XVII. THE FOLLOW-UP ADMINISTRATION AFTER DELEGATING THE APPROVAL OF ENTERPRISE INCOME TAX CREDITS FOR ENTERPRISES TO PURCHASE DOMESTICALLY PRODUCED EQUIPMENT FOR INVESTMENT According to Article 10 of the "Notice of the State Administration of Taxation on Printing and Promulgating the Measures for the Administration of Enterprise Income Tax Credits for Foreign-funded Enterprises and Foreign Enterprises to Purchase Domestically Produced Equipment for Investment" (No. 90 [2000] of the State Administration of Taxation), if an enterprise purchases domestically produced equipment and applies for enterprise income tax credit due to investment, it shall, within two months after purchasing the domestically produced equipment, apply to the competent taxation organ, which shall then report the application level by level to the taxation organ at the provincial level for approval. After the above mentioned approval item has been delegated to the taxation organ of the prefecture (city), an enterprise that purchases domestically produced equipment shall still, at the time of applying for enterprise income tax credit due to investment, submit the relevant documents to the competent taxation organ on time required by Document No. 90 [2000] promulgated by the State Administration of Taxation. The competent taxation organ shall, after receipt of the application, report to the taxation organ of the prefecture (city) for approval. The taxation organ of the prefecture (city) shall, strictly according to the "Notice of the Ministry of Finance and the State Administration of Taxation on the Relevant Issues concerning Enterprise Income Tax Credits by Foreign-funded Enterprises and Foreign Enterprises That Purchase Domestically Produced Equipment for Investment" (No. 49 [2000] of the Ministry of Finance) and Order No. 90 [2000] promulgated by the State Administration of Taxation, carefully verify and approve the applications, and submit the approval opinions to the taxation organ at the provincial level for archival purposes. XVIII. OTHERS This Notice shall enter into force on July 1, 2004. The unapproved matters occurred prior to the implementation of this Notice shall still be governed by the previous provisions. |
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