Participants

To see the list of participants please  click here

Agenda

1. Presentation on Enterprise Income Tax Law by Mr. James Huang (Q Plus Law Firm)
2. Questions and Answers about the Presentation
3. Suggestions for the Position Paper

Discussion points

1. The Presentation

The presentation focused on the major differences between the new Enterprise Income Tax law and the previous Enterprise Income Tax Law.

A. Overview: Four Points of Unification

(a) The new Enterprise Income Tax law unifies different tax laws for different types of enterprises. Previously companies were divided into domestic companies, collective companies, sino-foreign joint venture companies etc. Under the new law, there are simply: ‘resident enterprises’ and ‘non-resident enterprises’. Note that the new taxation law will not apply to sole traders or to partnerships.

(b) The New Enterprise Income Tax unifies different tax rates for different types of enterprises applied in the previous tax system and reduces the tax rate from 33% to 25%.

The new law sets out three types of tax rates:

Ø      15% for enterprises carrying out high technology development which is supported by the State. This will now also apply to those companies located outside of special economic zones.

Ø       20% for both small scale enterprises with low profits; and non-resident enterprises that have income sourced from China, regardless of whether or not they have a representative office established there.

Ø       25% for all resident enterprises operating in China.

(c) The new Enterprise Income Tax unifies criteria for pretax deduction. For example, in the previous system, only foreign-invested companies enjoyed unlimited pre-tax deductions on salaries. Now, all companies will enjoy such privileges.

Ø       Charity donations are now tax-deductible up to 12%, whereas in the past, this was only 3%

Ø       Additional tax deduction is allowed for developing new technology, new products, and new technological crafts. According to a Notice published by the Finance Department and State General Tax Bureau on 8th September 2006, enterprises can deduct up to 100% on costs related to developing new technology and another 50% on costs actually incurred.

Ø      Salaries to disabled people and to other people who the State recommends companies to employ will also be tax-deductible.

(d) The new Enterprise Income Tax unifies preferential tax incentives and establishes a new preferential taxation system which gives priority to “industrial preferential tax incentives” and takes “regional preferential tax incentives as auxiliary means”.

These benefits will particularly affect: hi-tech enterprises; small-scaled and low profit enterprises; extra pretax deduction for costs of hi-tech development; projects related to environmental protection and/or reducing consumption of energy and water; enterprises engaged in agriculture; forestry, fishery, and animal husbandry and prior infrastructure projects supported by the State; enterprises providing jobs to special people, including the handicapped and layoffs; and enterprises established in minority regions.

 

B. Exemptions and Reductions

Enterprises will be exempted from tax on the following:

(1) interests gained from purchasing state bonds;

(2) dividends and capital bonuses gained from investing in resident enterprises

(3) dividends and capital bonuses gained by non-resident enterprises that have their representative offices/places in China through their investment in resident enterprises, on the condition that such dividends and capital bonuses are actually related to the representative offices/places;

(4) incomes gained by non-profit organizations

 

Tax on the following can be reduced or exempted:                  

(1) income gained by undertaking projects of agriculture, forestry, animal husbandry and fishery;

(2) income gained by investing in public infrastructure projects particularly supported by the state;

(3) income gained by undertaking projects related to environmental protection, energy and water saving, which accord with criteria;

(4) income gained by transferring technologies that accord with criteria.

 

 C. Transition from previous tax system to the new tax system

Article 57 of the new tax law provides that enterprises which were established upon approval prior to the promulgation of this new tax law and which were provided with preferential tax incentives in accordance with previous laws and administrative regulations shall be provided with a five-year period of transition, during which their tax rates shall be gradually changed to the tax rates set forth in the new tax law.

 

D. Taxable Incomes and Pretax Deduction

According to Articles 5 and 6 of the new enterprise income law, the term “taxable income” refers to the income of an enterprise’s total annual revenues after deduction of non-taxable revenues, costs allowed to be deducted and the amount of losses of the previous years that are allowed to be offset. Such taxable incomes include:

(a) sales revenues;

(b) revenues generated by providing labor-related services;

(c) revenues generated by transferring assets;

(d) revenues generated by investment, such as capital bonus and dividends;

(e) interests;

(f) rentals;

(g) royalties;

(h) revenues from acceptance of donations.

Before paying tax, the enterprise is allowed to deduct related costs and expenses. Based on Article 8 of the law, such pretax deduction includes reasonable expenses related to the gain of incomes, which includes costs; fees; payment of taxes, other than enterprise income tax; losses; depreciation of fixed assets, and other expenses that are allowed to be deducted by law. At the same time, Article 10 of the new tax law clearly provides that pretax deduction excludes the payment of enterprise income tax, dividends paid to investors, penalties and losses caused by assets being confiscated, the amount of donation exceeding 12% of an enterprise’s annual income, payment of patronage, unapproved reserves, and other expenses that have nothing to do with the gain of incomes.

 

2. Question and Answers following the presentation on the new Enterprise Income Tax Law

A. High-Tech Companies

According to the new law, ‘high-tech’ companies will be taxed at a rate of 15%. The law does not change the definition of what it is to be a ‘high-tech’ company; it is only the Municipal Science Commission which has this power. The Municipal Science Commission in Nanjing is responsible for handling applications for high-tech company status. Companies are required to fill out a form containing detailed information about the total investment of the company and the type of technology which is being developed.

During the five-year transitional period immediately following the law’s implementation, preferential tax benefits for ‘high-tech’ companies located in special high-tech development zone will continue to be applied. Afterwards, these companies will be required to apply to the Municipal Science Commission for ‘high-tech’ status just like those companies located outside of such zones.

 

B. Transitional period

The transitional period, lasting for a total of five years, enables companies which currently enjoy preferential tax treatment to be gradually eased towards paying taxes according to the new regulations. The exact details of this will be clarified in the implementation rules to be published before the end of 2007 in preparation for the law’s implementation on 1st January 2008.

 

C. Royalties

Companies with or without a Rep Office in China, having income sourced from China will pay 20% on income derived from royalties. It is likely that there will be preferential rules eventually, but these are not yet clear.

 

D. Local tax percentage

According to previous legislation, foreign invested enterprises and foreign enterprises were taxed at 30% by the State Administration of Taxation and then at an additional 3% by the local government. In the new law, there may still be an extra percentage payable to the local government on top of the new 25% base rate.

 

E. Technology transfer

For technology transfer abroad, 10% will be taxable to the local tax office and the rest of the tax will be liable to tax in the home country. The 90% is tax deductible depending on different tax treaties between the home country and the PRC.

 

F. Tax consolidation

There is no discussion of tax consolidation in the new law.

 

G. VAT on equipment exports

In the past, FIEs did not have to pay VAT on equipment exports, but it is not clear whether this is still the case. This may be clarified in the implementation rules to be published before the end of the year.

3. Position Paper Discussion

 

Members of the meeting were invited to make suggestions to the Position Paper on general Finance and Taxation issues. In addition, they were asked to make suggestions about the implementation rules for the Enterprise Income Tax Law. A special document will be presented by the EUCCC to government authorities on this subject before the publication of the Position Paper. Accordingly, certain points may be removed from the Position Paper if they are dealt with in the implementation rules.

 

A. Old enterprises with new investment – new category.

One member asked whether new investments made by companies established before March 16th 2007 and thus still eligible for a continued tax holiday for a period of five years, would themselves be eligible for preferential treatment.

 

B. Suggestions on the transition period.

It was suggested that the details of the continued preferential tax treatment during the five year transitional period for certain companies should be clarified in the implementation guidelines.

 

The next meeting of the Working Group will be held on 18th July 2007.

 

Related

Contact