Laws of the People's Republic of China

State Administration of Taxation

Circular on the Follow-up Control of Certain Income Tax Treatment of Enterprises with Foreign Investment and Foreign Enterprises After the Lifting of the Examination and Approval Procedure for Such Treatment

[2003] No.127 of the State Administration of Taxation

October 24, 2003

The administrations of state taxation and the administrations of local taxation of the provinces, autonomous regions, municipalities directly under the central government, and cities directly under state planning, and the entities under those administrations:

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 as "enterprise") after the administrative examination and approval procedures for such treatment is lifted by the State Council in accordance with 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 with a view of implementing 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:

1.

The follow-up control of the standard for enterprises' itemizing the wages of and welfare funds for their workers and staff after the lifting of the examination and approval procedures for such standard

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 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 as "Rules for the Implementation of the Income Tax Law"). After the lifting of such examination and approval procedures, when the enterprise submits its annual income tax returns it shall, 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 in the standard of wages and welfare fund afterwards; If there is 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 documents submitted by enterprises regarding the wages of and welfare funds for the workers and staff of the enterprises. The standard for itemizing the welfare funds shall be in accordance with the standard 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.

Follow-up control after the lifting of the approval procedures bad debt reserves

An enterprise which is 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 as 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 in accordance with Article 25 of the Rules for the Implementation of the Income Tax Law. The enterprises engaged in the business mentioned above may provide bad debt reserves in the light with 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 that are engaged in any business other than credit and leasing are generally not permitted 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 according to 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.

Follow-up control of accelerated depreciations of fixed assets of Chinese-foreign contractual joint ventures after the lifting of the examination and approval procedure for such depreciations

In the light with 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 party 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 on the basis of 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 party after the duration of operation of the Chinese-foreign contractual joint venture. The enterprise shall submit such information to the competent tax authorities for archival purposes as purchasing price, time of purchase, purpose of use and provisions for depreciation of the above-mentioned fixed assets.

4.

Follow-up control of the retaining of lower or no scrap value of fixed assets after the lifting of the examination and approval procedures for such treatment

In the light with 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 evaluated and deducted from the cost price of the fixed assets. The scrap value should not be lower 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. The enterprise may retain no scrap value if it is predictable that any fixed asset of an enterprise cannot be sold off or have no value of selling-off after its service life.

5.

Follow-up control of reduction of income taxes payable by export-oriented enterprises after the lifting of the examination and approval procedures for such reduction

In the light with Article 75 (7) of the Rules for the Implementation of the Income Tax Law, after the period of reduction or remission of its income tax under the tax law has expired, if the export-oriented enterprise has exported its products up to 70% of its total value of products for the year, this enterprise with foreign investment may further enjoy a reduction of income tax by 50%. 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 which certifies that the enterprise is an export-oriented enterprise for the year; and

(2)

A certification issued by the relevant authorities which prove 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 examine the total value of products and the export value of the enterprise, cooperate with other departments involved, establish a system for information communication strengthen coordination and agree on a uniform standard.

6.

Follow-up control of proceeds from the investment of non-monetary assets of enterprises with foreign investment after the lifting of the examination and approval procedure for such incomes

In the light with 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, in the case that 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 as evaluated 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 examination and approval procedures mentioned above, if the amount of the net proceeds as mentioned above 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. Once the period for carrying forward the proceeds is decided by the enterprise, no change may be made.

7.

Follow-up control of the deduction of expenses for technological development from the taxable incomes of enterprises with foreign investment after the lifting of the examination and approval procedures for such deduction

In the light with 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), in the case that the annual expenses for technological development of an enterprise with foreign investment increase at least by 10% as 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 examination and approval procedures mentioned above, 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 plans and budget program prepared for the year by the enterprise with foreign investment;

(2)

Information about the technological research staff of the enterprise with foreign investment;

(3)

The technological development expenses of the enterprise with foreign investment;

(4)

The technological development expenses incurred in the last year to the enterprise with foreign investment; and

(5)

Other documents which may be required by the taxation authorities.

The competent tax authorities shall strictly examine the documents mentioned above in the light with 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 complying with the relevant provisions and with the above-mentioned documents submitted.

8.

Follow-up control of the 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 after the lifting of the approval procedures for such carry-forward

In the light with 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 evaluated and be included in the taxable income of the enterprise for the year. In the case that the donation is in a 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 approval procedures mentioned above, 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 corresponding periods. Once it is decided by the enterprise, no change may be made to the period for such carry-forward.

9.

Follow-up control of the exemption of individual income tax on external social insurance expenses for employees of enterprises with foreign investment and foreign enterprises after the lifting of the approval procedures for such exemption

In the light with 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, after getting approval from 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 in accordance with to the relevant regulations of the country . After the lifting of the approval procedures mentioned above, 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 documents 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.

The present Circular shall go into effect as of January 1, 2003.