Laws of the People's Republic of China

Circular of the State Administration of Taxation concerning Related Specific Issues in respect of the Implementation of the Policies on Adjusting the Wages Subject to Enterprise Income Tax

Guo Shui Fa [2006] No. 137

The state taxation bureaus and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan:

Upon approval of the State Council, the quota of taxable wages to be deducted before the levy of enterprise income tax shall be uniformly adjusted into RMB 1,600 per person per month as of July 1, 2006, and the policy of upward floating at 20 percent shall be halted from implementation simultaneously. For the purpose of guaranteeing the smooth implementation of this policy from the second half of this year, the relevant issues in the specific implementation are hereby announced as follows in accordance with the spirit of the Circular of the Ministry of Finance and the State Administration of Taxation on Adjusting the Policies on the Deduction of Wage Expenditures Prior to the Levy of Enterprise Income Taxes (Cai Shui [2006]) No. 126):

1.

Adjusting the rate for deduction of taxable wages before the levy of tax is a specific measure for the effective implementation of the spirit of the Central Economic Working Conference, and an important policy adjustment before the reform of combination of the two laws concerning enterprise income tax as well, which is advantageous for reducing the tax burden gap between Chinese-funded enterprises and foreign-funded enterprises, and achieving impartial competition gradually. This policy adjustment is of great significance, and affects the interests of the taxpayers. Consequently, the taxation organs at each level shall attach great importance to the effective implementation of the policies, publicize the new policies on taxable wages in a timely, comprehensive and deep manner, ensure that the taxpayers understand the spirit of the new policies as soon as possible and then file returns of prepayable enterprise income tax under the new policies.

2.

The taxation organs at each level, especially the grass-roots taxation organs, shall promptly devote into the policy adjustment, ensure the effective implementation of the new policies on taxable wages within this year, in order that the taxpayers may enjoy the preferences from the policy adjustment on taxable wages by the end of December.

(1)

All grass-roots taxation organs shall assess the amounts of reduced enterprise income taxes carefully as a result of policy adjustment on taxable wages, and shall adjust prepayable amounts declared by the taxpayers in each month (quarter) from July to December of this year based on the assessment.

(2)

The issues on the enterprises that prepay taxes at the actual amount for the term of tax payment shall be handled separately according to such two circumstances:

(a)

In case an enterprise prepays enterprise income tax on a monthly basis, it shall calculate and deduct the prepaid amount at the deduction proportion as assessed under the aforesaid requirements when filing returns of the prepayable taxes in each month from September to December of this year. And the enterprise shall file returns of prepayable taxes of September together with calculating the reduced amounts of July and August, which shall be used to offset the prepayable taxes of September, while the insufficient part shall be offset by the prepayable taxes of the subsequent months in this year until it is fully offset. The enterprise shall file returns of prepayable taxes of November in December together with calculating the reduced amount of December, which shall be used to offset the prepayable taxes of November, while the tax refund procedures for the insufficient part shall be completed by the end of December.

(b)

In case an enterprise prepays enterprise income tax on a quarterly basis, it shall calculate the reduced amount of the fourth quarter in addition to calculating the reduced prepayable amount of the third quarter at the assessed proportion of reduction when filing returns of the prepayable enterprise income tax of the third quarter. The reduced prepayable amount shall be used to offset the prepayable taxes of the third quarter, while the tax refund procedures for the insufficient part shall be completed by the end of December.

(3)

The issues on the enterprises that prepay taxes at a certain proportion of the amount of taxable income in the last year shall be handled separately according to such two circumstances:

(a)

In case an enterprise prepays enterprise income tax on a monthly basis at 1/12 of the amount of taxable income of the last year, it shall reduce the prepayable amount in each month at the same proportion of reduction as assessed in light of the aforesaid requirements, and the reduced amount of prepayable taxes of July and August shall be calculated and reduced simultaneously in September. If the reduced amount as calculated is negative, the part excessive to the amount of prepayable taxes of September shall be reduced continuously when the returns of prepayable taxes in the subsequent months are filed, until the said amounts are completely offset. The enterprise shall file returns of prepayable taxes of November in December together with calculating the reduced amount of December, and use the said amount to offset the prepayable taxes of November.

(b)

The matter concerning an enterprise that prepays enterprise income tax on a quarterly basis at 1/4 of the amount of taxable income of the last year shall be handled in the way subject to Subparagraph 2 of Paragraph (2) in this Article.

(4)

The issues on the enterprises, the taxes of which are levied based on verification, shall be handled separately according to such two circumstances:

(a)

As for the approved rate of taxable income, the rate shall be lowered accordingly at the proportion of reduction as assessed under the aforesaid requirements, the reduced amount after the rate of taxable income is lowered shall be calculated, and the issue shall be handled in the way subject to Paragraph (2) of this Article.

(b)

As for the approved amount of payable income taxes, the quota of each month shall be reduced accordingly at the proportion of reduction as assessed under the aforesaid requirements, and the issue shall be handled in the way subject to Paragraph (2) of this Article.

3.

The amount of tax reduction of the taxpayers occurring due to the policy adjustment on taxable wages shall be incorporated into the range of final settlement and payment after the end of this year, and be subject to final settlement and payment together with others.

4.

The taxation organs at each level shall rigidly carry out these policies, and may not illegally raise the rate of taxable wages or provision the floating proportion for the certain regions under any excuses or in any form after the new policies on taxable wages come into force. If the taxable wage rates are higher than the uniformly prescribed rate of the state in practical implementation, it shall be remedied promptly. You shall strictly implement the applicable scope of the policies on taxable wages by connection of wages with performance. No enterprise may adopt the method of connecting wages with performance except for the state-owned and state-holding industrial and commercial enterprises, and financial and insurance enterprises that implement the policies on taxable wages by connecting wages with performance and are restructured or reformed into joint stock enterprises upon examination and approval of the Ministry of Finance and the State Administration of Taxation.

Where there is any question arising from the implementation of the new policies on taxable wages, it shall be timely reported to the State Administration of Taxation.

The State Administration of Taxation

September 1, 2006