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CIRCULAR OF THE STATE COUNCIL ON RELATED QUESTIONS CONCERNING THE ADJUSTMENT OF THE TAXATION POLICY FOR THE FINANCIAL AND INSURANCE INDUSTRIES

    For the purpose of bringing into play the role of taxation in regulation
and control, further smoothing the relations of distribution between the
State and the financial and insurance enterprises, promoting equal competition
among financial and insurance enterprises and guaranteeing the financial
revenue of the State, the State Council decides to adjust the taxation policy
for the financial and insurance industries as of January 1, 1997. The related
questions are hereby notified as follows:

    1.Standardize the income tax rate of the financial and insurance enter-
prises. The income tax rate of 55% currently in force for the financial and
insurance enterprises, their income tax rate shall be unifiedly reduced to
33%. Budget grades for the income tax of the financial and insurance enter-
prises shall remain unchanged.

    2.Revise the provisions on sales tax rate for the financial and insurance
industries in the of China>, raising the current sales tax rate of 5% for the financial and
insurance industries to 8%. After the increase in the sales tax rate,
exclusive of the sales tax paid by the head offices of all banks and
insurance companies which shall be the revenue of Central finance in its
entirety, the sales tax paid by other financial and insurance enterprises,
the portion collected according to the original 5% rate goes to the revenue
of local finance, the portion collected according to the raised 3% rate
belongs to Central finance.

    3.Financial enterprises with foreign investment and foreign financial
enterprises set up in the special economic zones(including Shanghai Pudong
New Development Zone and Suzhou Industrial Park, the same hereinafter),
whose sales revenue originating from inside the special economic zones shall
continue to implement the preferential policy of sales tax exemption
starting from the date of registration and collection at the rate of 8%
shall be enforced upon expiration of the exemption period; the portion of sales revenue originating from outside the special economic zones, the
preferential policy of tax exemption for special economic zones shall no
longer be implemented, and relevant taxation policy for financial enterprises
with foreign investment and foreign financial enterprises established outside
special economic zones shall be implemented.

    4.For financial and insurance enterprises with foreign investment and foreign
financial and insurance enterprises established outside special economic
zones before December 31, 1996, sales tax shall be levied at the reduced
rate of 5% which shall remain to be revenue of local finance before December
31, 1998; sales tax shall be levied at the rate of 8% as of January 1, 1999.
Financial and insurance enterprises with foreign investment and foreign
financial and insurance enterprises newly established outside special economic
zones after January 1, 1997 shall all implement the sales tax rate of 8%.

    5.After the increase in sales tax rate for the financial and insurance
industries, State policy banks shall be levied at the reduced rate of 5%.
Sales tax paid by policy banks shall be returned to them as State capital
investment. The return policy shall cease to be implemented starting from
the date when capital of policy banks reaches the amount prescribed by the
State Council.

    6.After the increase in sales tax rate for the financial and insurance
industries, sales tax of rural credit unions shall be levied at the reduced
rate of 5% before December 31, 1997 which shall continue to be the revenue
of local finance;it shall be levied at the resumed rate of 8% as of January 1,
1998.

    7.After the increase in sales tax rate for the financial and insurance
industries, urban maintenance and construction tax and additional education
fee levied along with sales tax shall continue to be calculated and levied
at the original rate of 5%, the portion of the increased rate of 3% shall
be exempted. Revenue of additional taxation shall continue to be revenue
of local finance.

    8.After the increase in sales tax rate for the financial and insurance
industries, sales tax of financial and insurance enterprises the collection
of which is the responsibility of the collection organs under local tax
bureaus currently shall be jointly collected by collection organs under
State tax bureaus and local tax bureaus. Among this tax, the portion
calculated and levied at the original rate of 5% shall be collected by
collection organs under local tax bureaus, the portion calculated and
levied at the increased rate of 3% shall be collected by collection organs
under State tax bureaus. Sales tax paid by head offices of all banks and
insurance companies shall continue to be collected by collection organs
directly under the State Taxation Administration. Urban maintenance and
construction tax and additional education fee levied along with sales tax
shall be collected by collection organs under local tax bureaus.

    Adjustment of taxation policy for the financial and insurance industries
constitutes an important decision made by the State Council, people's
governments of all localities must attache great importance to it and
strengthen leadership;organs of State tax bureaus and local tax bureaus
at all levels should closely cooperate with each other, really strengthen
taxation administration, plug tax avoidance, evasion and leakage;
all financial and insurance enterprises should further enhance
the consciousness of paying tax, declare and pay tax in sufficient amount
and timely in accordance with the provisions of the State to ensure the
implementation of the State taxation policy for financial and insurance
enterprises.