Laws of the People's Republic of China

The Ministry of Finance, The State Administration of Taxation

Notice of the Ministry of Finance and the State Administration of Taxation on the Printing and Distribution of the Provision on Several Issues concerning Extending Value-added Tax Credit Scope in Northeast Region

Cai Shui [2004] No. 156

Departments (bureau) of finance and State Administration of Taxation of Liaoning province, Jilin province and Heilongjiang province and Dalian city:

In accordance with the spirit of Several Opinions on Carrying out the Strategy of Revitalizing Traditional Industrial Bases in Northeast Region issued by the Central Committee of the Communist Party of China and the State Council (Zhong Fa [2003] No. 11), and with the approval by the State Council, the Ministry of Finance and the State Administration of Taxation formulate the Provision on Several Issues concerning Extending Value-added Tax (hereafter referred to as VAT) Credit Scope in Northeast Region (hereafter referred to as the Provision), we hereby print and distribute it to you, please abide by it.

In case that normal VAT-payers, engaged in manufacturing of military and hi-tech products, which are beyond the scope listed in the Provision on the industries of equipment-manufacturing, petrochemistry, metallurgy, ship-building, automobile-manufacturing, agro-product processing, intends to claim the tax credit prescribed in the Provision, concrete conditions applicable to military and hi-tech products shall be forwarded by the Provincial finance and taxation authorities, then they shall be submitted to the Ministry of Finance and the State Administration of Taxation to be examined and to be formulated separately.

Selecting several industries in Northeast region to extend VAT credit scope as a trial is an important measure of the Central Government to revitalize Northeast traditional industrial bases, it also can accumulate experience for the future VAT reform to be conducted nationwide. Departments in the concerned region shall enhance the management and coordinate the implementation seriously; the Ministry of Finance and the State Administration of Taxation shall be informed of the possible problems emerging from the implementation process.

Annex: the Provision on Several Issues concerning Extending Value-added Tax Credit Scope in Northeast Region

The Ministry of Finance

The State Administration of Taxation

September 14, 2004 Annex:The Provision on Several Issues concerning Extending Value-added Tax Credit Scope in Northeast Region

I.

This Provision is formulated in accordance with the Several Opinions on Carrying out the Strategy of Revitalizing Traditional Industrial Bases in Northeast and other Regions (Zhong Fa [2003] No.11) issued by the Central Committee of the Communist Party of China and the State Council.

II.

This Provision is applicable to the normal VAT payers (hereafter referred to as the Tax-payers) mainly engaged in the industries of equipment manufacturing, petrochemistry, metallurgy, ship-building, automobile manufacturing and agro-product processing.

The aforesaid "mainly" refers to that the Tax-payers' sales amount in the industries of equipment manufacturing, petrochemistry, metallurgy, ship-building, automobile manufacturing and agro-product processing shall exceed 50% (including 50%) of their whole sales amount.

Please refer to the annex for the concrete scope of industries where this Provision is applicable.

III.

The VAT credit shall be applied according to the Provisions in Article V when the Taxpayers' liability of input tax arises as follows:

1.

Purchasing fixed assets (including the reception of donation and investment in kind, the same hereinafter);

2.

Goods purchasing and taxable labors used for self-making fixed assets (including alteration and extension and installing, the same hereinafter);

3.

The fixed assets obtained in the way of financial leasing, where the leaser has paid the VAT in accordance with Notice of the State Administration of Taxation on Levying Circulation Tax upon the Financial Leasing Business (Guo Shui Han [2000] No. 514); or

4.

The transport charges paid for the fixed assets.

The input tax mentioned in this Article refers to such one as arises as of July 1, 2004 and obtains such tax deduction warrants as the special VAT invoice, the transport invoice and the special payment book of customs import VAT issued after July 1, 2004 (included).

IV.

The fixed assets mentioned in this Provision refer to the ones prescribed in the Article 19 of the Rules for the Implementation of the Provisional Regulations of the People's Republic of China on VAT. The outsourcing and self-made fixed assets shall be beyond the credit scope in this Provision.

V.

The tax-payer's input tax amount granted credit in accordance with the aforesaid Article III shall not exceed the increased VAT amount in the year concerned; where there is no increased VAT amount or inadequate increased VAT amount to be credited against in the year concerned, such input tax as has not been credited remains to the next year; where the tax-payer fails to pay the VAT, the tax owed shall first be deducted.

The increased VAT amount mentioned in this article refers to exceeded part of the payable VAT in the year concerned against the one in the year of 2003.

The method, characterized by periodical calculation of the increased VAT, monthly crediting and year-end clearance, shall be adopted in the process of operation in order to guarantee the balance of the crediting in the year concerned.

VI.

Where the present enterprises undergo merging, dividing, restructuring, reorganizing, extending, moving, changing of business, absorbing new blood, changing of leading (or affiliation) relations and changing of their names, the increased VAT amount shall be calculated on the basis of the payable VAT of the enterprises concerned in the year of 2003.

VII.

The input tax amount shall not be credited in accordance with the Provisions in Article V, when these situations below arise during the tax-payer purchases the fixed assets:

1.

The fixed assets are exclusively used in non-taxable projects (the projects under construction mentioned in this Provision are not included, the same hereinafter);

2.

The fixed assets are exclusively used in tax-exempt projects;

3.

The fixed assets are exclusively used in collective welfare or individual consumption;

4.

The fixed assets are the excisable automobiles or motor-bicycles; or

5.

The fixed assets are offered for use to such institutions as is beyond the scope prescribed in this Provision.

Where the aforesaid situations occur to such fixed assets as has already been credited or entered into the input tax to be credited, the tax-payer shall calculate the uncreditable input tax in accordance with the formula below:

Uncreditable input tax=Net worth of the fixed assets ¡Á Applicable tax rate

With regard to the uncreditable input tax, the excess of the input tax to be credited may first be deduced, if there is no excess, it shall be transferred from the input tax of the current period.

VIII.

The tax-payer's activities listed below shall be regarded as selling of goods:

1.

exclusively using the self-made or consigned processing fixed assets in non-taxable projects;

2.

exclusively using the self-made or consigned processing fixed assets in tax-exempt projects;

3.

offering the self-made, consigned processing or purchased fixed assets to other institutions or self-employed individuals as investment;

4.

allocating the self-made, consigned processing or purchased fixed assets to shareholders or investors;

5.

exclusively using the self-made or consigned processing fixed assets in collective welfare or individual consumption; or

6.

gratuitously donating the self-made, consigned processing or purchased fixed assets to others.

Where these acts of the tax-payer exist but fails to be realized, the net worth of selling fixed assets shall be regarded as sales amount.

IX.

Where the tax-payer sells his/her used fixed assets, his/her gained sales income shall be taxed in accordance with the applicable tax rate, and the input tax of the fixed assets shall be credited in accordance with the methods listed below:

1.

Where the input tax of the fixed assets concerned is entered into the fixed assets input tax to be credited, the output tax of the fixed assets shall be increased while the excess of the fixed assets input tax shall be decreased in the size and be transferred into the input tax for being credited; where the excess of the fixed assets input tax to be credited is less than the fixed assets output tax, it may be wholly transferred into the input tax of the current period for being credited.

2.

Where the fixed assets concerned fails to be credited or to be entered into input tax to be credited, the creditable input tax shall be calculated in accordance with the formula listed below:

Creditable input tax of used fixed assets=Net worth of fixed assets ¡Á Applicable tax rate

The creditable input tax of used fixed assets may directly be entered into the VAT input tax of the current period.

X.

The tax reimbursement in purchasing home equipment within the total amount of investment does not any more apply to the enterprises with foreign investment incorporated into the scope prescribed in this Provision.

XI.

The Ministry of Finance and the State Administration of Taxation are responsible for the interpretation of this Provision.

XII.

This Provision shall enter into force as of July 1, 2004. The concrete implementation measures of this Provision and the transitional measures for the year of 2004 shall be formulated and enacted separately.

Annex:

The Concrete Scope of Industries Applicable to the Extension of VAT Credit

I.

The equipment-manufacturing industry: including the industries of general-purpose equipment manufacturing, special-purpose equipment manufacturing, electric machinery and apparatus manufacturing, instrument and meter and cultural office supplies manufacturing, communication equipment manufacturing, computer and other electronic equipment manufacturing, aerospace vehicle manufacturing, railway transportation equipment manufacturing and trafficking equipment and other transport and communication facilities manufacturing.

II.

The petrochemical industry: including the industries of petrol-processing, coking and nuclear fuel processing, chemical materials and chemical product manufacturing, chemical fiber manufacturing, pharmaceutical manufacturing, rubber product manufacturing and plastic product manufacturing. The coke-processing industry is not included.

III.

The metallurgical industry: including the industries of the smelting and calendering of ferrous metal, the smelting and calendering of nonferrous metal. The electrolytic aluminum manufacturing enterprises and the steel manufacturing enterprises having an annual output of less than 2 million tons of plain steel, or less than 500 thousand tons of special steel, or less than 100 thousand tons of ferroalloy are included.

IV.

The ship-building industry: including the industry of ship and floating equipment manufacturing.

V.

The automobile-manufacturing industry: including the industry of automobile manufacturing.

VI.

The agro-product processing industry: including the industries of agro-product and non-staple foodstuff processing, foodstuff manufacturing, beverage manufacturing, textile manufacturing, costume, shoes and caps manufacturing, leather, fur and feather (velvet) and their products manufacturing, lump processing and timber-, bamboo-, vine, palm and grass products manufacturing, furniture manufacturing, paper-making and paper product manufacturing, handicraft articles manufacturing, etc.

For the detail description of the aforesaid industries, please refer to the National Economic Industrial Classification (GB/T4754¨D2002) under the National Standards of the People's Republic of China.