Laws of the People's Republic of China

    Article 1  These Rules are formulated in accordance with the provisions
of Article 18 of the Income Tax Law of the People's Republic of China for
Foreign Enterprises (hereinafter referred to as the Tax Law).

    Article 2  "Establishments" mentioned in Article 1 of the Tax Law mean
offices, premises or business agents established by foreign enterprises
within China for production and business operations.

    Offices and premises mentioned in the preceding paragraph mainly include
administrative offices, branches, representative offices, factories and places
for the exploitation of natural resources as well as places for contracted
projects of building, installation, assembly, exploration and other such
projects.

    Article 3  Foreign enterprises and Chinese enterprises involved in
cooperative production or cooperative operations shall, except as otherwise
provided, pay their income taxes respectively.

    Article 4  "Income derived from production and business operations"
mentioned in Article 1 of the Tax Law means income derived from the production
and business operations by foreign enterprises in the fields of industry,
mining, communications, transportation, agriculture, forestry, animal
husbandry, fisheries, poultry farming, commerce, service trades and other
fields of production and business.

    "Other income" mentioned in Article 1 of the Tax Law means income from
dividends and interest; income from leasing or sales of property; income from
transfer of patent rights, proprietary technology, trademark rights,
copyrights and other such property; and other non-operating income.

    Article 5  "Taxable income for the purpose of the imposition of the
local income tax" mentioned in Article 4 of the Tax Law shall have the same
meaning as "taxable income" mentioned in Article 3 of the Tax Law, i.e. it is
calculated according to the formulas listed in Article 9 of these Rules.

    Article 6  "Foreign enterprises with small-scale production and low
profits" mentioned in Paragraph 2 of Article 4 of the Tax Law means foreign
enterprises with an annual income of one million yuan or less.

    Article 7  Foreign enterprises with low rate of profit as mentioned in
Article 5 of the Tax Law include foreign enterprises exploiting deep-mine coal
resources with low rate of profit.

    Article 8  The tax year for foreign enterprises means each year of the
Gregorian calendar commencing on January 1 and ending on December 31.

    A foreign enterprise which has difficulty in determining its tax liability
on the basis of the tax year stipulated in the preceding paragraph may submit
an application to, and upon approval by the local tax authorities, use the
12-month accounting year of the enterprise to determine its tax liability.

    Article 9  The taxable income shall be calculated according to the
following formulas:

    a. Industry:

    1. manufacturing cost for the period = direct materials consumed in
production for the period + direct labor + manufacturing expenses;

    2. cost of the products manufactured for the period = manufacturing cost
for the period + inventory of semi-finished products and products in process
at the beginning of the period - inventory of semi-finished  and products in
process at the end of the period;

    3. cost of products sold = cost of the products manufactured for the
period + inventory of the products at the beginning of the period - inventory
of the products at the end the period;

    4. net sales = gross sales - (sales returns + sales discounts and
allowances);

    5. profit on sales = net sales - cost of products sold - tax on the sales
- (selling expenses + overhead expenses);

    6. taxable income = profit on sales + profit from other operations +
non-operating income - non-operating expenses.

    b. Commerce:

    1. net sales = gross sales - (sales returns + sales discounts and
allowances);

    2. cost of sales = inventory of merchandise at the beginning of the
period + [purchases of merchandise during the period - (purchase returns +
purchase discounts and allowances) + purchase expenses] - inventory of
merchandise at the end of the period;

    3. profit on sales = net sales - cost of sales - tax on sales - (selling
expenses + overhead expenses);

    4. taxable income = profit on sales + profit from other operation +
non-operating income - non-operating expenses.

    c. Service trades:

    1. net business income = gross business income - (tax on business income
+ operating expenses + overhead expenses);

    2. taxable income = net business income + non-operating income -
non-operating, expenses.

    d. Other lines of business: calculation shall be made with reference to
the above formulas.

    Article 10  The following items shall not be itemized as costs, expenses
or losses in the calculation the taxable income:

    1. expenditures related to the acquisition or construction of machinery,
equipment, building facilities and other fixed assets;

    2. expenditures related to the acquisition of intangible assets;

    3. interest on equity capital;

    4. income tax payments and local income tax payments;

    5. fines for illegal business operations and losses caused by the
confiscation of property;

    6. penalties for the overdue tax payment of taxes and tax fines;

    7. the portion of losses caused by windstorms, floods, fires and other
such disasters which is compensated by insurance proceeds;

    8. donations and contributions other than those used in China for public
welfare and relief purposes;

    9. royalties paid to the head offices; and

    10. other expenses not related to production and business operations.

    Article 11  Reasonable overhead expenses paid by a foreign enterprise to
its head office in connection with the production or business operation of
the enterprise and actual expenses paid to its head office incurred as a
result of services directly provided by the head office, may be itemized as
expenses, subject to examination and approval by the tax authorities of the
locality of the enterprise, provided that certificates, invoices and vouchers,
together with a financial report certified by a certified public accountant,
are supplied by the head office.

    Where an agreement regarding the allocation of the overhead expenses of
the head office exists between a foreign enterprise and a Chinese enterprise
in a contract for cooperative production or cooperative business operations
payments of such expenses may, subject to examination and approval by the
local tax authorities, be itemized as expenses according to the methods
specified in the contract.

    Article 12  A foreign enterprise paying interest on loans shall submit to
the local tax authorities for examination certificates as to the amount of
interest paid, where such loans are consistent with general commercial
practise, a reasonable amount of interest shall be allowed as itemized
expenses.

    Article 13  Reasonable entertainment expenses paid by foreign enterprises
that are related to production and business operations shall, when supported
by authentic records or invoices and vouchers, be allowed respectively as
itemized expenses subject to the following limits:

    1. where annual net sales are 15 million yuan or less, the entertainment
expenses shall not exceed 3 millesimal; where annual net sales exceed 15
million, the entertainment expenses for that portion exceeded shall not exceed
1 millesimal;

    2. where annual gross business income is 5 million yuan or less, the
entertainment expenses shall not exceed 10 millesimal of the gross business
income; where annual gross business income exceeds 5 million yuan, the
expenses for that portion exceeded shall not exceed 3 millesimal.

    Article 14  The depreciation of fixed assets which are already used by
foreign enterprises shall be calculated on an annual basis. Fixed assets mean
houses, buildings, machinery, mechanical apparatuses, means of transport and
other equipment related to production or business operations which has a
useful life of one year or more. Articles not in the nature of major equipment
which are used for production or business operations, and which have a unit
value of 500 yuan or less and a relatively short useful life may be itemized
as expenses on the basis of actual consumption.

    Article 15  The valuation of fixed assets shall be based on the original
value.

    The original value of fixed assets regarded as investment in cooperative
production or cooperative business operations between a foreign enterprise and
a Chinese enterprise shall be the price agreed upon by the parties to the
cooperation.

    The original value of the purchased fixed assets shall be the purchase
price plus transportation expenses, installation expenses and other related
expenses incurred prior to the use of the assets.

    The original value of self-made and self-built fixed assets shall be the
actual expenses incurred on their manufacture or construction.

    Imported fixed assets which are owned and have already been used by a
foreign enterprise shall be revalued according to their condition with
reference to certification provided by the foreign enterprise as to the
original value of the assets and the number of years the assets have been in
use, together with relevant market price information. Where certification
cannot be provided, the enterprise shall carry out the valuation according to
the condition of the assets and submit the valuation to the local tax
authorities for verification.

    Article 16  The depreciation of fixed assets shall be calculated
commencing from the month in which they are put to use. The calculation of
depreciation shall cease in the month following the month in which the fixed
assets cease to be used during the year.

    For enterprises engaged in exploiting off-shore petroleum resources, all
investments at the stage of development shall, taking the oil (gas) field as a
unit, be aggregated and treated as capital expenditure; the computation of
depreciation shall begin in the month in which the oil (gas) field commences
commercial production.

    Article 17  In calculating depreciation of fixed assets, the salvage value
shall be estimated and deducted from the original value; in principle, the
salvage value should be 10% of the original value. In the case of fixed assets
for which it is necessary to retain a lower or no salvage value, the matter
shall be reported to the local tax authorities for approval; if the
depreciation is calculated in accordance with a composite life method, salvage
value may not be retained.

    Depreciation of fixed assets shall generally be calculated using the
straight-line method of depreciation.

    Article 18  In the calculation of depreciation, useful life of the various
categories of fixed assets shall be as follows:

    1. for houses and buildings, the minimum useful life shall be 20 years;

    2. for railway rolling stock, boats and ships, machinery and other
production equipment, the minimum useful life shall be 10 years; and

    3. for electronic equipment, means of transport other than railway rolling
stock and boats and ships, fixtures, tools, furnishings and other assets'
related to production and business operations, the minimum useful life shall
be 5 years.

    Where, for special reasons, a foreign enterprise needs to accelerate
depreciation or change the method of depreciation, an application may be
submitted to the local tax authorities for examination and then transmitted
level by level to the Ministry of Finance for approval. In respect of fixed
assets that are regarded as investments made during and after the development
stage by an enterprise engaged in the exploitation of off-shore oil resources,
depreciation may be calculated on a consolidated composite basis. The
depreciation period shall not be less than 6 years.

    For enterprises engaged in exploiting coal resources, the provisions of
the preceding paragraph may be applied.

    Article 19  Expenditure on expansion, replacement, reconstruction and
technical innovation which result in an increase in the value and the
extension of the useful life of fixed assets already in use shall be treated
as capital expenditure, and shall not be itemized as expenses.

    For the fixed assets remaining in use after having been fully depreciated,
no further depreciation shall be allowed.

    Article 20  The balance of the proceeds from the transfer or disposal of
fixed assets at the current prices shall, after deduction of the undepreciated
amount or the salvage value, be entered into the profit and loss account for
the current year.

    Article 21  Intangible assets such as patent rights, proprietary
technology, trademark rights, copyrights, rights to use sites and other
special rights transferred to a foreign enterprise shall be amortized on the
basis of reasonable cost commencing from the month they are first put in use.

    Intangible assets mentioned in the preceding paragraph regarded as
investments in cooperative production or cooperative business operations
between a foreign enterprise and a Chinese enterprise may be amortized on the
basis of the amount prescribed in the agreement or contracts, commencing from
the month they are first put in use.

    Intangible assets mentioned in the preceding two paragraphs for which a
period of use is specified at the time of transfer or investment may be
amortized in accordance with the specified period; the period of amortization
for assets for which no period of use is specified shall not be less than
10 years.

    Article 22  Expenses incurred during the period or organization of a
foreign enterprise shall be amortized upon the commencement of production or
operation. The period of amortization shall not be less than 5 years.

    Reasonable exploration expenses incurred by a foreign enterprise engaged
in the exploitation of off-shore petroleum resources may be amortized against
income from the oil (or gas) fields that have already commenced commercial
production. The amortization period shall not be less than 1 year.

    Article 23  Inventory of merchandise, raw materials, products in process
of production, semi-finished products, finished products and by-products shall
be valued at cost. The enterprises may choose one of the following methods of
calculation: first-in first-out; moving average; or weighted average. Where a
change in the method of calculation is necessary, the matter shall be reported
to the local tax authorities for approval.

    Article 24  Where a foreign enterprise cannot authenticate its costs and
expenses and cannot accurately determine its taxable income, the local tax
authorities shall appraise and determine its profit rate with reference to the
prevailing profit levels in the same or similar lines of business, and then
calculate its taxable income on the basis of its net sales or its gross
business income.

    The taxable income of a foreign enterprise engaged in contracted projects
for the exploration or development of off-shore petroleum resources shall be
calculated according to the profit rate appraised and determined on the basis
of its gross income derived from the contracted project.

    Article 25  For foreign airlines or ocean shipping enterprises engaged in
international transport business, the taxable income shall be 5% of their
gross income derived from transport services for passengers and/or cargoes
loaded in China.

    Article 26  A foreign enterprise engaged in cooperative production with a
Chinese enterprise under a product-sharing arrangement shall be deemed to
receive income at the time products are allocated; the amount of income
received shall be computed on the basis of the sales price to the third party
or with reference to the prevailing, market price at the time allocation.

    A foreign enterprise engaged in the cooperative exploitation of off-shore
petroleum resources shall be deemed to receive income at the time the crude
oil is divided; the amount of income received shall be computed on the basis
of a price which is adjusted periodically with reference to the international
market price for crude oil of similar quality.

    Article 27  "Dividends, interest, rentals, royalties and other income with
a source in China" mentioned in Article 11 of the Tax Law, shall be construed
as follows:

    "dividends" means dividends or profits in respect of shares received from
enterprises in China;

    "interest" means interest on deposits or loans, interest on all types of
bonds and debentures, interest on amounts advanced, overdue payments and
similar items or interest received from sources within China;

    "rentals" means rentals received from the leasing of property to a lessee
in China:

    "royalties" means income received from the assignment of patent rights,
proprietary technology, copyrights, trademark rights and other such property
for use in China;

    "other income" means income other than the preceding categories of income
which the Ministry of Finance determines to be subject to tax.

    Article 28  The amount of tax to be paid on dividends, interest, rentals,
royalties and other income with a source in China as mentioned in the
preceding Article shall, except as otherwise provided, be computed on the
basis of gross income; the unit making the payment shall withhold the tax from
each payment.

    Article 29  "International financial organizations" mentioned in Article
11 of the Tax Law means financial institutions under the aegis of the United
Nations such as the International Monetary Fund, the World Bank, the
International Development Association, the International Fund for Agricultural
Development; "preferential interest" mentioned means a rate at least 10% lower
than the average rate on the international financial markets.

    Article 30  "China's state banks" mentioned in Article 11 of the Tax Law
include the people's Bank of China, the Bank of China, the Agricultural Bank
of China, the People's Construction Bank of China, the Investment Bank of
China, and international trust and investment corporations that are approved
by the State Council to conduct foreign exchange deposit, loan and credit
business with foreign clients.

    Article 31  "Income from interest on deposits", mentioned in Paragraph 4
of Article 11 of the Tax Law shall not include the interest received by
foreign banks on deposits with China's state banks at a rate lower than the
rate on the international financial markets. Income received from interest on
deposits at a rate lower than the rate on the international financial markets
shall be exempted from income tax.

    Article 32  "Amount of payment" mentioned in Article 11 of the Tax Law
includes payments in cash, payments by remittance, payments through transfer
accounts, as well as payments made in marketable securities or in kind which
are rendered into equivalent amounts of money.

    Article 33  Income tax to be paid in advance in quarterly instalments as
stipulated in Article 7 of the Tax Law may be calculated on the basis of the
actual quarterly profit, or on the basis of one quarter of either the current
year's planned annual profit or the actual income in the preceding year.

    Article 34  Income tax on a foreign enterprise which is in operation for
less than one year shall be calculated and paid on the basis of actual income
derived during the period of the operation according to the tax rates
prescribed by the Tax Law.

    Article 35  A foreign enterprise which commences operations or ceases
operations shall complete tax registration procedures with the local tax
authorities within 30 days after commencement of operations, or within 30 days
before the termination of the operations, respectively, in accordance with the
provisions of Article 10 of the Tax Law.

    Article 36  A foreign enterprise shall, whether realizing profits or
losses in a tax year, file its income tax returns and final accounting
statements with the local tax authorities within the prescribed period and,
except as otherwise stipulated, shall also include an audit statement of
certified public accountants registered in the People's Republic of China.

    Article 37  In case of failure to submit the tax returns within the
prescribed time limit owing to special reasons, the foreign enterprise shall
submit an application to the local tax authorities within the said time limit,
and the time limit for filing tax returns and accordingly that for final
settlement may be appropriately extended upon file latter's approval.

    The final day of the time limit for tax payment and that for filing tax
returns may be postponed to the next business day if it falls on a public
holiday.

    Article 38  In principle, foreign enterprises shall use the accrual
method of accounting to calculate their income and expenses. All accounting
records shall be accurate, complete and supported by valid vouchers as the
basis for entries.

    Article 39  Accounting vouchers, books, statements and reports adopted by
foreign enterprises shall be kept in the Chinese language, or in both Chinese
and a foreign language.

    Accounting vouchers, books, statements and reports shall be retained for
at least 15 years.

    Article 40  Forms of sales invoices and business receipts used by a
foreign enterprise shall be submitted to the local tax authorities for
approval prior to use.

    Article 41  Officials assigned by the tax authorities to conduct
investigations of the financial, accounting and tax affairs of a foreign
enterprise shall produce identification cards and undertake to maintain
confidentiality.

    Article 42  Income earned by a foreign enterprise in foreign currencies
shall, for the purpose of advance quarterly payments of tax, be converted into
Renminbi according to the foreign exchange rate quoted by the State General
Administration of Exchange Control on the day when the receipt for payment of
tax is issued; for the purpose of the additional tax payable or the tax
refundable on final settlement at the year-end, the income in foreign
currencies shall be converted into Renminbi according to the foreign exchange
rate quoted by the State General Administration of Exchange Control on the
last day of the tax year.

    Article 43  The Tax authorities may, according to the seriousness of the
case, impose a fine of 5,000 yuan or less on a foreign enterprise which
violates the provisions of Article 8, Paragraph 1 of Article 9, Article 10 or
Article 12 of the Tax Law.

    Article 44  The tax authorities may, according to the seriousness of the
case, impose a fine of 5,000 yuan or less on a foreign enterprise which
violates the provisions of Paragraph 2 of Article 39 and Article 4O of these
Rules.

    Article 45  The evasion of or refusal to pay tax mentioned in Paragraph
3 of Article 15 of the Tax Law shall be construed as follows:

    "Tax evasion" means the illegal actions of a taxpayer who has
intentionally violated the provisions of the Tax Law by such means as
falsifying, altering or destorying account books, receipts or accounting
vouchers; falsely itemizing or overstating costs and expenses; concealing or
understanding taxable income or receipts; or avoiding taxes or fraudulently
recovering taxes already paid.

    "Refuse to pay tax" means the illegal actions of a taxpayer who has
violated the provisions of the Tax Law by such means as refusing to file
tax returns or to provide documentation of tax payment, invoices or vouchers;
refusing to agree to investigations by the tax authorities of its financial,
accounting and tax affairs; or refusing to pay tax or fines in accordance
with the law.

    Article 46  Notice of disposal of a violation shall be served in those
cases in which the tax authorities impose a fine in accordance with the
provisions of the Tax Law and these Rules.

    Article 47  When a foreign enterprise applies for reconsideration of a
case in accordance with the provisions of Article 16 of the Tax Law, the tax
authorities concerned shall decide upon the disposal of the case within 3
months after receipt of the application.

    Article 48  Standardized income tax returns and tax payment receipts to
be used by foreign enterprises shall be printed by the General Taxation
Bureau of the Ministry of Finance of the People's Republic of China.

    Article 49  The right to interpret these Rules shall reside with the
Ministry of Finance of the People's Republic of China.

    Article 50  These Rules shall become effective on the same date of
promulgation and effective date of the Income Tax Law of the People's Republic
of China for Foreign Enterprises.