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PRC corporate income tax law features unifiedincome tax

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unifiedincome tax law
PRC corporate
■ The Unified Corporate Income Tax Law         II. UNIFIED TAX DEDUCTION POLICIES             III. TAX HOLIDAY AND
(New Law) has been approved on 16 March        The new law eliminates those limitations       OTHER PREFERENTIAL
2007 at the 5th Session of the 10th            which currently domestic companies may         TAX TREATMENT
National People’s Congress (NPC), and will     accept for specific types of expenses,         The existing tax holiday and other
become effective on 1 January 2008. The        creating a more level field of competition     preferential tax treatment will be
passage of the new law marks full stop         between domestic enterprises and FIEs.         streamlined in the following manner:
for the exploration of years as to how
China will conduct its income tax reform
and symbolises the beginning of the new         Tax Deduction Policy       Current Law                   New Law
era when domestic enterprises and
foreign invested enterprises (FIEs) will        Salary                     Domestic companies have       Reasonable salary expenses
start racing at the same level by adopting                                 a cap of the deductible       are deductible for both
the unified income tax rate and more                                       salary expenses while FIEs    domestic companies and
streamlined tax incentives that are part of                                do not.                       FIEs.
the national economic policy.
                                                Donation                   Donations only for public     Both FIEs and domestic
I. UNIFIED 25% TAX RATE                                                    welfare or charity are        companies may deduct
With an exception to qualified enterprises                                 deductible. For domestic      donations for public welfare
with small profits1, both domestic                                         companies, a deductible       or charity up to the 12% of
companies and FIEs in China will be                                        portion is limited; whereas   taxable income.
generally subject to the unified tax rate of                               FIEs are allowed a full
25% introduced by the new law.                                             deduction.
    The unified tax rate significantly
reduces nominal tax burden of domestic          Advertising Expense        Deductions for domestic       Deductions for both
enterprises to whom the 33% statutory                                      companies are limited and     domestic companies and
income tax rate applies under the current                                  any excess may be carried     FIEs are allowed if they are
tax law. However, for certain FIEs that                                    forward. FIEs are allowed     reasonable. Further details
already have enjoyed a favourable tax rate                                 a full deduction.             may be available in the
of 24% or 15% and others that are under                                                                  detailed implementing
preferential tax regime likewise, their tax                                                              regulations.
cost are very likely to increase.


16 perspective Summer 2007
                         features
Expansion
Certain tax preferential treatment, such as
high-tech enterprises located in National
High-Tech Industrial Development Zones
will spread nationwide. Revenue earned by
qualified not-for-profit organisations is
exempted as well. Enterprises that
purchase special equipment that protects
the environment, reduces the
consumption of energy or water, raises
manufacturing safety, etc can claim a
certain percentage of the investment in
such equipment as a tax credit. Revenue
that derived from qualified environment
protection, energy and water-saving
projects and technology transfer can
enjoy tax reduction or exemption.
Furthermore, it is expected that the
definition of high-tech enterprises will be
updated to be in line with the country’s
economic policy.

Retention of preferential benefits
Certain preferential treatment2 will be
retained for enterprises engaged in state-
encouraged infrastructure facilities.
Similarly, the preferential treatment is
preserved for agriculture, forestry, stock
breeding, and fishing industries.
Enterprises that salvage and recycle
resources to produce products that meet
nationally mandated standards may
continue to calculate revenue on a
reduced basis. In addition, the new law
embodied tax preferential treatments for
venture capital enterprises3 which were
introduced in Caishui (2007) No 31 issued
in February 2007.

Replacement
The new law introduces a super deduction
for compensation paid to disabled
workers and other employees who are
encouraged to be employed by the


           Summer 2007 perspective 17
 features




  Preferential Tax Treatments              Currently Available to                             Changes under New Law

  15% Tax Rate                             Companies in Special Economic Zones and            Repealed but the 5-year grandfather
                                           Shanghai Pudong New Area and production            provision is available for existing FIEs.
                                           FIEs located in economic technological             (See Part IV)
                                           development zones

  15% Tax Rate                             Hi-tech companies in Hi-Tech Parks                 Applied nationwide. However, definition
                                                                                              of Hi-tech companies may change.

  24% Tax Rate                             Production FIEs in coastal economic open cities    Repealed but the 5-year grandfather
                                           or other developmental areas                       provision is available for existing FIEs.
                                                                                              (See Part IV)

  Two-year exemption followed by three-    Production FIEs                                    Repealed but the remaining tax holiday
  year half deduction (2+3 tax holiday)                                                       is grandfathered. (See Part IV)

  50% rate reduction for an extended       Technologically-Advanced Enterprises               Repealed but the remaining tax holiday
  period of 3 years                                                                           is grandfathered. (See Part IV)

  50% rate reduction                       Export-oriented FIE                                Repealed

  Reinvestment refund                      Foreign Investors; Foreign Invested China          Repealed.
                                           Holding Companies

  Refund on local portion of the           Provincial level governments and municipalities    Repealed.
  corporate income tax (CIT) revenue or    directly under the central government have the
  local income tax                         right to grant the local income tax exemption or
                                           local income tax reduction to encouraged FIEs.


government, replacing the current tax             Extended 3-year 50% rate reduction          certain preferential tax treatment will be
preferential treatment for employment-            for technologically advanced FIEs           covered by transitional rules. They are
promoting companies.                              Extended 50% rate reduction for             described more in detail in the following
                                                  export-oriented FIEs                        Grandfather Provision section.
Repeal                                            Preferential tax rates of 15% and 24%
Tax preference provisions that are                Tax refund on reinvestment of after tax     IV. GRANDFATHER PROVISION
repealed under the new law include:               profits                                     Notwithstanding the changes on
    The “two-year exemption followed by                                                       preferential tax treatment, the new law
    three-year half deduction” (2+3) tax      Transition Rules                                provides grandfather provisions to the
    holiday for the production FIEs           Existing companies that are enjoying            existing FIEs. For FIEs that are currently


18 perspective Summer 2007
                                                                                                                           features
enjoying the preferential tax rate of 15%            The new law incorporates anti-              management in determining tax
or 24%, their applicable tax rate will           avoidance measures by introducing               residency. A company will be recognised
gradually be phased in to the new 25% tax        controlled foreign corporation rules. This      as a China tax resident if it is incorporated
rate during the five-year transitional           effectively terminates income deferral          in China or its place of effective control
period. For example, the 15% tax rate will       strategies that have been enjoyed by            and management is in China. It is a
increase by 2% per year until it reaches         certain domestic corporations and               significant change from the current
25% by the end of the five-year transition       individuals who have had controlling            practice that is based solely on the place
period. Entities that are currently              interests in foreign corporations located in    of incorporation. ■
benefiting under the fixed-term tax holiday      low tax jurisdictions. Under the new law,
regime will retain the remaining tax holiday     Chinese companies and individuals are
until it is exhausted. If an existing            required to recognise passive income that
company established by the                       are unreasonably retained overseas as
announcement of the new law is currently         income subject to PRC income tax.               Joseph Lee
entitled to a tax holiday but the tax holiday        With respect to non-Chinese                 Partner of Tax Services
has not yet commenced due to                     multinationals, the introduction of the anti-   Ernst & Young
accumulated losses, the tax holiday will         avoidance rules will signal an aggressive
be deemed to begin in the year the new           approach by the tax authorities to review
law takes effect.                                currently implemented tax structures. It
    A transition relief will also be available   also provides the tax authorities with
to some qualified high-tech enterprises          ample opportunities to make adjustments
that are newly-established in specific           as they consider necessary in the
areas eg Shanghai Pudong New Area and            absence of a business purpose.                  Reference
the current five Special Economic Zones.             The new law endorses cost sharing
They may be able to avail of the 2+3 tax         arrangement, advanced pricing                   1
                                                                                                     A qualified enterprise retains the 20%
holiday.                                         agreement and emphasises transfer                   preferential tax rate.
                                                 pricing documentation requirement. At the       2
                                                                                                     The regime allows either exemption
V. WITHHOLDING TAXES                             same time, it did not eliminate the                 from income or a 15% tax rate or a
The new law provides that withholding            possibility of tax consolidation of group           20% rate to small qualified enterprise.
taxes of 20% will apply to passive income        companies. Details can be expected in the           The preferential treatment is offered
which is defined to include dividends,           implementing regulations to be released             to industries and projects that are
interest, royalties and capital gains. It is     shortly.                                            heavily encouraged and supported by
expected that further guidance on this               Going forward, permanent                        the government.
subject will be provided in the detailed         establishment issues and transfer pricing       3
                                                                                                     Entities that are engaged in start-up
implementing regulations.                        enforcement will become a priority.                 investments.
                                                 Further guidance is expected with the
VI. ANTI-TAX AVOIDANCE RULES                     issuance of the detailed implementing
The new law highlights that China will           regulations.
focus more on revenue raising effects. It
endorses added enforcement efforts on            VII. PLACE OF MANAGEMENT AS A
business substance associated with               RESIDENCY DETERMINANT FACTOR
transactions and corporate structures.           The new law introduces a concept of


                                                                                                            Summer 2007 perspective 19

				
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