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Please click on the links below to view more:   Update on development of the new unified Corporate Income Tax Law    We understand that following the first reading in late December 2006, the Standing Committee of National People's Congress ("NPC") plans to put forward the draft Corporate Income Tax Law ("CIT Law") for voting at the upcoming NPC meeting in mid March 2007.  It is possible that the law may go through a shorter legislative process which would not require all three readings.    There is a good chance that the draft CIT Law would be passed in March.  Having to consider the time required for the review and publication of the Detailed Implementation Rules of CIT Law, the new CIT Law may take effect on 1 January 2008 although one could not at this moment rule out mid-year implementation with certainty. The draft CIT Law is not available for public consultation though many investors are very concerned about the impact of the new law.  Based on the information available in the public domain and speeches made by government officials, we hereby attempt to summarise our understanding on the direction of certain proposed changes with relevance to foreign investors.  Clearly, all details below are subject to confirmation against the CIT Law upon its finalisation in the future.   Read more...... Expand / Collapse Tax residence A new concept of "tax resident enterprise" may be introduced.  Tax resident enterprises would be subject to China corporate income tax on worldwide income whereas non-tax resident enterprises are to be taxed on China sourced income only.   Foreign enterprises whose effective management is based in China may be deemed as "tax resident enterprises" under the new law with the consequences of exposing their worldwide income to China income tax. Tax rate A standardised CIT rate at 25% is expected.  A reduced rate of say 20% may be offered to small and thin-profit enterprises.   Statutory withholding income tax ("WHT") rate of 20% may be adopted.  Whether the current WHT exemption for dividend payable to foreign investors and the current concessionary WHT rate of 10% on other types of passive income would survive remains to be seen. Expense deduction A unified set of expense deduction rules would be adopted for all enterprises.   It is expected that various deduction caps currently imposed on domestic enterprises, such as on salaries and wages, would be removed.  This said, the new law may seek to impose deduction caps on certain types of expenses. Preferential tax treatments Future preferential tax treatments would gear primarily towards encouraged industries and activities.  High-tech industry, infrastructure projects, agriculture, forestry and fishery projects, energy and water preservation activities, environmental protection activities and venture capital businesses may be granted different forms of tax incentive ranging from tax holiday, reduced tax rate, tax credit, super deduction etc.   General tax holidays on manufacturing enterprises and export oriented enterprises are expected to be abolished with grandfathering arrangements available to existing foreign invested enterprises. Grandfathering A 5-year grandfathering period may be granted to enterprises approved before the publication of the new CIT Law ("Old Enterprises").   The CIT rate of an Old Enterprise, if lower than the standardised tax rate, may be increased gradually to the standardised rate.   Existing tax holiday and incentives are expected to be grandfathered to a certain extent, and related details are expected to be covered in the implementing regulations. Anti-avoidance A general anti-avoidance provision may be introduced to empower tax authorities to adjust taxable income where business transactions are arranged without reasonable commercial substance.   Certain controlled foreign corporation rules may be introduced such that profits derived by related enterprises located in low tax rate countries/regions may be taxed in China as deemed distribution.   Thin capitalisation rule may be formally introduced such that excessive interest expenses may be disallowed.   Transfer pricing should continue to be the focus.  Enterprises may become subject to more detailed disclosure requirements and surcharge for transfer pricing tax adjustments.   Cost sharing may be introduced as an acceptable transfer pricing arrangement between related enterprises. The new CIT Law is obviously subject to further discussion and amendments prior to its eventual promulgation by the NPC.  It is expected that the State Council will be issuing Detailed Implementation Rules following the enactment of the CIT Law in order to provide definitions of various important terms and to explain the needed details of implementation especially on the grandfathering arrangements and application of new incentive policies.    In summary, the new CIT Law is a significant step forward in the China taxation history in unifying the income tax laws between foreign invested enterprises and domestic enterprises.  We shall note that the information provided above is not meant to be definitive and only aims at providing readers with some early food for thoughts in assessing potential impact of the new CIT Law on their China businesses.  There are both new opportunities and challenges with regard to tax planning and compliance management.  Foreign investors are urged to review such impact on their China operations and consider necessary responses as early as possible.   Close The People's Republic of China and the United States enter into the first Bilateral Advance Pricing Agreement The State Administration of Taxation ("SAT") of the People's Republic of China and the United States Internal Revenue Service ("IRS") jointly announced on 12 January 2007, that the two governments have completed their first Bilateral Advance Pricing Agreement ("BAPA").  This is the second BAPA concluded between China and a tax treaty partner.  The first BAPA was concluded between China and Japan in 2005.  This particular Advance Pricing Agreement ("APA") with China involves Wal-Mart Stores, Inc.  According to the announcement, the Company filed its APA application in June of 2006, and the agreement was concluded by the two governments after two rounds of discussions.    Read more...... Expand / Collapse The evolution of the BAPA process comes at an interesting time for China, as it is expected in the near future that China may move to eliminate certain tax preferences for foreign investment.  This development could make the BAPA process a more potentially attractive option especially given the growing materiality of China's cross border transactions.  According to the joint announcement, both SAT and IRS regard the BAPA process as an effective mechanism to resolve potential transfer pricing disputes.  SAT also views the BAPA process as an avenue that can help achieve additional efficiencies in tax administration. Close

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