Publikationen

---

China’s State Administration of Taxation (SAT) recently issued the Provisional Rules of Income Tax Collection and Administration on Consolidated Filing for Enterprise with Cross-District Operations (Guo Shui Fa [2008] No. 28) (Notice 28), significantly changing tax filing rules applicable to foreign investment enterprises (FIEs).

Notice 28 was released on March 10, going into effect retroactive to January 1, 2008.

Background

China’s new Enterprise Income Tax Law (EIT Law), which took effect January 1, 2008, requires that resident enterprises must file a consolidated EIT return. That is, a resident enterprise must file a single EIT return for all of its branches to the tax authority in the locale where the enterprise is registered (or in the place of effective management for a resident enterprise registered outside of China).

One major concern arising from the consolidated tax filing requirement is that the EIT revenue would flow into the few locations where enterprises prefer to register their head offices, such as Beijing and Shanghai. This, it was feared, would exacerbate the uneven allocation of fiscal revenue among different regions. To mitigate this potential effect, on January 15 the SAT, joining the Ministry of Finance (MOF) and the People’s Bank of China, issued Provisional Rules on Allocation and Fiscal Administration of Income Tax from Enterprises with Cross-Province Head Office and Branches (Cai Yu [2008] No. 10) (Notice 10).

Notice 10 mainly sets out a framework for allocation of the collected EIT revenue among the central and local governments—a process largely hidden from the enterprises themselves. To implement Notice 10, the SAT issued Notice 28, which provides enterprises with further operational tax filing guidance.

Applicable Enterprises

All resident enterprises that have cross-district¹ branches must comply with Notice 28, except for certain named enterprises²; All EIT revenue from the latter will go solely into the central government’s treasury.

Basic Principles

• Consolidated calculation: the head office (HO) of an enterprise must calculate the taxable income and tax payable for the whole enterprise, including each of branches.
• Distributed administration: the HO and branches are subject to administration of the respective local tax authorities in the locales where the HO and branches are registered.
• Local pre-payments: each of the HO and branches must pre-pay EIT, monthly or quarterly, to the appropriate local tax authorities.
• Annual settlement: the HO must carry out annual settlement of EIT payable for the enterprise after offsetting EIT pre-payments made locally by the HO and branches.
• Treasury transfer: the MOF will allocate and transfer the tax revenue from the central government’s treasury to local government treasuries, pursuant to prescribed ratios.³

Qualified Branches

Only the branches with the function of production and operation (first-tier branches) shall pre-pay EIT locally. Second-tier or lower-tier branches will be absorbed into a first-tier branch for purposes of calculating and making EIT pre-payments locally.

An operational unit under the HO could be deemed a qualified branch and thus pre-pay EIT locally if such unit has an independent function of production and operation and if such unit’s business revenue, staff salary costs and asset value are accounted for separate from the HO’s managerial unit.

A newly established branch will not pre-pay EIT locally in the year it is established. A deregistered branch will not pay EIT locally starting the year after its closure. The EIT payable with regard to the rest of the current tax year when the deregistered branch is closed shall be paid by the HO to the central treasury.

The following branches will not qualify for local EIT pre-payment and will be excluded for purposes of Notice 28:

• A branch that has no function of production and operation but only engaging in certain internal, auxiliary activities, such as after-sales services, internal R&D and warehousing, and does not pay VAT or business tax locally;
• Offshore branches;
• Branches of a low-profit enterprise.

Calculation and Allocation of EIT

Enterprises with cross-district branches should perform consolidated EIT filings based on the following steps:

(1) The HO and its branches should calculate the overall taxable income of the enterprise as a whole.⁴ In arriving at the overall taxable income, the profits and losses of the HO and the branches can be offset against each other.

(2) During each provisional filing, the overall taxable income, as calculated in (1) above, should be allocated between the HO and the branches on a 50:50 basis.

(3) 50 percent of the taxable income allocated to all branches, as calculated in (2) above, shall then be further allocated among the branches in accordance with three parameters, namely business revenue, staff salary costs and asset value of each branch, using this formula:

A = 0.35 * AR/TR + 0.35 * AS/TS +0.30 * AA/TA
A is the allocation ratio for calculating the share of the total taxable income of the enterprise allocated to the branch in question.
AR is the business revenue of the branch in question.
TR is the total business revenue of all branches.
AS is the staff salary cost of the branch in question.
TS is the total staff salary cost of all branches.
AA is the asset value of the branch in question.
TA is the total asset value of all branches.

In calculating the allocation ratio, the HO is required to use the historical figures of the business revenue, staff salary costs, and asset value as reported in the enterprise accounts. Specifically, for the period from January to June of the current year, the amounts of the business revenue, staff salary costs and asset value of the relevant branch in the year immediately before the last year shall be used to calculate the above allocation ratio. For the period from July to December of the current year, the relevant amounts of the branch in the last year shall be used instead. Once the allocation ratio of each branch is determined pursuant to the above formula, the allocation ratio shall remain unchanged within the same year.

(4) Once the allocation ratio for the branch is determined, the taxable income allocated to the HO and the branches can be calculated. The HO and the branches can then compute the respective EIT payable by multiplying the applicable EIT rate. Under the new EIT Law, with a few exceptions, the standard EIT rate applying to all PRC enterprises is 25 percent.

(5) The HO must allocate the particular amounts of EIT pre-payment to each of branches within 10 days of the end of a month or quarter so that the branches and the HO can make EIT pre-payments to the relevant tax authorities within 15 days of the end of a month or quarter.

(6) Within five months of the end of the tax year, the HO is required to carry out the annual settlement of EIT payable, and if applicable, make up additional taxes or apply for tax refund for the enterprise (including the branches). Branches are not required to carry out an annual EIT settlement with their local tax bureaus.

Other Issues Concerning the Calculation and Allocation of EIT Payable

• An enterprise must calculate the EIT pre-payments based on its current actual profit. Upon approval by the tax authority in charge of the HO (HO tax authority), the calculation basis of EIT pre-payments can be 1/12 (for monthly payment) or 1/4 (for quarterly payment) of the enterprise’s taxable income in the last year. Once determined, the calculation basis of pre-payments shall remain unchanged in the same year.

• Business revenue of a branch is defined to refer to the total business revenue realized by the branch from business operations, such as income from sales of good or provision of services for a production enterprise, interest and fees for a financial institution, and premiums for an insurance company. Staff salaries of a branch are defined to refer to various remunerations paid to the staff in exchange for the staff’s services. Assets of a branch are defined to refer to the total amount of economic resources that the branch owns and controls, excluding intangible assets.

Comments

Notice 28 now requires 50 percent of the EIT to be pre-paid to the tax bureaus in charge of the branches. Compared to prior tax filing rules applicable to FIEs, this new requirement increases FIEs’ compliance costs in China.

Notice 28 may intensify the competition for tax revenue among different localities. FIEs with cross-district operations should keep careful track of their tax-related information. They should also be prepared for tax audits from both the tax authorities in charge of the HO and the tax authorities in charge of the branches.