(Promulgated by the Ministry of Finance and the State Administration of Taxation on November 25, 1997)
1. Calculation of overseas income
(1) Overseas income of an enterprise which establishes a fully-funded organization overseas refers to the sum after the costs and expenses actually incurred overseas and the administrative expenses which are to be allocated for the head office are deducted from the total overseas income.
The costs and expenses actually incurred overseas refer to the costs and expenses which are allowed to be itemized in expenditures according to the financial and accounting system of our country.
(2) Income from overseas investments gained by an enterprise which has not established a fully-funded organization overseas refers to profits, dividends, bonuses and etc., which have already been distributed to the investor by the enterprise in which the investment is made.
2. Profits and losses between overseas transactions of an enterprise may be offset against each other, but profits and losses between domestic and overseas transactions of an enterprise may not offset against each other.
3.Calculation of tax payable
Tax payable = Tax payable on domestic income + Tax payable on overseas income - Deductible amount of income tax paid abroad
Tax payable on overseas income = Taxable income from abroad กไ Statutory tax rate
Taxable income from abroad refers to the sum after profits and losses between overseas transactions of an enterprise are offset against each other.
4. The method of deducting income tax already paid abroad
In accordance with the provisions of the Regulations and their Implementing Rules, income tax paid abroad by a taxpayer may be deducted by choosing any of the following methods when tax is paid on a consolidated basis, and the deduction method shall not be changed at will once it has been determined.
(1) Deduction according to different countries irrespective of different items: an enterprise which is able to comprehensively provide overseas tax payment certificates may adopt the deduction according to different countries irrespective of different items.
a. Income tax already paid abroad by a taxpayer shall be deducted according to different countries (regions).
Income tax already paid abroad by a taxpayer includes the tax actually paid abroad by the taxpayer and the tax which is regarded as the same as the tax already paid as stipulated by Articles 6 and 7 of these Measures. Taxpayers shall provide tax payment certificates or receipts and relevant proof of tax reduction or exemption verified and issued by the tax authorities of the country (region) where they reside, accurately declare income tax paid abroad, and shall not conceal or falsify information.
b. Deducted limitations on income tax already paid abroad by a taxpayer shall be calculated according to different countries (regions). Any "deducted limitation on tax paid for overseas income" from sources within a certain country (region) shall be calculated according to the formula stipulated in the Implementing Rules, that is:
the deducted limitation on overseas income tax = The total amount of tax payable on income from home and abroad as calculated according to tax law * (Income from sources within a certain country (region) / The total amount of income from home and abroad)
c. Income tax already paid by a taxpayer in any of various foreign countries (regions), if it is lower than the "deducted limitation on overseas income tax" calculated for such a country (region), shall be deducted from the total amount of tax payable according to the actual amount; if it exceeds the "deducted limitation on overseas income tax", the deduction shall be carried out within the deducted limitation as calculated, and the excess portion shall not be deducted in the current year, but may be made up with the balance of tax deduction limitations in following years for a period of time not more than five years.
(2) Deduction at a fixed rate: to facilitate calculations and simplify administration of tax collection, upon application by an enterprise and approval by the tax authorities, the enterprise may carry out the deduction at a uniform rate of 16.5 percent of its taxable income from abroad, regardless of tax-exempt or non-tax-exempt items.
5. The term "total amount of tax payable on income from home and abroad as
calculated according to tax law" used in the formula calculating the deducted limitation on tax paid abroad, and the term "tax payable on overseas incomes" used in these Measures shall be calculated at a statutory tax rate of 33 percent.
6. Handling of overseas tax reductions and tax exemptions
Income tax reductions and exemptions granted to a taxpayer for his overseas investments or business operations according to the provisions of tax law or investments or business operations according to the provisions of tax law or governmental regulations of the country (region) where he resides shall be handled in the following ways depending on the different circumstances:
(1) In any country with which China has concluded an agreement avoiding double taxation, income tax reductions or exemptions granted to a taxpayer according to the provisions of tax law or governmental regulations of the country where he resides may be regarded as the same as the income tax already paid and creditable, provided that the taxpayer provides relevant certificates, which shall be verified by the Tax authorities.
(2) Where a foreign economic cooperation enterprise undertakes a foreign aid project of the Chinese government, a governmental project of the country (region) where it is located, a construction project supported by the World Bank or any other worldwide economic organization, or a project of a diplomatic or consular mission accredited by the Chinese government to the foreign country, income tax reductions or exemptions granted by the country (region) where it is located shall be regarded as the same as the income tax already paid and creditable, provided that the taxpayer provides relevant certificates, which shall be verified by the tax authorities.
7. Handling of natural disasters or other problems which an overseas enterprise encounters
(1) If a taxpayer encounters abroad a severe natural disaster caused by wind, fire, flood or earthquake, and incurs a relatively heavy loss which makes it really difficult for him to continue to sustain investment or business operations, a certificate shall be obtained from an embassy, a consulate or any other locally based organization accredited to the foreign country by the Chinese government, and upon submission of the case to and approval by the tax authorities according to the existing provisions, special treatment in the form of an income tax reduction or exemption within one year shall be granted to his overseas income in accordance with the relevant provisions of the regulations and their Implementing Rules.
(2) If a taxpayer who operates an overseas enterprise or other investment activities (such as engineering project contracting, service contracting, etc.) suffers a relatively large loss due to the occurrence of a war or a political disturbance or other irresistible objective factors in the country (region) where he resides, the matter may be handled by reference to the provisions of the preceding paragraph.
8. The tax year and declarations
For income earned by a taxpayer from sources outside the territory, whether or not it has been remitted back home, income tax shall be calculated, declared and paid based on the tax year (from January 1 to December 31 in the Gregorian calendar) as stipulated in the Regulations and their Implementing Rules.
9. Prepayment and settlement of tax For income of a taxpayer from overseas and domestic sources, enterprise income tax shall be calculated and paid in accordance with the Regulations, their Implementing Rules and these Measures. Tax prepayments are separated and combined settlement at the year-end is made on a consolidated basis. That is, the tax on the portion of domestic income shall continue to be prepaid in accordance with the unified provisions; the tax payable on the portion of overseas income may be calculated and prepaid on a six-month or yearly basis, and the specific prepayment date and the tax amount shall be verified and determined by the local tax authorities. Taxpayers shall prepay the tax payable for the whole year before January 15 of the following year. Within four months after the end of one year, the tax authorities shall combine income of a taxpayer from overseas and domestic sources and make combined settlement on a consolidated basis. 10. These Measures shall be implemented as of January 1,1997.
This translation, together with any explanatory material, is provided courtesy of Lehman Tax & Accounting.