From Cover, issue no. 343, Nov 26th 2007
Original article: [Chinese]

Wang Biqiang reveals more regarding the latest draft of the Corporate Tax Law Details, which will clarify many of the ambiguities present in its parent law passed earlier this year. This is the second of a two-part series. The first can be found here.

Third suspense:?qualifying as a high-tech enterprise

?“The 15 percent tax rate offered to high-tech enterprise is very attractive when compared to the?25 percent one demanded of other businesses,” Wu Jiayuan said, “As a result, many?would like to seek?high-tech status.”
This preferential tax is found in the second clause of 28th article. But it doesn’t define high-tech firms, or offer any concrete criterion to be met.

The details clarify this. Research and development costs are a major factor in gaining recognition. In the former draft, the high-tech enterprises were those:

● With annual sale revenue above 200 million yuan, research and development fees must stand at least 3 percent of their annual gross income;
● with annual sale revenue between 50 million and 200 million yuan, research and development fees should stand at above 4 percent of their annual gross income;
● with annual sale revenue under 50 million yuan, research and development fees should stand at least 6 percent of their annual gross income.

The prior draft also states that high-tech enterprises must satisfy the following conditions, which were laid out in a special “Nationally Supported High-tech” area:

● the enterprises’ revenue from product and technology sale should occupy at least 60 percent of their annual gross income;
● employees with with bachelor's degrees or above should occupy more than 30 percent of the enterprise’s total employees;
● technicians should occupy more than 20 percent of the enterprise’s total employees.

The State Council's legislative affairs office deleted specific proportion requirements before submission to the State Council. This indicates the possibility that the State Council and the State Tax Bureau will release such conditions at a later date.

Some insiders say that these requirements were removed because they would be difficult for the State Council to pass, and would require heavy revising, so instead they have been left for the State Tax Bureau to deal with after the rest of the Details have been set.

Wen Zhe, a tax consultant at Baker & McKenzie law firm, echoes these predictions. He thinks that the Details will not include benchmarks based on research and development costs, sales revenues, and minimum proportions of specialized staff.? Instead, he says, they will appear in the subsequent documents.

Fourth suspense:?tax evasion and transfer pricing

“Many foreign-funded enterprises are very concerned about China's transfer pricing policy changes,” Wen Zhe said, “The Details will have a great impact on them.” [Editor's note: you can learn more about transfer pricing here]

Sources say that the Details have one particular clause dealing with price-transferring. It defines the “Business Activity without Reasonable Purposes” which is not clear in the enterprise income tax law. “Business Activity without Reasonable Purposes” refers to business activities aiming to reduce, delay, or evade the tax.

They add that the 47th article clearly states that where the enterprise does business activities without reasonable purposes to reduce the payable income, the tax authority has the right to reasonably make adjustments.

That is to say, if the enterprise takes advantage of corporate restructuring or re-investment, or other arrangements to evade and delay the tax, regardless whether such acts are legal, the tax authorities have the right to adjust the enterprise’s income tax.

It is also said that the Details also stipulates that besides collecting the payable income tax, tax authorities should impose additional interests on the enterprises.
The sources say the State Administration of Taxation will formulate a special document supplementing transfer pricing regulation by the end of this year or the next.
Enterprises are likely to be required to keep relevant business records dealing with transfer pricing, and deliver those records to the tax authority by the end of every year. In addition, the tax authority is likely at any time to conduct an investigation of those records.

Fifth suspense:? pre-tax deduction

The Law sets a unified standard for both foreign and domestic firms' tax deductions, but does not state what the exact ratios are. Sources say that the Details clarify this-- for example, 60 percent of expenses related to business activities can count towards a pre-tax deduction, but this cannot exceed 0.5 percent of annual sales revenue. They add that labor union expenditures that are less than 2 percent of staffs’ total salaries can also be deducted.

Regarding non-profit donations, sources say that the Details stipulate that donations less than 12 percent of the enterprise’s annual total profits can also be deducted.