The State Administration of Taxation (SAT) and the Ministry of Finance (MOF) issued the Notice on Policy concerning Pre-tax Deduction of Advertising Fees and Business Promotional Fees in Certain Industries (“Deduction Notice”) at the end of July. The Deduction Notice is set to be effective from January 1, 2008 to December 31, 2010.

Pursuant to the Deduction Notice, advertising fees and promotional fees incurred by cosmetics production enterprises, pharmaceutical and beverage production enterprises (exclusive of alcohol production enterprises) up to 30 percent of the business revenue in the current year are allowed to be deducted, with the balance to be carried over and deducted in subsequent years.

In the case of beverage production enterprises operating through franchise, advertising fees and business promotional fees up to 30 percent of the business revenue in the current year incurred by the user of the beverage brand may be deducted by the user, or part or all of the aforementioned fees may be assigned to the holder or manager of the beverage brand to be deducted as its sales expenses before paying enterprise income tax.

Tobacco and cigarette enterprises should not deduct advertising or business promotional expenses when calculating their taxable income.