On December 16, 2008, the State Administration for Taxation (SAT) of the PRC promulgated the Circular on Adjusting the Scope of the Collection and Administration of the Enterprise Income Tax on Newly-Established Enterprises, Guo Shui Fa (2008) 120, the Circular). The Circular clarifies the allocation of jurisdiction between the two types of taxation authorities, namely the state tax authorities (STA) and local tax authorities (LTA), on the collection of the enterprise income tax (EIT), and helps to streamline the EIT administration for enterprises newly established after the end of 2008 (NEEs). The Circular took effect on January 1, 2009.
In order for an enterprise to qualify as an NEE, the enterprise must be incorporated after the end of 2008, and its shareholders’ contribution of non-financial assets to the enterprise may not exceed 25 percent of its registered capital. The Circular sets forth the following basic rules (Basic Rules):
- EIT taxpayers that existed before January 1, 2009, will pay their EITs to the same EIT authority (i.e., an STA or an LTA);
- an STA will administrate an NEE’s EIT, if the NEE is subject to value-added tax (VAT);
- in general, an LTA will administrate an NEE’s EIT, if the NEE is subject to business tax (BT);
- an STA will administrate an NEE’s EIT, if the entire EIT is allocated to the central government, or if an NEE conducts business in particular sectors (i.e. the banking, insurance and rail transportation industries) and must pay its BT to an STA, an STA will administrate the NEE’s EIT;
- STAs will administrate the EIT of NEEs that are banks, credit unions, or insurance companies, while LTAs will administrate the EIT of other financial NEEs; and
- STAs will administrate the EIT of foreign-invested NEEs or foreign enterprises’ representative offices established after January 1, 2009.
In addition to the Basic Rules, the Circular sets forth several specific rules. First, when a domestic enterprise or individual (the payer) pays income to a non-resident enterprise (the payee) that does not have any establishment or place of business in the PRC, or whose establishment or place of business in the PRC is not effectively connected with the income, and such income constitutes the payee’s PRC-sourced income subject to the PRC withholding tax, the STA or LTA in charge of the collection and administration of the payer’s income tax will also be responsible for the collection and administration of the EIT withholding on the payee’s income.
If an enterprise is involved in cross-region operations and has paid EIT on a consolidated basis before 2009, the same type of tax authority (either an STA or an LTA) that administrates the EIT of the enterprise’s headquarters will also be responsible for the EIT of its branches established after January 1, 2009. If an NEE is engaged in cross-region operations and pays EIT on a consolidated basis, the EIT authority of the NEE’s headquarters will be determined according to the Basic Rules, and the same type of tax authority (either an STA or an LTA) will administrate the EIT of its headquarters and branches.
Under the Circular, if an enterprise is exempt from certain turnover taxes, its EIT authority will be determined based on the type of the exempted turnover tax, while the LTAs will tentatively administrate the EIT of those enterprises liable for neither VAT nor BT.
If an enterprise is liable for both VAT and BT, its EIT authority, in principle, will be determined based on the type of turnover tax that is imposed on the core business that the enterprise declares on its taxation registration. However, if its core business cannot be identified in this way, the first item of the business scope registered with the competent industry and commerce authority will be deemed as its core business for this purpose. Once the EIT authority is determined, in principle, no adjustments will be made.