Summary
The new Corporate Income Tax Law (CITL) and the CITL Implementation Regulations (CITLIR) have been in force for more than four years. With a view of providing unified CIT policies so as to facilitate the tax administration of local tax authorities, on 24 April 2012, the State Administration of Taxation (SAT) released SAT Announcement `2012` No. 15 (Announcement 15) clarifying certain matters related to CIT treatments which are frequently encountered by the local tax authorities.
This article summarizes the clarifications covered in Announcement 15 and discusses some recent developments of CIT policies that are worth the attention of taxpayers.
Issues clarified in Announcement 15
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Items |
Descriptions |
Applications |
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Deduction of financing expenses |
Pursuant to Clause No. 17 of the Accounting Standards for Enterprises (cost of borrowing) and Article 37 of the new CITLIR, Announcement 15 clarifies that, reasonable expenses incurred for financing purposes (e.g., issuance of bonds, obtaining loans and absorbing deposit of the insured), can be included in the relevant assets or financing expenses. Where the financing cost satisfies the condition of capitalization, it shall be amortized/depreciated under the respective assets; otherwise, it should be listed as financing expenses and deducted in the current year. |
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Deduction of entertainment, advertising and promotion expenses incurred in the pre-operating period |
According to Announcement 15, 60% of the entertainment expenses and 100% of the advertising and promotion expenses that were actually incurred in the pre-operating period and related to the pre-operating activities, shall be recognized as pre-operating expenses and deductible for CIT purposes according to Article 9 of Guoshuihan `2009` No. 98 (Circular 98) regarding the transition of certain tax treatments from the old CITL to the new CTIL. * Pursuant to Circular 98, a company can choose to either take a one-off deduction or amortize its pre-operating expenses over no less than three years. No changes can be made once the company selects a deduction method. |
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Issue related to expenses which were incurred in prior years and should have been deducted but have not yet been deducted |
Pursuant to the Tax Collection and Administration Law, for the expenses (including asset losses) which were actually incurred in prior years and should have been deducted for CIT purposes but have not yet been deducted or not fully deducted, retroactive deduction in the tax year when such expenses were incurred (“the retroactive year”) is allowed. The relevant enterprise should perform itemized reporting and provide explanation. The retroactive deduction period shall not exceed 5 years. The CIT overpaid by the enterprises due to the above reasons, is allowed be offset against the CIT payable of the retroactive year. If the CIT overpaid exceeds the CIT payable of the retroactive year, the excess amount is allowed to be offset against the CIT payable of the following years or refunded. |
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Issue related to administration on non-taxable income |
For the non-taxable income derived by enterprises, the tax treatments should be referenced to Caishui `2011` No. 70 (Circular 70) regarding CIT treatments of fiscal funds (财政性资金) for specific usage purposes. If the administration of the above non-taxable income is not in compliance with Circular 70, such income shall be treated as taxable income and CIT will become payable. |
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Still, there are uncertainties
Although tax authorities at the central government level released a series of tax circulars or announcements to clarify certain CIT related issues and treatments to eliminate the differences of tax implementation at the local level, some uncertainties related to CIT deduction still exist, resulting in varieties of local practice. Further clarification or guidance from relevant tax authorities is still required.
Supplementary pension funds and medical insurance funds
Pursuant to the new CITLIR, qualified supplementary pension funds and medical insurance funds (two supplementary funds) paid by an enterprise for its investors and employees are deductible for CIT purposes. In reality, many of the two supplementary funds are arranged through commercial insurance companies, which raise questions on CIT deduction due to the limitation set in the CIRTIR. However, so far, there has been no further clarification from the SAT on the deductibility of the two supplementary funds that were arranged through commercial insurance companies.
Mobile phone expenses reimbursed to staff
Currently, there is no tax rule stipulating the tax treatments on the CIT deduction of mobile phone expenses incurred by the employees but reimbursed by the company. In this respect, tax authorities at local level have taken different positions on its CIT deduction:
- Allowing the CIT deduction of such expenses as employee welfare expenses
- Allowing the CIT deduction of such expenses as office communication expenses
- Only allowing the CIT deduction of such expenses when substantiated by an invoice in the company’s name
- Only allowing the CIT deduction of such expenses as salaries and wages
Circular 3 requires an enterprise to fulfill the relevant IIT withholding obligation on salaries and wages actually paid before it can claim the salaries and wages deduction for CIT purposes.
As this type of expense is quite common, a clarification on the tax treatment would be helpful to enterprises and also the relevant employees.
Service fees charged by overseas related companies
Companies incorporated in China by multinational companies often receive support and guidance from their overseas related companies. It makes commercial sense for these overseas related parties to recharge their costs on a reasonable basis. Such charges would normally be in the form of service fees or cost sharing.
However, in order to prevent tax avoidance through improper inter-company transactions, the tax authorities are exercising strict administration of the deduction of the inter-company charges which are yet to be paid to the overseas related companies. If there could be clear guidelines on how these costs can be deducted, it will be extremely helpful to improve tax efficiency for companies with a multinational background.
Next step
Taxpayers should study Announcement 15 and the other circulars as stated here carefully and make proper use of those provisions stipulated in Announcement 15. If in doubt, consultations with tax professionals or clarification from the tax authorities in charge are always recommended.