On March 16, 2007 Chinese lawmakers passed the much talked about Enterprise Income Tax Law, unifying the tax rates for foreign and domestic enterprises. The law brings China's tax laws more in line with international standards. It has unified the two existing tax codes; one for domestic enterprises, the other for foreign invested enterprises (FIEs), into one and represents a fundamental change in China’s tax policy. Many of the tax incentives and tax holidays that existed in the old code for foreign investors have been changed or eliminated.
Having taken effect from January 1, 2008, the Enterprise Income Tax Law of the People’s Republic of China contains general provisions on the law as well as chapters on what constitutes taxable income, taxes payable, tax incentives, withholding tax at the source, special tax adjustments, administration of the levy and collection of taxes, as well as some supplementary provisions. As is common in China, the details of those provisions, as well as their interpretation and application will be left to further regulations and supplementary circulars. The law has been written, but it remains to be seen how it is to be fully implemented. Some clarifications concerning qualifying for preferential treatment and deadlines for implementation have still to be issued.
The Enterprise Income Tax (EIT) is calculated against the net income in a financial year after deducting reasonable business costs and losses – in other words it is effectively a tax on profits. EIT is settled on an annual basis but is often paid quarterly with adjustments either refunded or carried forward to the next year. The final calculation is based on the year end audit. The detail is complex, so get good advice.
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