China Tax & Investment Express China Tax Center Issue No. 2015005 6 February 2015 China Tax & Investment Express (CTIE) * brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a weblink that leads you to the full content of the announcement (in Chinese). Please feel free to contact your Ernst & Young client service professionals for further assistance if you find the announcements have an impact on your business operations. This CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in-depth analyses of tax and business developments in China. * If you wish to access these previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars ► Notice regarding Corporate Income Tax (CIT) policies related to the deduction for loan loss provisions made by financial institutions (Caishui [2015] No. 9) ► Notice regarding CIT policies related to the deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small and medium-sized enterprises (Caishui [2015] No. 3) Synopsis Pursuant to the PRC CIT Law and its implementation rules, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released the following circulars to clarify the CIT deduction for loan loss provisions on 15 January 2015: ► Caishui [2015] No. 9 (“Circular 9”) to clarify the CIT deduction for loan loss provisions made by financial institutions (i.e., policy banks, commercial banks, finance companies, credit cooperative in urban and rural areas (城乡 信用社) and finance leasing companies, etc.) ► Caishui [2015] No. 3 (“Circular 3”) to clarify CIT deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small and medium-sized enterprises
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China Tax & Investment Express
China Tax Center Issue No. 2015005 6 February 2015
China Tax & Investment Express (CTIE) * brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a weblink that leads you to the full content of the announcement (in Chinese). Please feel free to contact your Ernst & Young client service professionals for further assistance if you find the announcements have an impact on your business operations.
This CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in-depth analyses of tax and business developments in China. * If you wish to access these previous issues of CTIE and China Tax & Investment News, please contact us.
Tax circulars
► Notice regarding Corporate Income Tax (CIT) policies related to the deduction for loan loss provisions made by financial institutions (Caishui [2015] No. 9)
► Notice regarding CIT policies related to the deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small and medium-sized enterprises (Caishui [2015] No. 3)
Synopsis Pursuant to the PRC CIT Law and its implementation rules, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released the following circulars to clarify the CIT deduction for loan loss provisions on 15 January 2015:
► Caishui [2015] No. 9 (“Circular 9”) to clarify the CIT deduction for loan loss provisions made by financial institutions (i.e., policy banks, commercial banks, finance companies, credit cooperative in urban and rural areas (城乡信用社) and finance leasing companies, etc.)
► Caishui [2015] No. 3 (“Circular 3”) to clarify CIT deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small and medium-sized enterprises
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Key features of the Circulars are as follows:
Items Provisions General rules on CIT deduction for loan loss provisions (as prescribed in Circular 9) Scope of applicable loan assets
Deductible loan loss provisions can be allowed for the following loan assets:
► Loans (including mortgage, pledge and guaranteed loans)
► Risk assets with loan characters, e.g., bank cards overdraft, discounts, credit advance (including bank acceptance bill advance, letter of credit advance, guaranty advance), import and export bills of exchange, inter-bank lending, finance lease receivable
► Foreign loans on-lent by financial institutions with repayment obligation (including loans from international financial institutions, credit granted by foreign buyers, loans from foreign governments, unconditional loans from the Japan Bank for International Cooperation and mixed loans from foreign governments)
Calculation of deductible loan loss provisions
Deductible loan loss provisions in the current year = Ending balance of aforementioned loan assets of the current year x 1% - Ending balance of loan loss provisions that have been deducted for CIT purposes in the preceding year Deductible loan losses incurred by financial institutions should be first set off against the loan loss provisions already deducted. The excess deductible loan losses shall be deducted against taxable income of the current year on an actual basis.
Nondeductible loan loss provisions
Loan loss provisions on certain assets for which financial institutions do not undertake risks, such as entrusted loans, treasury bonds, dividend receivable, and reserves to be paid over to the central bank, are not allowed.
Exception For CIT deduction of loan loss provisions provided to the agricultural industry or small and medium-sized companies, financial institutions may choose to follow either the tax treatments prescribed in the exceptional rule under Circular 3 or the relevant tax treatments stipulated in Circular 9.
Exception to the general rule: CIT deduction for loan loss provisions made by financial institutions on loans provided to the agricultural industry and small and medium-sized enterprises (as prescribed in Circular 3) Scope of loans provided to the agricultural industry and small and medium-sized enterprises
Loans provided to the agricultural industry Loans provided to farmers as well as enterprises and organizations registered in rural areas as prescribed in Circular 3 and counted according to the relevant statistical rule. Loans provided to small and medium-sized enterprises Loans provided to small and medium-sized enterprises with both annual revenue and total assets of no more than Rmb200 million.
Calculation of deductible loan loss provisions on loans provided to the agricultural industry and small and medium-sized enterprises
The calculation of the aforementioned deductible loan loss provisions shall refer to classifications of loans according to Yinfa [2001] No. 416 (“Circular 416”, i.e., Guiding Principle on Classifications of Credit Risks):
► For loans classified into loans with concern (关注类贷款), the deductible loan loss provision is capped at 2%
► For loans classified into subprime loans (次级类贷款), the deductible loan loss provision is capped at 25%
► For loans classified into doubtful loans (可疑类贷款), the deductible loan loss provision is capped at 50%
► For loans classified into loss loans (损失类贷款), the deductible loan loss provision is capped at 100%
Deductible loan losses incurred by financial institutions related to loans provided to the agricultural industry and small and medium-sized enterprises should be set off against loan loss provisions already deducted first. Excess deductible loan losses shall be deducted against the taxable income of the current year on an actual basis.
Effectiveness Both Circulars 3 and 9 are effective from 1 January 2014 to 31 December 2018.
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Our observations Circulars 9 and 3 are issued to extend the policies of CIT deduction for loan loss provisions by financial institutions as prescribed in Caishui [2012] No. 5 (“Circular 5”, i.e., Notice regarding the deduction for loan loss provisions by financial institutions for CIT purposes) and Caishui [2009] No. 99 (“Circular 99”, i.e., Notice regarding CIT policies related to the deduction for loan loss provisions by financial institutions on loans provided to the agricultural industry and small and medium-sized companies) . (Please refer to CTIE2012006 and CTIE2009026 for details of Circulars 5 and 99.) The main purpose of continuing the CIT deduction on loan loss provisions by financial institutions as prescribed in Circulars 5 and 99 is to help financial institutions mitigate their credit risks, in order to support the healthy development of the finance industry. No changes are made in Circulars 9 and 3 compared to the earlier two circulars. Circulars 9 and 3 took retroactive effect on 1 January 2014, which means the CIT deduction for loan loss provisions shall be applied in the 2014 annual CIT filing. Financial institutions should make use of the relevant provisions and complete the 2014 annual CIT filing properly. If in doubt, assistance from tax professionals would be helpful. You may click this link to access full content of Circular 9: http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201501/t20150126_1184434.html
You may click this link to access full content of Circular 3: http://www.chinatax.gov.cn/n810341/n810755/c1476113/content.html
You may click this link to access full content of Circular 416: http://www.pbc.gov.cn/rhwg/19980602f.htm
You may click this link to access full content of Circular 5: http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201202/t20120214_627901.html
You may click this link to access full content of Circular 99: http://sme.heshan.gov.cn/news/bencandy.php?fid=73&id=1714
► Notice regarding the “Administrative Standardizations on Export Tax Refund/Exemption for All Tax Authorities (Version 1.0)” (Shuizongfa [2014] No. 155) Synopsis To regulate the administration of export tax refund/exemption and specify the administration issues such as authorities, work duties and procedures (including the relevant procedures for the approval of export tax refund/exemption as well as issuance of certificate for export tax exemption) to be conducted by different levels of state tax bureaus, the SAT released the “Administrative Standardizations on Export Tax Refund/Exemption for All Tax Authorities (Version 1.0)” (hereinafter referred to as the “Export Tax Refund/Exception Standardizations”) through Shuizongfa [2014] No. 155 (“Circular 155”) on 28 December 2014. Although the Export Tax Refund/Exception Standardizations mainly serve for state tax bureaus’ internal use, enterprises engaging in export businesses may still observe it to understand details of state tax bureaus’ administration in this regard, such as procedures related to export tax refund/exemption as well as key information that the state tax bureaus will focus on during the assessment/approval procedures. You may click this link to access full content of Circular 155: http://www.zjtax.gov.cn/pub/13310030000/04/zxwj/201501/t20150105_434890.html
► Notice regarding Value-Added Tax (VAT) refund/exemption policies applicable to goods entering into the China - Kazakhstan Korgas International Border Cooperation Center (Caishui [2015] No. 17)
Synopsis On 21 January 2015, the MOF and SAT jointly released Caishui [2015] No. 17 (“Circular 17”) to launch the VAT refund/exemption policies applicable to China - Kazakhstan Korgas International Border Cooperation Center (hereinafter referred to as the “CKK Center”) as below:
► Upon verification and acceptance by the CKK center, infrastructure (except for public infrastructure), construction materials and equipment entering into the CCK center from the PRC, which are to be utilized in the CKK Center, are considered as export goods and eligible for VAT refund/exemption policies.
► Customs declaration form for export goods (for export tax refund purpose) should be submitted for the VAT refund/exemption application.
Circular 17 became effective on its promulgation date, i.e., 21 January 2015, and applies to the above-mentioned tax refund/exemption issues occurred prior to 21 January 2015. You may click this link to access full content of Circular 17: http://www.chinatax.gov.cn/n810341/n810755/c1484557/content.html
► Notice regarding four charitable social organizations eligible for the deduction of charitable donations for income tax purposes for the year 2014 (Caishui [2015] No. 1) Synopsis Pursuant to Caishui [2009] No. 124 (“Circular 124”, i.e., Notice regarding the deduction of charitable donations made through charitable social organizations for income tax purposes), on 15 January 2015, the MOF and SAT jointly released Caishui [2015] No. 1 (“Circular 1”) announcing the following four charitable social organizations (hereinafter referred to as “CSOs”), through which the charitable donations made are eligible for the deduction for income tax purposes for the year 2014. (Please refer to CTIE2009038 for details of Circular 124.) ► Red Cross Society of China
► All China Federation of Trade Unions
► China Soong Ching Ling Foundation
► China International Talent Exchange Foundation According to the PRC CIT Law, in general a company’s charitable donations to approved CSOs are deductible for CIT purposes up to 12% of its total annual profits calculated in accordance with PRC Accounting Standards. For individuals, charitable donations to approved CSOs are fully deductible for Individual Income Tax purposes. You may click this link to access full content of Circular 1: http://www.chinatax.gov.cn/n810341/n810755/c1484541/content.html
You may click this link to access full content of Circular 124: http://czj.zunyi.gov.cn/ch2587/ch2594/2009/12/28/content_2009744071.shtml
► Notice regarding copying and rolling out certain reform arrangements implemented in the China
(Shanghai) Pilot Free Trade Zone (SHPFTZ) nationwide (Guofa [2014] No. 65)
Synopsis The SHPFTZ, having been established for more than one year, has made remarkable progress in the reform of the foreign investment management system, trade supervision system, innovative financial system and ex ante/ex post supervision system. Some reform measures would be replicated and rolled out nationwide. On 21 December 2014, the State Council released Guofa [2014] No. 65 (“Circular 65”) introducing the replicable pilot reform experience gained in the SHPFTZ nationwide. Key features of Circular 65 include: In principle, except for matters involving revisions to laws and the construction of an international financial center in Shanghai, replicable pilot reform experience in the SHPFTZ shall be introduced in other locations or even nationwide as soon as possible. Some experience/measures have been replicated and applied nationwide by certain government departments, e.g., the SAT announced a scheme to gradually expand the application of innovative tax-related measures in the SHPFTZ on 17 November 2014 through Shuizonghan [2014] No. 545 (“Circular 545”). On top of it, Circular 65 further announced 35 reform measures, of which, 29 shall be replicated and implemented by relevant departments of the State Council and 6 shall be implemented by governments at the provincial level by using the SHPFTZ’s experience for reference. (Please refer to CTIE2015004 for details of Circular 545.) Certain reform measures to be replicated and implemented by relevant departments of the State Council You may click this link to access full content of the Discussion Draft: http://tfs.mofcom.gov.cn/article/as/201501/20150100871010.shtml
You may click this link to access full content of the Three FIEs Laws: http://www.gov.cn/banshi/2005-08/31/content_69775.htm
6 Real-time allotment of organization code General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ)
11 Online customs clearance implemented by inspection and quarantine authorities
15 Settlement of foreign exchange capital funds of foreign investment enterprises according to willful exchange settlement (意愿结汇)
State Administration of Foreign Exchange (SAFE)
17 Delegating the approval authority to banks for the foreign exchange registration and alteration registration under foreign direct investment accounts
18 Allowing finance lease companies to concurrently engage in the commercial factoring business relating to their core businesses
Ministry of Commerce (MOFCOM)
19 Allowing the establishment of foreign-invested enterprises engaging in credit investigation
20 Allowing foreign investors to establish joint-stock China Holding Companies
21 Removing restrictions on the minimum registered capital requirement for establishment of subsidiaries by finance lease companies
Certain reform measures to be implemented by governments at the provincial level by using the SHPFTZ’s experience for reference
According to Circular 65, the departments of the State Council are required to expand the application of relevant reform measures within the prescribed time limit. The governments at the provincial level and departments of the State Council are required to formulate relevant work plans specifying the detailed measures to be introduced, application timeline and assessment criteria, which shall be submitted to the MOFCOM within a prescribed time limit. Enterprises should study and observe Circular 65 as well as implementation circulars/notices to be released by relevant departments of the State Council and governments at the local level. Enterprises are also suggested to get familiar with these new measures and apply them once they are introduced. If in doubt, consultations with professionals are always recommended. You may click this link to access full content of Circular 65: http://www.gov.cn/zhengce/content/2015-01/29/content_9437.htm
You may click this link to access full content of Circular 545: http://www.xjds.gov.cn/n7380/n373182/n1914935/n1989375/9689391.html
No. Reform measures In-charge departments
Applicable regions
Application timeline
22 Allowing domestic and foreign-invested enterprises to engage in manufacturing and sales of game and entertainment equipment, that can be sold domestically but subject to content review of culture authorities in charge
Ministry of Culture Nationwide By 30 June 2015
23 Specifying detailed supervision requirements in various aspects (e.g., criteria for investors, procedures for company set-up, business rules, supervision and administration, penalties for non-compliance) for industries open-up, and improving the specialized supervision system
Various industry supervision departments
Nationwide (by using the SHPFTZ’s experience for reference)
Depending on the status of opening up industries
25 Customs supervision on cross-border repair and maintenance
General Administration of Customs
Special customs supervision zones
By 30 June 2015
26 Customs supervision on finance lease businesses
27 Advance inspection of import goods AQSIQ
No. Reform measures Application timeline
1 “One-window” system to implement a centralized acceptance of applications for company set-up
Within two to three years
2 Social credit system
3 Information sharing and comprehensive law enforcement mechanism
4 Company’s annual report system and directory of enterprises with abnormal operations
5 Market supervision mechanism with involvement of the public
6 Improving specialized supervision system Depending on the status of opening up industries
► Notice regarding the “Guidelines on Foreign Exchange Administration for the Insurance Business” (Huifa
[2015] No. 6)
Synopsis To promote delegation of approval authority to lower levels and properly regulate the foreign exchange administration for the insurance business, on 19 January 2015, the SAFE released the “Guidelines on Foreign Exchange Administration for the Insurance Business” (hereinafter referred to as the “Guidelines”) through Huifa [2015] No. 6 (“Circular 6”) on 19 January 2015. The Guidelines mainly cover the following key features: Delegation of approval authority to lower levels ► Delegate the approval authority for admission/exit of the foreign exchange insurance market by
insurance companies with legal entity status as well as conversion of capital funds to foreign currency to local administrative bureaus under the SAFE.
► Branch offices of insurance companies are no longer required to apply for admission/exit of foreign exchange insurance market on their own.
► Renewal of approval for engaging in foreign exchange insurance business is no longer required. Usage of foreign currency accounts and capital in foreign currency ► The Guidelines specify the scope of income and expenditure of the respective foreign currency accounts
of insurance companies and the usage of capital in foreign currency.
► The Guidelines specify that the foreign exchange administration for foreign income and expenditures related to cross-border insurance business shall refer to that for current items of domestic entities.
Simplified relevant procedures ► Financial institutions may perform verification on income and expenditure of cross-border foreign
currency, domestic/overseas foreign currency transmission and foreign currency settlement/sale based on the understanding of their clients, transactions when fulfilling their duty of verification.
► An insurance company and its branches, or each branch, under the same legal entity, may collect/pay foreign capital on behalf of each other.
The Guidelines revoked eight earlier released foreign exchange circulars which conflicted with the stipulations in the Guidelines as announced in its attachment III. In addition, by the effectiveness of the Guidelines on 1 March 2015, it shall replace Huifa [2002] No. 95 (“Circular 95”, i.e., Provisional Regulations on Foreign Exchange Administration for Insurance Business). You may click this link to access full content of Circular 6: http://www.safe.gov.cn/wps/portal/!ut/p/c5/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gPZxdnX293QwMLE09nA09Pr0BXLy8PQ99gI6B8pFm8s7ujh4m5jwFQ3t3AwNPEyd_PwznQ0MDTmIDucJB9uFU4m6LLe4dZAOVNg529Qr2NjLzNIfL47AfJG-AAjgb6fh75uan6BbkRBpmeuo4AWV1tGg!!/dl3/d3/L2dJQSEvUUt3QS9ZQnZ3LzZfSENEQ01LRzEwODRJQzBJSUpRRUpKSDEySTI!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/safe_web_store/safe_web/zcfg/jcxmwhgl/jcxmzh/node_zcfg_jcxm_jcxmzh_store/cd7922804712a3219c72bceee2a1794d
You may click this link to access full content of Circular 95: http://www.safe.gov.cn/wps/portal/!ut/p/c4/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gPZxdnX293QwMLE09nA09Pr0BXLy8PQyNPI_2CbEdFAKLWUno!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/safe_web_store/safe_web/zcfg/jcxmwhgl/jcxmzh/node_zcfg_jcxm_jcxmzh_store/8daaee80481c43e68f8daf70e36bc97c
► Notice regarding non-public enterprises eligible for the deduction of CPC-related working expenses for CIT purpose (Zutongzi [2014] No. 42) http://www.sc.ahxf.gov.cn/shownews.asp?id=44713
► Notice regarding the “Procedural Guidelines on the Entry of Foreign Nationals for Short-term Commercial Performances” (Banshifa [2015] No. 1) http://www.mcprc.gov.cn/sjzz/whscs_sjzz/whscs_gg/201501/t20150116_438540.htm
► Notice regarding a list of enterprises recognized as animation and comics enterprises in 2014 (Wenchanfa [2014] No. 53) http://www.mcprc.gov.cn/sjzz/whcys_4769/cys_dmyxzt/201501/t20150109_438366.htm
► Notice regarding the abolishment of the “Provisional Regulations on Foreign Exchange Administration of the Insurance Business” (Huifa [2015] No. 5) http://www.safe.gov.cn/wps/portal/!ut/p/c5/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gPZxdnX293QwMLE09nA09Pr0BXLy8PQ19nU6B8pFm8s7ujh4m5jwFQ3t3AwNPEyd_PwznQ0MDTmIDucJB9yCq8wyyAKkyDnb1CvY2MvM0h8vjMB8kb4ACOBvp-Hvm5qfoFuREGmQHpigA8Piyq/dl3/d3/L2dJQSEvUUt3QS9ZQnZ3LzZfSENEQ01LRzEwODRJQzBJSUpRRUpKSDEySTI!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/safe_web_store/safe_web/zcfg/jcxmwhgl/jcxmzh/node_zcfg_jcxm_jcxmzh_store/32ff57004712b1dc9c90bceee2a1794d
Other business and tax related circulars recently announced by central government authorities:
