Chinese Enterprise Income Tax Changes in the Year of the Tiger By Ella Xu

Enterprise income tax (“EIT”) should be a main source of tax income for the Government here. However, because of some twists and turns in the Chinese Corporate law, this tax has been substantially avoidable if you closely monitored your cash flow.  
 
As such, a substantial number of small to medium sized enterprises have historically chosen to post their quarterly or year-end profits at zero, thus allowing them to avoid paying any EIT – legally. This is especially common among foreign direct investors with an off-shore holding company owning their Wholly Foreign Owned Enterprise (“WFOE”) here in Mainland China.
 
So, starting back in 2005 the Central Government assigned the State Tax Bureau and the Ministry of Finance the task of finding a business friendly solution to plug up this hole. The concerned Central and Local Government departments have now issued a series of rules and regulations to solve this problem in a step by step fashion -- as is common here. Most changes to Chinese law are incremental and telegraphed far in advance. They tell you what they are going to do, then they give you a bit of time to adjust to the changes – then they implement that change. 
 
From here forward, the relevant tax offices will now fix an EIT rate for all the companies who have not paid for EIT for a period of time. The fixed tax rate should be evaluated by the character of industry, location, business size, income level and profit level etc.  At the same time, any company that is in one of listed conditions below they will also be assigned a fixed EIT rate.
 
1.       The company who need not set up account books -- following the law;
2.       The company who has not set up account books -- breaching the law;
3.       The company who destroys their own account books – hiding evidence.
4.       The company’s account books are not in good order or are not auditable.
5.       The company who has not paid for tax after being notified by tax bureau to pay;
6.       The company whose “declared amount” of profit is obviously lower than reasonable level.
 
The fixed tax rates will follow this chart.
Industry                                                         Rate %
Agriculture, Forest, Stockbreeding, Fishing            3-10
Manufacturing                                                   5-15 
Wholesale and Retail Trading                               4-15
Transportation                                                  7-15
Construction                                                     8-20
Food and drink                                                  8-25
Entertainment                                                  15-30
Others                                                             10-30       
 
The tax office will re-evaluate the fixed rate every June and the company should follow the new tax rate then.
 
Concerned regulation:
1.       No. 【2009】377 document of State Tax Bureau;
2.       No. 【2008】30 document of State Tax Bureau;
3.       No. 【2007】223 document of Shenzhen State Tax Bureau;
4.       No.【2006】83 document of Shenzhen State Tax Bureau;
5.       No. 【2005】68 document of Shenzhen State Tax Bureau