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China Corporate Income Tax Deductions

Updated:2018-6-20 12:23:14    Source:www.tannet-group.comViews:104

China corporate income tax deductions is important for those doing business in China. Generally, an enterprise is allowed to deduct reasonable expenditures that actually have been incurred and are related to the generation of income. Recently, China’s State Administration of Taxation (SAT) released measures clarifying the materials required for corporate income tax (CIT) deductions.

Introduction to corporate income tax in China
The fundamental regulations on China’s corporate income tax (CIT) are the CIT Law and its Implementation Guidelines. All enterprises (except sole proprietorships and partnerships), including all organizations that generate income in China, are subject to CIT. The CIT Law categorizes enterprises into resident enterprises and non-resident enterprises, which are subject to different tax obligations.

Deductions from gross income include reasonable expenditure incurred in relation to income received by an enterprise, such as costs, expenses, taxes (except CIT and VAT) and losses; charitable donations and gifts within 12 percent of the gross annual profit; reasonable depreciation of fixed assets; amortization of intangible assets; amortization of long-term prepaid expenses; inventory cost; net value of an asset transferred; and other deductions stipulated by laws and regulations.

Documents required for CIT deductions
SAT Announcement [2018] No. 28, which will go into effect on July 1, 2018, states the specific instances where taxpayers may not require fapiao - Chinese invoices - in support of CIT deductions in all instances. Receipts, internal documents, and payment slips can be used as supporting evidence for pre-tax deductions in some cases - if fapiao cannot be obtained.

Such a scenario can arise if the expense in question is not subject to value-added tax (VAT), or if a taxpayer receives an unqualified fapiao and cannot acquire a re-issued fapiao because the counterparty has been liquidated and can no longer issue the fapiao. In most situations, however, the re-issued fapiao must be obtained before CIT reconciliation.

Further, the measures state that where an enterprise incurs an expenditure for receiving services subject to VAT jointly with another enterprise - including a related party - the cost-sharing shall be based on the arm’s length principle. In such a situation, the fapiao and the related cost-sharing agreement should be used together as supporting documents for pre-tax deduction.

It must be noted, however, that taxpayers still must submit fapiao to receive pre-tax deductions in most situations.

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