Full Text: Explanation on China´s draft enterprise income tax law

(ii) Transitional measures for enterprises enjoying the existing statutory tax preferential treatment

Introduction of the new Tax Law will increase the income tax burden on some old enterprises. To ease this impact, the Draft develops some transitional preferential measures for old enterprises established before the promulgation of the new Tax Law which enjoy low tax rates or regular tax reduction and exemption treatment under current tax laws and administrative regulations. According to these transitional measures, old enterprises entitled to enjoy an income tax rate of 15 percent or 24 percent under the current tax laws may, pursuant to the regulations of the State Council, continue to enjoy a gradually increasing transitional income tax rate within five years after the new Tax Law becomes effective. Old enterprises entitled to enjoy regular tax reduction and exemption treatment under the current income tax laws may continue to enjoy remaining incentives in accordance with the requirements and period specified by the current income tax laws. However, for enterprises that have not made any profits and thus not enjoyed such preferential treatment, the period for enjoying preferential treatment shall be calculated from the year in which the new Tax Law becomes effective.

Given the policy considerations and complex background of these transitional measures, it is provided in the Draft that the State Council shall develop measures for implementing such transitional incentives (Article 57 of the Draft).

(iii) Taxpayers and their obligation to pay tax

When levying tax on organizations or entities other than individuals, most countries use "legal person" to define a taxpayer, and the reform to the enterprise income tax system should be accordingly orientated towards the introduction of a legal person tax system. Therefore, the Draft no longer uses the "independent economic accounting" criteria in the current Tax Law on Domestic Enterprises to define a taxpayer. Meanwhile, it defines a taxpayer as an enterprise or other organization that earns income. Such provision is basically in conformity with the relevant provisions of the current tax laws. To avoid double taxation, the Draft does not apply to individual proprietorship enterprises and partnership enterprises.

To be compatible with international practice, the terms of "resident enterprise" and "non-resident enterprise" are used in the Draft. A resident enterprise shall perform comprehensive obligation of tax payment and pay tax on all of its income from sources inside and outside the territory of China. A non-resident enterprise shall perform limited obligation of tax payment and generally pay tax on its income from sources inside the territory of China. In the international community, several criteria may be used to define a resident enterprise, such as the "place of registration", "place of effective management" and "place of head office"; and most countries adopt a combination of two or more above-mentioned criteria. In light of the actual conditions in China, resident enterprises and non-resident enterprises are defined in the Draft by combining the criteria of "place of registration" and "place of effective management" (Article 2 of the Draft).