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China Clarifies Tax Treatment Of Corporate Income Earned Abroad

Wednesday, January 27, 2010

The Chinese Ministry of Finance, acting through the State Administration of Taxation, has issued a Circular to clarify corporate income tax provisions with regard to income earned abroad.

According to the Circular, if the tax paid abroad cannot be accurately verified, then the tax paid in the related country (region) should not be deducted from tax payable in the current period, nor deducted from the annual tax amount. The Circular clarifies terms that have been effective since January 1, 2008.

Item 5 of the Circular stipulates that corporate pre-tax income earned abroad should be calculated in accordance with Article 7 of the Implementation Rules of the Enterprise Income Tax Law and the amount of income tax payable for income earned abroad is as defined in Article 78 of the Implementation Rules.

The Circular also defines the amount of income tax that is deductible on income earned abroad as the tax payable and actually paid for the enterprise income earned abroad. The Circular specifies six types of taxes that do not fall into the category of deductible corporate income tax on income earned abroad.

A formula is given for businesses to calculate the amount of deductible tax. Two conditions are outlined in which taxation authorities approve the use of some simple methods for calculating the amount of income tax paid for income earned abroad.

The corporate income tax on income earned from Hong Kong, Macao and Taiwan shall be levied according to the Circular. If a tax treaty exists between Chinese government and the relevant foreign country prescribing rates that differ from the Circular, the treaty rates shall prevail.

The Circular also has a list of 15 countries with much higher statutory tax rates than China's, such as the US, France and Japan.

The British Virgin Islands has recently signed an Agreement on the Exchange of Tax Information with the Government of People's Republic of China. This is the second information exchange agreement signed between China and the offshore financial centers, the first one with the Bahamas, having been signed on December 1, 2009.