The following matters are covered in this issue:
- CIT law revised to encourage charitable donations (Presidential Decree No. 64)
- Encouraging foreign investment in central/western China (NDRC and MOFCOM Order No. 33)
- SAT reinforces administration of VAT on imports (SAT Announcement  No. 3)
- China further lowers unemployment insurance rate (Ren She Bu Fa  No. 14)
CIT law revised to encourage charitable donations
On 24 February 2017, Xi Jinping, the President of the People’s Republic of China (PRC), signed Presidential Decree No. 64. With this he announced that the revised PRC Corporate Income Tax (CIT) Law (“revised CIT law”), adopted on 24 February at the 26th Session of the 12th National People’s Congress (NPC), is effective from the date of issuance*.
An amendment has been made to the Article 9 of the existing CIT Law, which sets out rules governing the tax deductibility of corporate charitable donations . Under this, charitable donations made by an enterprise are deductible up to 12% of the enterprise’s gross annual profit. In the revised CIT law, charitable donations exceeding 12% of the gross annual profit are permitted to be carried forward and be deducted from the taxable income of an enterprise over the following 3 years. The amendment aligns the CIT Law with the provisions of the new Charity Law of the People’s Republic of China** which was adopted by the NPC on 16 March 2016. The overall goal is to encourage corporate charitable donations.
While the deduction provision which has prompted this CIT Law revision is, by itself, of relatively minor importance, the amendment is of broader significance as it is the first CIT Law amendment since the CIT law was introduced in 2008. Generally speaking, in the past China CIT policy changes have effected by the issuance of guidance, in the form of circulars or announcements, by the State Administration of Taxation (SAT), either by itself or in combination with other ministries or agencies of the Chinese state. While the broad language used in the NPC-issued CIT Law and the State Council-issued CIT Law implementing regulations has provided wide latitude for CIT policymaking in this way, the SAT still encounters limits where a desired tax policy would not be consistent with wording of the above. An example in this regard might be the OECD BEPS anti-hybrid and interest limitation rules, whose introduction is complicated by the specific wording of the CIT Law.
The new CIT Law amendment shows that changing the CIT Law through the NPC to effect tax policy changes is possible, and might be seen to open the way to further changes in future. It might also be noted that this development links to the SAT’s working plan, issued in December 2016, for putting tax regulations and policies on a statutory basis in the course of the 13th Five-Year-Plan period. Please refer to KPMG China Tax Weekly Update (Issue 48, December 2016) for more details.
* According to the news article released on the official website of the State Council on 24 February 2017, charitable donation made after 1 September 2016 may be entitled to enjoy the 3 year carry-forward. It is noted that the said effective date in the news is consistent with the effective date of the new Charity Law, but not with the date publicized in the President Decree No. 64, which needs to be clarified. We will monitor this matter and keep you posted on any clarification.
** With regard to the details of the Charity Law of the People’s Republic of China, please refer to KPMG China Tax Weekly Update (Issue 10, March 2016).
Encouraging foreign investment in central/western China
As highlighted in KPMG China Tax Weekly Update (Issue 4, January 2017), on 17 January 2017, the State Council have issued a circular setting out 20 measures to boost foreign investment. This is part of a new national effort to build “a new open economic system” in China. One of the measures is to revise the “Catalogue of Priority Industries for Foreign Investment in Central and Western China“. The Catalogue covers provinces in central/western China (such as Shanxi, Inner Mongolia, Anhui, Jiangxi). It also (despite the title of the Catalogue) covers provinces in northeast China (such as Liaoning, Jilin, Heilongjiang) as well as Hainan province (in the far south). The northeast, while clearly not central/west, is an old heavy industry region which has experienced economic difficulties. This region, as well as Hainan, have been identified by the government as being in need of economic rejuvenation support, and so have been added to the Catalogue.
To give effect to this, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued Order No. 33 and published the revised "Catalogue of Priority Industries for Foreign Investments in Central and Western China 2017" (“the revised catalogue”). This is in effect from 20 March 2017 and replaces the 2013 catalogue. The Catalogue revisions expand the number of sectors and industries encouraged by the government and incentivizes FIEs to relocate their operations to the central/west and northeast regions (and Hainan). Formally encouraged business sectors may be granted a range of tax, customs and other support (e.g. preferred land access, subsidies) by provincial/local governments in the locations where the encouraged businesses are established. A further driver behind the Catalogue revisions is to facilitate the “One Belt One Road” external economic strategy and assist, in particular, western China to establish and deepen economic linkages with countries along the New Silk Road (please refer to KPMG China Tax Weekly Update (Issue 5, February 2016) for more information about “One Belt One Road” strategy).
The revised catalogue is updated from the 2013 catalogue to reflect the emergence of newly significant economic sectors, and to fully leverage the economic comparative advantages of the central/western and northeast regions (and Hainan). It contains 639 encouraged industries (and specific industrial/business sectors), with an increase of 139 compared with the 2013 catalogue. The leading goals and main changes made are:
- Promote the transformation and upgrade of traditional industries in the central and western regions. For provinces with established agricultural and animal husbandry sectors, newly encouraged business sectors include processing of organic food and establishment of vegetable base with standardized facilities. Newly encouraged are also business sectors for the production of “intelligent agriculture” monitoring and control technology and modern agricultural equipment.
- Support high-tech industrial development. Newly encouraged business sectors like integrated circuit manufacturing, smart phone, laptop, and biological medicine, were added in some provinces to support electronic and medical industry cluster development.
- Encourage the acceleration of service sector development. The new catalogue adds a variety of services sectors which deal with intermediate services to manufacturers (such as engineering survey design, graphic design, logistics) as well as consumer related service sectors (such as tourism and leisure, culture and sports). Which of these services is encouraged in a particular province depends on what service sectors are already prominent in that province (e.g. Yunnan – tourism).
- Promote the development of labour intensive industry. In provinces with labour cost advantages the revised catalogue provides for encouragement of industry sectors such as export-oriented textile, clothing and furniture production. This is with a view to promoting the development of new export-oriented industry clusters in central/west China, and to draw such activity away from its traditional clusters in east/south China, which is becoming more expensive and seeking to upgrade into more capital/technology intensive sectors.
- Intensify infrastructure and industry support. Newly encouraged business sectors like public parking facility, electric vehicle charging facility and highway freight station were added up for some provinces to enhance transport and logistics network development. Newly encouraged are also business sectors such as semiconductor lighting materials, auto parts, intelligent terminal products and key parts, which aim to strengthen industrial supporting capability (e.g. automotive, electronics industries).
- Adjustment of the 2013 encouraged business sectors to reflect the expansion/contraction of certain industries, in specific provinces, since 2013. This involved modifying the coverage of specific encouraged business sectors (e.g. auto parts manufacturing and biomass power generation equipment manufacturing) and deleting certain sectors from the encouraged list (e.g. pilot training and aviation clubs, rosin deep processing).
Foreign-invested projects covered by the catalogue, may enjoy the following preferential policies:
- Imports of equipment for use in operations are entitled to a customs duty exemption.
- Priority access to land for encouraged foreign-invested industrial projects which use land intensively. The land transfer price may be set by the local government at a 30% discount to the national minimum price for the same class of land.
- From 1 January 2011 to 31 December 2020, foreign-invested enterprises established in the western region, are entitled to a CIT rate of 15%, provided they fall within encouraged industries.
This West/Central encouraged sectors catalogue is separate from the Catalogue detailing whether, at a national level, sectors in China are encouraged/restricted/prohibited to foreign investors, and that the two catalogues would need to be read by foreign investors in tandem with each other. The NDRC and the MOFCOM are in the process of revising the national catalogue, and they publicized the discussion draft of the revised national catalogue and solicited public opinion on it in December 2016. Please refer to KPMG China Tax Weekly Update (Issue 47, December 2016) for details.
SAT reinforces administration of VAT on imports
In recent years, a number of cases have been identified in which certain taxpayers have improperly claimed input credits for import Value Added Tax (“VAT”) by use of false or improperly obtained import VAT payment certificates issued by the customs authorities (“customs payment notices”). To further strengthen VAT administration and crack down on the abuse of customs payment notices, on 13 February 2017, the State Administration of Taxation (SAT) issued Announcement  No. 3 (“Announcement No. 3”), effective as at date of issuance. This aims to reinforce the administration of the import VAT input credit through the following measures:
- VAT general taxpayers must accurately fill in their enterprise name when making declaration for imports. This is to ensure that the enterprise name stated on the customs payment notice is consistent with the one used for tax (VAT) registration.
- Tax authorities shall verify the input tax credit claimed by general VAT taxpayers using the customs authorities’ records of import VAT paid;
- If the tax authority claims data and customs VAT payment data are properly matching, an input VAT credit can be claimed.
- If the tax authority claims data and customs VAT payment data are not properly matching, an input VAT credit may not be claimed until all the information stated on the customs payment notice are verified by the tax authorities.
China further lowers unemployment insurance rate
KPMG China Tax Weekly Update (Issue 6, February 2017) highlighted that, on 4 February 2017, with the issuance of Guo Ban Fa  No. 6, the State Council released a detailed plan for a pilot program to merge the social security contributions made by employees and employers under the maternity insurance and employees’ basic medical insurance schemes (hereinafter referred as the “two public insurance schemes”) in 12 cities.
On 16 February 2017, the Ministry of Human Resources & Social Security (MOHRSS) and the Ministry of Finance (MOF) jointly issued Ren She Bu Fa  No. 14 (“Circular 14”) to further lower the rate of unemployment insurance in a bid to reduce the fiscal burden on businesses and, at the same time, boost the economy through stimulating increased consumption.
Unemployment insurance is part of the nationwide Chinese social security scheme* which also includes pensions, medical care, employment injury, and maternity insurance (This is so-called “Five Insurances plus the housing fund” or “Four insurances plus the housing fund” after implementation of “two public insurance schemes”). Both employees and employers face mandatory requirements to pay a monthly contribution to the relevant social insurance schemes according to rates fixed by employees’ salary levels.
Circular 14 decided that, starting from 1 January 2017, all provinces (autonomous regions, municipalities) still requiring payment of unemployment insurance at the 1.5% rate (provided for under existing guidance) must lower the rate to 1% by 30 April 2018. The rates for employer and employee, within one province (autonomous region, municipaltiy), shall be unfied, and the rate that an employee is subject to shall not be higher than the rate for the employer. Detailed plans for reducing the rate of unemployment insurance can be determined by each province’s (autonomous regions, municipalities) local government.
In the context of downward economic pressure and declining corporate profits, the MOHRSS and the MOF have issued two Circulars in 2015 and 2016 respectively, and to reduce the unemployment insurance rate in twice, i.e., reducing the rate from 3% to 2% from 1 March 2015; and starting from 1 May 2016, within 2 years, further reducing the rate to 1%-1.5% by stages. Some provinces, such as Guangdong and Sichuan, have already cut down the rate to 1% before the issuance of Circular 14, which requires that other provinces whose unemployment insurance rate has been stabilizing at 1.5% lowering the rate to 1% before 30 April 2018, and the rate for employee shall not exceed 0.5%.
* From 2011, foreigners who work in China (including those are directly employed by enterprises registered in China and those concluded an employment contract with a foreign employer and are dispatched to enterprises registered in China), are also required to participate in the Chinese social security system.