PRC Tentative Regulations on Consumption Tax (Revised)

(Promulgated by the State Council on November 10 2008 and effective as of January 1 2009.)

Order of the State Council No.539

Article 1: Work units and individuals in the People's Republic of China that produce, commission the processing of and import the consumer goods specified herein as well as other work units and individuals determined by the State Council that sell the consumer goods specified herein are payers of consumption tax and shall pay consumption tax in accordance herewith.

Article 2: The items and rates of the consumption tax shall be as set forth in the Table of Consumption Tax Items and Rates appended to these Regulations.

Adjustments to the consumption tax items and rates shall be determined by the State Council.

Article 3: If a taxpayer concurrently deals in consumer goods that are subject to different consumption tax rates (Taxable Consumer Goods), it shall separately calculate the sales turnovers for and sales quantities of the Taxable Consumer Goods subject to different tax rates. If it fails to calculate the sales turnovers and sales quantities separately, or sells Taxable Consumer Goods subject to different tax rates together as a set, the highest tax rate shall apply.

Article 4: Tax on the Taxable Consumer Goods produced by taxpayers shall be paid at the time of sale by the taxpayers. Taxable Consumer Goods produced by taxpayers for their own use shall be exempt from tax if used for continued production of Taxable Consumer Goods, and shall be liable for tax at the time of transfer if used for other purposes.

Tax on Taxable Consumer Goods that are processed pursuant to a commission shall be collected and turned over by the commissioned party at the time of delivery of the goods to the commissioning party except where the commissioned party is an individual. Where Taxable Consumer Goods processed pursuant to a commission are used by the commissioning party in the continued production of Taxable Consumer Goods, the tax paid may be set off in accordance with provisions.

Tax on imported Taxable Consumer Goods shall be paid at the time of customs declaration for import.

Article 5: The amount of consumption tax payable shall be calculated ad valorem, at a flat rate or by a combination of the two (the Combined Method). The formulae for calculating the tax payable are set forth below:

tax payable as calculated by the ad valorem method = sales turnover × proportional tax rate;

tax payable as calculated by the flat rate method = sales quantity × flat tax rate; and

tax payable as calculated by the Combined Method = sales turnover × proportional tax rate + sales quantity × flat tax rate.

The sales turnover for Taxable Consumer Goods sold by a taxpayer shall be calculated in renminbi. If a taxpayer settles its sales turnover in a currency other than renminbi, it shall translate the same into renminbi.

Article 6: The sales turnover shall be the full price and all additional charges that are collected by the taxpayer from the purchaser for the sale of Taxable Consumer Goods.

Article 7: Tax on Taxable Consumer Goods produced by taxpayers for their own use shall be calculated and paid according to the selling price of the same type of consumer goods produced by the taxpayer. In the absence of a selling price of the same type of consumer goods, tax shall be calculated and paid according to a composite price for taxation purposes.

The formula for calculation of the composite price for taxation purposes by the ad valorem method is set forth below:

composite price for taxation purposes = (cost + profit) ÷ (1 – proportional tax rate)

The formula for calculation of the composite price for taxation purposes by the Combined Method is set forth below:

composite price for taxation purposes = (cost + profit + quantity self-produced and self-used × flat tax rate) ÷ (1 – proportional tax rate)

Article 8: Tax on Taxable Consumer Goods processed pursuant to a commission shall be calculated and paid according to the selling price of the same type of consumer goods of the commissioned party. In the absence of a selling price of the same type of consumer goods, tax shall be calculated and paid according to a composite price for taxation purposes.

The formula for calculation of the composite price for taxation purposes by the ad valorem method is set forth below:

composite price for taxation purposes = (materials cost + processing fee) ÷ (1 – proportional tax rate)

The formula for calculation of the composite price for taxation purposes by the Combined Method is set forth below:

composite price for taxation purposes = (materials cost + processing fee + commissioned processing quantity × flat tax rate) ÷ (1 – proportional tax rate)

Article 9: Tax on imported Taxable Consumer Goods shall be calculated and paid according to a composite price for taxation purposes.

The formula for calculation of the composite price for taxation purposes by the ad valorem method is set forth below:

composite price for taxation purposes = (dutiable price + customs duty) ÷ (1 – proportional consumption tax rate)

The formula for calculation of the composite price for taxation purposes by the Combined Method is set forth below:

composite price for taxation purposes = (dutiable price + customs duty + import quantity × flat consumption tax rate) ÷ (1 – proportional consumption tax rate)

Article 10: If the price for taxation purposes of a taxpayer's Taxable Consumer Goods is obviously low without legitimate reason, the tax authority in charge shall determine its price for taxation purposes for such goods.

Article 11: Taxable Consumer Goods exported by taxpayers shall be exempt from consumption tax, except where the State Council determines otherwise. Measures for the exemption of exported Taxable Consumer Goods from tax shall be formulated by the State Council's departments in charge of finance and tax.

Article 12: Consumption tax shall be levied and collected by the tax authorities. Consumption tax on imported Taxable Consumer Goods shall be levied by customs on behalf of the tax authorities.

Consumption tax on Taxable Consumer Goods that are carried or mailed into the PRC by individuals shall be calculated and levied together with customs duties. The specific measures for such calculation and levy shall be formulated by the Tariff/Tax Regulation Committee of the State Council in conjunction with relevant departments.

Article 13: With respect to Taxable Consumer Goods sold by taxpayers and Taxable Consumer Goods produced by taxpayers for their own use, tax returns shall be filed with and tax paid to the authority in charge of tax at the place where the taxpayer's establishment is located or resident, unless otherwise specified by the State Council's departments in charge of finance and tax.

With respect to Taxable Consumer Goods that are processed pursuant to a commission, the commissioned party shall pay the consumption tax to the tax authority in charge at the place where its establishment is located or resident except where the commissioned party is an individual.

With respect to imported Taxable Consumer Goods, tax returns shall be filed with and paid to customs of the place where customs procedures were carried out.

Article 14: The terms for payment of consumption tax shall be one day, three days, five days, 10 days, 15 days, one month or one quarter, respectively. Taxpayers' specific terms of tax payment shall be determined by the tax authorities in charge on the basis of the size of the taxpayers' amounts of tax payable. Taxpayers that cannot pay tax according to fixed terms may pay tax each time the liability to pay tax arises.

Taxpayers whose term of tax payment is one month or one quarter shall file a tax return and pay tax within a period of 15 days commencing from the date of expiration of the term. Taxpayers whose term of tax payment is one, three, five, 10 or 15 days shall prepay the tax within a period of five days commencing from the date of expiration of the term and, within a period of 15 days commencing from the first day of the next month, file a tax return and settle in full the amount of tax payable for the preceding month.

Article 15: If a taxpayer imports Taxable Consumer Goods, it shall pay tax within 15 days from the date of issuance of the customs import consumption tax payment demand by customs.

Article 16: The levy and collection of consumption tax shall be carried out in accordance with the PRC Law on the Administration of the Levy and Collection of Taxes and relevant provisions hereof.

Article 17: These Regulations shall be effective as of January 1 2009.