Circular on Issues Relevant to the Deduction of Wages, Salaries and Employee Benefit Expenses by Enterprises

(Issued by the State Administration of Taxation on January 4 2009 and effective as of January 1 2008.)

Guo Shui Han [2009] No.3

Offices of the State Administration of Taxation and local taxation bureaux of provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans:

With a view to effectively and thoroughly implementing the Implementing Regulations for the PRC Enterprise Income Tax Law (the Regulations), we hereby notify you on issues relevant to the deduction of wage, salary and employee benefit expenses by enterprises as follows:

1. Issue of Reasonable Wages and Salaries

For the purposes of Article 34 of the Regulations, the term “reasonable wages and salaries” means the wages and salaries actually paid by an enterprise to its employees in accordance with the wage and salary system formulated by the shareholders' general meeting, board of directors, remuneration committee or the relevant management body. When confirming the reasonableness of wages and salaries, the tax authority may do so by considering the following principles:

(1) whether the enterprise has formulated a relatively compliant employee wage and salary system;

(2) whether the employee wage and salary system formulated by the enterprise is consistent with the level in the industry and the region;

(3) whether the wages and salaries paid by the enterprise during a certain period are relatively fixed, and whether the revision of wages and salaries is done in an orderly fashion;

(4) whether the enterprise has performed in accordance with the law its obligation of withholding individual income tax on the wages and salaries it has actually paid; and

(5) whether the relevant wage and salary arrangement has as its objective the reduction or evasion of taxes.

2. Issue of Total Payroll

For the purposes of Articles 40, 41 and 42 of the Regulations, the term “total payroll” means the sum of wages and salaries actually paid by an enterprise in accordance with Article 1 hereof, but excluding the enterprise's employee benefit expenses, employee education funds, labour union funds, social insurance premiums such as old-age insurance premiums, medical insurance premiums, unemployment insurance premiums, work-related injury insurance premiums and maternity insurance premiums, and contributions to the housing reserve. The wages and salaries of an enterprise of a state-owned nature may not exceed the limit imposed by the relevant governmental departments. Any amount in excess thereof may not be included in the enterprise's total payroll nor be deducted when calculating the tax payable by the enterprise.

3. Issue of Deduction of Employee Benefit Expenses

An enterprise's employee benefit expenses as specified in Article 40 of the Regulations include the following:

(1) for enterprises whose social functions have yet to be detached, the equipment, facility and personnel expenses incurred by their internal welfare departments, including the equipment, facility, repair and maintenance expenses of collective welfare departments such as employee cafeterias, employee bathrooms¹, hair salons, medical clinics, daycare centres, sanatoria, etc. and the wages, salaries, social insurance premiums, housing reserve contributions, service remuneration, etc. of the working personnel of the welfare departments;

(2) the various subsidies and non-monetary benefits paid to employees for health, living, housing, transportation, etc., including the expenses paid by an enterprise for medical treatment sought by employees while away on business, the medical expenses of employees of enterprises that have not implemented medical schemes, medical subsidies for immediate family supported by employees, heating subsidies, employee heatstroke prevention and cooling expenses, employee distress subsidies, relief expenses, employee cafeteria fund subsidies, employee transport subsidies, etc.; and

(3) other employee benefit expenses incurred in accordance with other provisions, including funeral subsidies, pensions for the family of disabled or deceased employees, settling-in allowances, home leave travel expenses, etc.

4. Issue of Accounting for Employee Benefit Expenses

Separate accounts shall be kept for the employee benefit expenses incurred by an enterprise and the accounting of such benefits shall be carried out accurately. If an enterprise fails to keep separate accounts or carry out the accounting of the expenses accurately, the tax authority shall order the enterprise to rectify the matter within a specified period of time. If the enterprise fails to rectify the matter by the specified deadline, the tax authority may reasonably determine the employee benefit expenses incurred by the enterprise.

5. This Circular shall be effective as of January 1 2008.