Measures for Administration of the Levy of Income Tax on Non-tax-resident Enterprises by Assessment

(Issued by the State Administration of Taxation on, and effective as of, February 20 2010.)

Guo Shui Fa [2010] No.19

Article 1: These Measures have been formulated pursuant to the PRC Enterprise Income Tax Law (the Enterprise Income Tax Law) and its Implementing Regulations and the PRC Law on the Administration of the Levy and Collection of Taxes (the Tax Collection Law) in order to regulate the assessment and levy of enterprise income tax on non-tax-resident enterprises.

Article 2: These Measures apply to the non-tax-resident enterprises specified in the second paragraph of Article 3 of the Enterprise Income Tax Law. The means for assessing the enterprise income tax of the resident representative offices of foreign enterprises shall be handled in accordance with relevant provisions.

Article 3: A non-tax-resident enterprise shall keep account books in accordance with the Tax Collection Law and relevant laws and regulations, keep its accounts and do its accounting based on lawful and valid documents, accurately calculate its taxable income based on the principle of the matching of the functions it actually performs and the risks that it bears, and truthfully file and pay enterprise income tax.

Article 4: If a non-tax-resident enterprise has incomplete account books, there are gaps in its documentation that make the checking of its accounts impossible or the accurate calculation and truthful filing of its taxable income is not possible due to another reason, the tax authority shall have the authority to assess its taxable income by one of the following methods.

(1) Assessment of taxable income based on total revenue: applicable to non-tax-resident enterprises that can accurately calculate their income or deduce their total revenue by reasonable means but cannot accurately calculate their costs and expenses. The formula therefor is as follows:

taxable income = total revenue × profit rate determined by the tax authority.

(2) Assessment of taxable income based on costs and expenses: applicable to non-tax-resident enterprises that can accurately calculate their costs and expenses but cannot accurately calculate their total revenue. The formula therefor is as follows:

taxable income = total of costs and expenses ÷ (1 – profit rate determined by the tax authority) × profit rate determined by the tax authority.

(3) Assessment of taxable income based on revenue converted from operational expenditures: applicable to non-tax-resident enterprises that can accurately calculate their operational expenditures but cannot accurately calculate their total revenue and their costs and expenses. The formula therefor is as follows:

taxable income = total of operational expenditures ÷ (1 – profit rate determined by the tax authority – business tax rate) × profit rate determined by the tax authority.

Article 5: A tax authority may assess a non-tax-resident enterprise's profit rate based on the following rates:

(1) for enterprises engaging in project contracting, design and consulting services, a profit rate of 15% to 30%;

(2) for enterprises providing management services, a profit rate of 30% to 50%; and

(3) for enterprises providing other services or engaging in business activities other than the provision of services, a profit rate of not less than 15%.

If the tax authority has evidence to believe that a non-tax-resident enterprise's actual profit rate is markedly higher than the foregoing rates, it may assess its taxable income based on a profit rate higher than the foregoing rates.

Article 6: If a non-tax-resident enterprise executes a machinery, equipment or goods sales contract with a tax-resident enterprise and additionally provides services such as equipment installation, assembly, technical training, guidance and supervision but the sales contract does not specify the amount to be charged for the aforementioned services, or if the pricing thereof is unreasonable, the competent tax authority may, depending on the actual circumstances, determine the service revenue by referring to the pricing standards for identical or similar businesses. If there are no standards available for reference, it shall determine the non-tax-resident enterprise's service revenue based on the principle of not less than 10% of the total sales contract price.

Article 7: With respect to the revenue derived by a non-tax-resident enterprise from providing services to customers in China, if all of the services are provided in China, it shall file and pay enterprise income tax in China on the entire amount. If it provides services both inside and outside China, it shall separate its revenue derived in China from that derived outside China based on the places where the services were provided, and file and pay enterprise income tax on the service revenue derived in China. If the tax authority has doubts as to the reasonableness and truthfulness of the separation of the revenue derived inside China from that derived outside China, it may require the non-tax-resident enterprise to provide true and valid proof thereof and, based on factors such as work quantities, hours of work, costs and expenses, reasonably separate its revenue derived inside China from that derived outside China. If the non-tax-resident enterprise fails to provide true and valid proof, the tax authority may deem that all of its services were provided in China, determine its service revenue and levy enterprise income tax on the basis thereof.

Article 8: If enterprise income tax is levied on a non-tax-resident enterprise by the assessment method, and such enterprise engages in business activities in China that are subject to different determined profit rates and derives taxable income therefrom, each of the same shall be calculated separately and the appropriate profit rates shall be applied thereto to calculate and pay enterprise income tax. If the revenues cannot be calculated separately, the highest profit rate shall apply in calculating and paying enterprise income tax.

Article 9: A non-tax-resident enterprise that wishes to have tax levied by the assessment method shall complete a Form for Determination of the Method of Levying Income Tax on a Non-tax-resident Enterprise (see the attachment; the Form) and submit it to the competent tax authority. The competent tax authority shall review the industry and the profit rate applicable to the Form submitted by the enterprise and note its comments thereon.

If a non-tax-resident enterprise is determined, after review, not to satisfy the conditions for the levy of tax by the assessment method, the competent tax authority shall issue it a Tax Matter Notice informing it of the outcome of the determination within 15 working days after receipt of the Form submitted by the enterprise. If a non-tax-resident enterprise does not receive a Tax Matter Notice within the aforementioned period of time, its levy method shall be deemed to have been approved.

Article 10: If a tax authority discovers that the taxable income calculated and filed by a non-tax-resident enterprise in using the assessment method is untrue or is markedly inconsistent with the functions it performs and the risks that it bears, it shall have the authority to adjust the same.

Article 11: The offices of the State Administration of Taxation and local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans may determine the applicable determined profit rate range in accordance with Article 5 hereof, and formulate specific operational rules based on these Measures, which they shall submit to the (International Tax Department of the) State Administration of Taxation for the record.

Article 12: These Measures shall be effective as of the date of issuance.

Attachment: Form for Determination of the Method of Levying Income Tax on a Non-tax-resident Enterprise