April 7 – China’s States Administration of Taxation recently clarified provisional corporate income tax (CIT) filing for branches of Chinese resident enterprises.

Guoshifa [2008] No. 28 applies to resident enterprises which maintain operating branches or establishments in multiple provinces. Headquarters and second-tier branches with business operations are required to file provisional monthly or quarterly CIT returns with their local tax bureaus.

Third-tier or lower branches whose provisional CIT payable is combined with that of the second-tier branches and second-tier or lower braches that are not VAT or business taxpayers and do not carry out business activities are not required to pay provisional CIT locally. In addition overseas branches and branches of resident enterprises qualified as small-scale enterprises with low profitability in the previous year are exempt from filing. 

Under Circular 28, if a headquarters operates independent business activities, such as stand-alone manufacturing for which the accounting records of the total salaries, and wages, and the total assets are maintained separately from its corporate administrative functions, the headquarters may be treated as a branch is therefore required to file and settle provisional CIT locally.

Provisional CIT should be calculated among headquarters and branches on a consolidated basis either monthly or quarterly. This consolidated taxable income may be determined either based on actual profits or on one twelfth or one quarter of the previous year’s taxable income dependent on whether the enterprise is reporting monthly or quarterly.

The provisional CIT liability is then calculated by multiplying the consolidated taxable income by the applicable CIT rate.

Fifty percent of the provisional CIT liability shall be allocated to the headquarters and the remaining 50 percent is to be allocated among the branches, based on the following calculation:

For January to June, the operating revenue, wages and salaries, and the total assets of the second preceding year should be used. For July to December, the operating revenue, wages and salaries, and total assets for the previous year should be used. Therefore, for 2008, enterprises need to supply details for both 2006 and 2007 to the supervising tax authority.

Provisional CIT filings need to be completed by the headquarters within 10 days after the end of each quarter.

For more information on China’s corporate income tax regime, please contact tax@dezshira.com or visit www.dezshira.com.