Breach of Regulation #43 causing problems for FIEs’ tax holidays

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By Andy Scott

Dec. 7 – As China moves to implement the new corporate income tax regulations, many FIEs are losing their tax holidays as the State Administration of Taxation puts them under increased scrutiny ahead of the new law’s implantation.

China’s tax authority has increasingly focused on FIEs that previously enjoyed tax relief. As the tax authorities have stepped up audits, many FIEs are seeing their tax holiday eliminated for breaching Regulation #43 of the new law.

Manufacturing operations are being reclassified as types not exempt under the new tax regime, meaning the two year exemption and three year tax reduction, which many thought had been grandfathered, is now being canceled.

Regulation #43 states that taxpayers shall apply for tax breaks with required documents. Once the tax breaks end, the enterprise income tax shall be submitted without delay. If any changes happened to the taxpayer relevant to tax breaks, within 15 days of the change, the taxpayer must declare this to the relevant authority. Taxpayers who no longer qualify for tax- breaks must pay tax. If the taxpayer fails to do so, the tax administration has the authority to claim back the outstanding balance, while also reserving the right to impose fines of up to five times the amount due in late payment penalities.

China based manufacturers who are affected by this are encouraged to contact their accountants in China for advice in preparation of tax payments and liability assessment, or contact the relevant Dezan Shira & Associates office (see www.dezshira.com for national coverage).

1 thought on “Breach of Regulation #43 causing problems for FIEs’ tax holidays

    Chris Devonshire-Ellis says:

    There are some ways in which you can still obtain tax benefits however. One is via using certain aspects of China’s regulations concerning R&D and the new concept of ‘super deductions’. It is permissible to levy expenses of up to 150% of R&D costs as expenses and thus reduce profitability in doing so. Readers wishing to discuss this and how to book it into their financial statements can email us at tax@dezshira.com

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