China Revises Advertising and Promotional Expenses

Aug. 18 – China’s Ministry of Finance and the State Administration of Taxation have released a circular on the qualifying deductions for advertising and promotional expenses (A&P Expenses) for corporate income tax computations beginning January 1, 2008 to December 31, 2010.

For manufacturers of cosmetic, pharmaceutical and beverage products, excluding alcoholic beverages, the annual deduction cap on A&P expenses shall be 30 percent of the annual sales. Excess amounts can be carried forward to future years for deduction.

Beverage manufacturers operating as franchises, may deduct the A&P expenses directly in accordance with the cap above. Alternatively, the franchise owner may now pass all or part of the A&P expenses to the franchiser or brand owner.

The franchiser is then able to consolidate all A&P expenses incurred by the franchisee and claim tax deductions as sales expenses in full. When calculating the annual cap for A&P expenses incurred under its own name, the franchiser can exclude those A&P expenses consolidated from the franchisee.

The franchiser should also keep separate records of the A&P expenses incurred under its own name as well as maintain records and supporting documentation for the franchisees A&P expenses and sales data. A&P expenses are not deductible for tobacco products.

For further advice email Sabrina Zhang, National Tax Partner, Dezan Shira & Associates at tax@dezshira.com.

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