PART A: EXPENSES AND DEDUCTIONS

On January 1, 2008, China launched its revised corporate income tax (CIT) regime. The new CIT law was based on the unification of the previous Enterprise Income Tax (EIT) Law for local enterprise and the Foreign Enterprise Income Tax (FEIT) Law for foreign invested enterprises.

According to the new CIT law, both domestic and foreign invested enterprises in China now have the same tax rate of 25 percent, regardless of whether an enterprise enjoyed tax incentives or holidays before 2008 (enterprises previously enjoying tax incentives were granted grandfather rules to either gradually increase their tax rate to 25 percent over five years percent or enjoy a tax holiday over five years.)

Compared with the previous EIT and FEIT laws, the new tax law included several changes to expenses deductions. As 2008 is the first year enterprises will have to comply with the new CIT law, we take a brief look at the main expense deductions enterprises can file in at the end of the year.

Advertising expense and business promotional expenses
Qualified advertising expense and business promotion expenses are allowed to be deductible of up to 15 percent of the sales (business) income of that year unless otherwise prescribed by the in-charge finance and tax departments of the State Council. Any excess amount is allowed to be carried forward and deductible in the following year.

Business entertainment expenses
For business entertainment expenses which is incurred by an enterprise and related to its production and business operation activities, only 60 percent of the incurred amount should be deductible but the maximum deduction amount shall not exceed 0.5 percent of the sales (business) income of the year.

Donation
Charitable donations incurred by an enterprise are allowed to be deductible up to 12 percent of the total annual accounting profit.

Commercial insurance expenses
Premiums for commercial insurance policies paid by the enterprise for its investors or employee are not deductible except for premiums for personal safety insurance paid by an enterprise pursuant to the state?s relevant regulations for its workers conducting special types of production work and premiums paid for other commercial insurance policies that may be deductible pursuant to the rules prescribed by the in-charge finance and tax departments of the State Council.

Sponsorship expenses
Sponsorship expenses are not deductible if they are of a non-advertising nature and not relevant to business operation.

Staff education expenses
Expenditures for staff education that is incurred by an enterprise are allowed to be deducted up to 2.5 percent of total wages and salaries. Any excess amount is allowed to be carried forward to future years.

Provisions
Provisions are generally not deductible.

Reserve fund
These are deductible for special funds that are appropriate for use in protecting environment, pursuant to the relevant laws and administrative regulations. Once usage of the aforesaid special funds changes, it shall not be deductible.
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