Clarification on the Implementation of the Enterprise Income Tax Preferential Policies for China’s Western Region
The State Administration of Taxation (“SAT”) issued Notice on the Matters regarding Enterprise Income Tax under the Development Strategy for Western Region (hereinafter referred to as “Notice”) which provided certain important clarifications for the implementation of Enterprise Income Tax (“EIT”) preferential policies and set out the relevant applications and approval procedures. The Notice takes retrospective effect from January 1st 2011.
1. Scope of Application
The Notice is applicable to the enterprises located in the Western Region. Furthermore, if an enterprise’s branch is located in the West Region but the enterprise’s head office itself is not located in the West Region, the Notice is applicable to the branch but is not applicable to the head office.
2. 15% Reduced EIT
Enterprises in the Western Region can apply for the 15% reduced EIT to the competent tax authorities provided that they fall within the Catalogue of Encouraged Industries in the Western Region (“the Catalogue for the Western Region”) and their aggregate revenue from these projects exceeds 70% of the total revenue.
3. The Catalogue for the Western Region
In fact, the catalogue for the Western Region has not yet been released by the relevant Chinese authorities so far. The Notice clarifies that enterprise may temporarily file the application for the 15% reduced EIT to the competent tax authorities provided that they fall within the encouraged industries under the following four “old” Catalogues:
· The Catalogue for the Guidance of Industrial Structure Adjustment (2005 Version);
· The Catalogue for the Guidance of Industrial Structure Adjustment (2011 Version);
· The Catalogue for the Guidance of Foreign Investment Industries (2007 Version); and
· The Catalogue of Competitive Industries in Central and Western Regions for Foreign Investment (2008 Version).
4. Both Incentives
Enterprises in the Western Region may enjoy both the 15% reduced EIT under the Notice and the half reduction of EIT during tax holiday period under EIT law. Therefore, enterprises may apply for the reduced CIT rate of 7.5% in this case.
The clarification in Notice once again indicates the Chinese government’s determination to boost the economy in the Western Region during the State’s 12th Five-year Plan.
Taxpayers in the Western Region are encouraged to observe and study the clarification provided in the Notice to plan and structure their investment. In addition, they should also stay tuned on the future policy developments in the region, particularly the release of the Catalogue for the Western Region.