China tax regulations aim to confuse.

Posted by Shi Zhiqun on December 31, 2009 under China Tax | Be the First to Comment

Many readers may have come across the many different types of tax regulations and policies in China – such as Caishui, Guoshuifa, Guoshuian etc. This can all be quite confusing at times so we thought that we would attempt to clarify how the laws, regulations etc interact. We will use the Enterprise Income Tax system as an example.

Basic Law

The taxation of enterprises is governed principally by the Enterprise Income Tax Law which was promulgated by the National People’s Congress (China’s governing parliament). The EITL is what is referred to as a Basic Law. This is the fundamental law underpinning a certain legal area (in this case the income taxation of enterprises). The NPC only meets once a year so Basic Laws can be very difficult to change. It can take up to ten years from an initial draft stage to the promulgation stage. Also, as with any political system, the more decision makes involved in a process the more highly politicised an issue will be. As such, Basic Laws are usually very … basic. They tend to be quite short and vaguely drafted in order to accomodate change at the level of regulations and to obtain a broad consensus.

Implementing Regulations

The next document in respect of enterprise income taxation is the Implementing Regulations of  Enterprise Income Tax Law which is issued by the State Council. Now we start to get a bit more substantive.  The State Council meets on a regular basis and is a relatively small group (in contrast to the NPC). The Implementing Regulations puts the meat on the bone of the EITL. However, once again the Implementing Regulations are not overly detailed and leave a lot to the imagination (or the tax authorities). Implementing Regulations are basically drafted by the SAT and signed off by the State Council.

Circulars and Measures

There are a number of different circulars and measures that are issued at different levels of the tax administration including the following:

1. Guofa -  these are circulars issued by the State Council. These are usually very short and confined to a single issue or topic area;
2. Caishui – these are notices jointly issued by the SAT and the Ministry of Commerce;
3. Guoshuifa (or Measures) – these are issued by the State Administration of Taxation and can be quite detailed. In 2009 the SAT issued Guoshuifa (No 2) a very detailed range of measures on anti-avoidance practices.
4. Guoshuihan – these are internal circulars issued by the SAT to the various provincial and local level SATs and local taxation bureaus outlining policy practice in respect of a certain area. In early December 2009 the SAT issued Guoshuihan [698] 2009 which outlined a new practice in respect of the taxation of off-shore equity transactions.

From a theoretical legal perpsective, the regulations higher up the end of the chain will have more force. For example, if a Guoshuihan circular contradicts a Caishui circular, the latter will prevail. However, in practice they are all fairly equal in terms of the need to be obeyed. Whilst Guoshuihan circulars are only internal policies, they effectively reflect the terms of the superior Laws and Regulations themselves, or at least the SAT’s interpretation of those Laws and Regulations.

To make things more confusing, these are just the regulations issued at a national level. Each provincial level SAT and, in fact, each provincial taxation bureau have their own set of regulations and policies.