On October 18, 2010, the State Council issued the Circular on Unifying Urban Construction Tax and Educational Surcharge on Chinese- and Foreign-funded Enterprises and Individuals (guofa [2010] No. 35), which expanded the coverage of Urban Construction Tax (UCT) and Education Surcharge (ES) to include foreign invested enterprises, foreign enterprises and foreign individuals in addition to domestic enterprises. The ES rate is 3% while the UCT rate varies depending on location of the taxpayer. Subsequently, in November 2010, the Ministry of Finance issued another circular (caizong [2010] No. 98, “Circular 98”), which unified Local Education Surcharge (LES) to 2% for all enterprises and individuals (including FIEs).

Following the promulgation of Circular 98, various major municipalities have promulgated their own regulations on LES collection. For example, the local tax bureau of Qingdao started collecting the tax from December 2010 soon after the promulgation of the circular, while Shanghai issued its circular on LES collection in January, 2011. Guangdong province promulgated its circular in February 2011, which also imposed LES from January 1, 2011 and required the LES for January to March 2011 to be paid no later than June 30, 2011.

Shenzhen, on the other hand, has just issued its circular on LES collection in July 2011, but provides in the circular that the collection of LES would apply retroactively from January 1, 2011.

Beijing has yet to promulgate its regulation mandating LES collection.  We anticipate it to do so soon, and it remains to be seen whether the collection would apply retroactively as in Shenzhen.  FIEs in China should nonetheless be prepared to pay the LES starting from this fiscal year.