China’s SAT Issues FAQs Relating to Tax Payments: Part IV

Mar. 14 – China’s State Administration of Taxation (SAT) has recently issued a set of frequently asked questions relating to tax payments and pre-tax deductions. The answers provided are based on existing regulations. Detailed information can be found below.

Q: Should enterprises pay consumption tax for wine importation?

A: According to the “Administrative Measures on Consumption Tax of Wine (guoshuifa [2006] No.6),” all entities and individuals engaged in the production, subcontracting for processing, or importation of wine within China are subject to consumption tax and the applicable tax rate is 10 percent.

Q: Where the performance of a technology transfer contract involves the transfer of associated equipment, can the income derived from the equipment transfer be subject to preferential corporate income tax treatment?

A: According to the “Notice on Issues Concerning the Reduction and Exemption of Corporate Income Tax for Gains from Technology Transfers (guoshuihan [2009] No. 212),” gains derived from a technology transfer shall be calculated as follows:

• Gains from technology transfer = income from technology transfer – costs of technology transfer – relevant taxes and charges

“Income from technology transfer” refers to the payment received by the party upon the performance of the technology transfer contract, excluding the non-technological income derived from the sale or transfer of equipment, instruments, components and raw materials. Therefore, income generated from the equipment transfer cannot enjoy preferential corporate income tax treatment.

Q: What is the pre-tax deduction standard for advertising and promotional expenses for enterprises engaged in the manufacturing and sale of cosmetics, manufacturing of pharmaceuticals, and the manufacturing of beverages?

A: According to the “Circular Regarding Pre-Tax Deduction Policies on Advertising and Business Promotion Expenses (caishui [2012] No.28),” enterprises engaged in the manufacturing and sale of cosmetics, manufacturing of pharmaceuticals, and the manufacturing of beverages (excluding enterprises producing alcoholic drinks) are eligible to deduct advertising and promotional fees which are less than 30 percent of the sales (business) incomes of the current year. The excess amounts can be carried forward to future years for deduction.

Q: For affiliated enterprises that have entered into advertising and business promotion expense-sharing agreements, how do they deduct the advertising and business promotion expense prior to the calculation of corporate income tax?

A: Where the affiliated enterprises have entered into advertising and business promotion expense-sharing agreements, the advertising and business promotion expenses incurred by one party that do not exceed the pre-tax deduction limit of sales (business) revenue of the current year can be deducted from the taxable income of the said party.

Alternatively, part or all of such expenses may be accumulated to the other party for deduction in accordance with the sharing agreement. When calculating the deductible advertising and business promotion expenses of the other party, the other party may exclude the advertising and business promotion expenses accumulated thereto according to the aforesaid measure.

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