April 21 2009, the document GSH [2009] 202 Notification for some tax issues on Company Income Tax issued by the State Administration of Taxation was issued to give detailed explanations on some issues of income tax.

Article 1 of the Notification identifies the base of sales (operation) income, equal similar sales (operation) incomes as stipulated in the Article 25 of the Implementation Regulations shall also be included as sales (operation) incomes when the Company calculates deduction limit of business entertainment expense, advertisement and business promotion expense, etc.

According to the supplementary notification GSH [2008] 1081 the Annual Tax Payment Declaration Form of Company Income Tax, PRC issued by the National State Tax Bureau: the Declaration Form aims to reflect the tax payer’s “Main Operation Revenue”, “Other Business Income” and “non-operating revenue” calculated based on company accounting system and company accounting principle, as well as equal sales income which shall be confirmed within the term based on taxation rules. The “Total Operation Income” in the second line equals to main operation revenue plus other business income, excluding equal sales income, because 3 items in the “Equal Sales Income” of the13rd line are taken as additional taxes in 2008, which is no longer calculated into total income. However, “Total Sales Income” in the 1^st line equals to main operation revenue plus other business plus equal sales income, which is the base to calculate deduction limit of advertisement expense, promotion expense and entertainment expense.
Besides, on Nov.9 2000, it is stipulated in the article 9 of GSH [2000] 906 Notifications on Income Tax Issues for Financial and Insurance Companies issued by the State Administration of Taxation that the business entertainment expense of financial and insurance companies shall, according to the operation revenue with interest income from the flow between financial organization excluded, be deducted based on the calculation standard stated in article 43 and 44 in the Before-tax Deduction Method of Company Income Tax. The rule has already been implemented in the following 8 years. After the new tax law was implemented in 2008, many financial and insurance organizations called me to ask whether this rule will continue to be implemented this year.

The flow between financial organizations refers to fund occupation and borrowing between financial institutions, excluding services provided by each other (such as settling, financial bonds issuing, etc.). Since such business doesn’t produce real income or expense for financial institutions, and there also have existed regulations on temporarily un-levying on such business by the state, therefore, this part of interest income is excluded from the taxable base of entertainment expense in regard of income tax.

On Apr. 18 2006, the State Administration of Taxation issued GSF [2006] 56 Notification on modifications for the tax payment declaration form of company income tax and it is mentioned in the notes of Sales (Operation) Income and other income details list that the total Sales (Operation) income in the first line equals to line 2+7+ 12 in the form. The amount of this line shall be filled into the 1^st line of the master form (Annual Tax Payment Declaration Form of Company Income Tax), and taken as the base to calculate the deduction limit of business entertainment expense, promotion expense and advertisement expense. But such regulations are not available in the notes of Form 1 (2)  Financial Institutions Income List, and the State Administration of Taxation never issued any rules for the deduction base of entertainment fee in financial institutions.
On Oct 30, 2008, GSF [2008]101 Notifications on the Annual Tax Payment Declaration Form of Company Income Tax, PRC was issued by the State Administration of Taxation to make clear the filling method of the form. It is stipulated in the notes of form 3 Taxable Adjustment Project Detail List that the entertainment fee in “6. Business Entertainment Expense in Line 26, “Account Amount” in Column 1 and “Taxable Amount” in Column shall be compared before being filled in, namely compare the amount of “Column 1 of this line x 60%” with “Line 1 of Income list ×5‰”, or “Line (1+38) of form 1 (2) Financial institutions income list ×5‰” with line 1 of the master form ×5‰”, and fill the smaller one in the column 2 of this line. If the column 1 ≥ column 2, the fill the balance of column 1-column 2 into column 3 of “Adjusted increased amount”. The column 4 of “Adjusted decreased amount” does not need to be filled in.

Hence, the provision base for entertainment fee of financial institutions are made clear, namely, the base are same for both financial and non-financial institutions.

It is regulated in the article 2 of the Notification: the prepare fund provisioned before Jan.1 2008 shall be treated according to the article 55 of Implementation Regulations that except the preparation fund approved to be provisioned by the financial ministry and state administration of taxation can be deducted before tax, all Capital Asset Devalue Preparation and Risk Preparation provisioned by other industries and companies are not allowed to deducted before tax. As for various preparation provisioned before Jan. 1 2008 according to the original company income tax law, since Jan. 1 2008, the actual loss occurred in future years shall be compensated firstly by the preparation if not approved by financial ministry and state administration of taxation
According to the article 55 of the Implementation Regulations, various Capital Asset Devalue Preparation and Risk Preparation provisioned by companies in the income tax 2008, especially the bad account preparation of financial institutions shall be handled similarly as the new taxation method for “payable welfare”, namely, based on the actual expense occurred and not provision is allowed. But, the recently issued CS[2009] 48 Notifications on issues of preparation funds of insurance company deducted pre-tax from the company income tax issued by State Administration of Taxation and Financial Ministry, CS [2009] 33 Notifications on issues of preparation funds of security industry deducted pre-tax from the company income tax issued by State Administration of Taxation and Financial Ministry, and CS [2009] 64 Notifications on issues of loan loss preparation funds of financial industry deducted pre-tax from the company income tax issued by State Administration of Taxation and Financial Ministry, have made clear the preparation provisioned by the above 3 types of companies.

The article 3 of the Notification made clear the pre-tax deduction for special-purpose donations. Any donations made by the company to support special projects like reconstruction in Wenchuan after earthquake, Beijing Olympic Games, Shanghai Word Expo., can be deducted 100% according to the relevant regulations in documents of CS [2008] 104 Notifications on tax policy to support reconstruction in Wenchuan after earthquake issued by the Financial Ministry, General Administration of Customs and State Administration of Taxation, CS [2003] 10 Notifications on tax policy to support 29^th Olympic Games issued by the Financial Ministry, nd State Administration of Taxation, CS [2005] 180 Notifications on tax policy to support 2010 Shanghai World Expo. issued by the Financial Ministry and State Administration of Taxation. Other donations shall be deducted according to the article 51, 52 and 53 of implementation regulations as well as article 9 of company income tax.

This is the reification for the implementation method of documents issued after the new tax law.

The article 4 of the Notification stipulates pre-tax deduction of employee education expense in software producing companies. The employee training expense in employee education fund occurred in software producing companies can be completely deducted before income tax according to CS [2008]1 Notifications on Preferential Policies for Company Income Tax issued by Financial Ministry and State Administration of Taxation. Software producing companies shall accurately identify employee training expense from the employee education fund. As for those unable to be identified and the balance after deduction of employee training expense shall be deducted according to the article 42 of Implementation Regulations.

Here we need to make further explanation: since the State Administration of Taxation never issued any document to list details for “Employee Education Fund”, so we can refer to the scope stated in CJ[2006] 317 Notifications on Comments of Company Employee Education Fund Withdrawal and Administration which includes: 1. On post and post transfer training, 2. post competence training. 3. post training and technical grade training, high technical talents training. 4. further education for professional skill technicians. 5. Trainings for people in special operation. 6. External training and expenses.   7. Vocational skill certification training, vocational qualification certification expense. 8. Purchase of education equipment and devices. 9. Self-study and achievement award for employees. 10. Employee training management fee. 11. Other expenses related to employee education.

It is stipulated in the Notification that software producing companies shall accurately identify employee training expense from the employee education fund. That means the above direct training expense shall be separated from the employee education fund, and only this part can enjoy full deduction. Besides, there are following notices: 1. tuition for degree education and Academic Degrees Education shall be shouldered by individual, and can’t be calculated into education fund. If the company pays tuition for the employee, the company shall adjust the taxable income and pay company income tax, and calculated into employee salary to pay personal income tax. 2. As for overseas training and investigation of management team of the company, the one-time expense shall be counted into other management expense so as to avoid occupying expense for employee education and training expense. 3.The handling method of employee education fund balance in previous years is stipulated in article 5 of GSH [2009] 98 Notifications on link issues of company income tax affairs issued by the state administration of taxation: as for employee education fund balance which has already been provisioned before 2008 but hasn’t been used, the newly-happened employee education expense after 2008 shall be deducted from the balance. If balance still exists, it can be used in later years.