New Incentives For Technologically-Advanced Service Enterprises in China

Excerpt from Practical Asian Tax Strategies by Jon Eichelberger & Brendan Kelly (Baker & Mckenzie, China)

Since January 1, 2006, a pilot testing was launched in Suzhou Industrial Park (“SIP”), which granted tax incentives to technologically-advanced service enterprises (“TASEs”), including technologically-advanced service outsourcing enterprises. On January 1, 2009, to further support the growth of TASEs, the State Council issued the Reply on Issues Relating to Promoting the Development of the Service Outsourcing Industry on January 15 2009 (“Circular 9”), which expanded the pilot testing to 20 cities in China and expanded the scope of incentives to include subsidies.

The most notable incentives provided in Circular 9 for qualified TASEs are (a) reduced Enterprise Income Tax (“EIT”) rate of 15% for a five year period starting from 1 January 2009; (b) employee educational expenses of up to 8% of the total salary expenses of the TASE can be deducted from the taxable income for EIT purposes; and (c) business tax exemption for offshore service outsourcing provided by TASEs. According to our informal discussions with tax officials, “offshore service outsourcing” encompasses situations where domestic PRC companies provide services to foreign companies.

Other incentives, such as subsidies for professional training expenses and cost to purchase public service platform equipments, as well as interest subsidies for loans used in constructing service outsourcing infrastructure in state-level economic zones in central and western China, are also provided to qualified technologically-advanced service outsourcing enterprises in Circular 9.

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China Issues Detailed Guidance on Anti-Avoidance Rules

Exerpt from Practical China Tax and Finance Strategies, published by WorldTrade Executive, Inc.

China’s new 2007 Enterprise Income Tax Law, for the first time in Chinese tax history, introduced a set of anti-avoidance rules in its Special Tax Adjustments chapter, which include not only transfer pricing and advanced pricing agreement rules but also rules on cost sharing agreements, thin-capitalization, controlled foreign corporations, and general anti-avoidance.

On January 8, 2009, the SAT released long-awaited Circular Guoshuifa [2009] No 2, Implementation Measures of Special Tax Adjustments (Trial) that details rules on administrating all the aspects of those anti-avoidance rules. If the Special Tax Adjustments chapter represents the first anti-voidance legislation in China, Guoshuifa [2009] No 2 can be viewed as the first comprehensive operating manual of anti-avoidance administrations in China. All the provisions in Guoshuifa [2009] No 2 take retrospective effect from January 1, 2008.

As the starting point of the anti-avoidance administration, Guoshuifa [2009] No 2 restates that all enterprises shall file the following nine forms annually to report related party transactions:

Form 1 - Related party relationships
Form 2 - Summary of related party transactions
Form .3 - Purchases and sales
Form 4 - Labor services
Form 5 - Intangible assets
Form 6 - Fixed assets
Form 7 - Financing
Form 8 - Outbound investments
Form 9 - Outbound payments

Those forms require enterprises to indicate whether they have contemporaneous transfer pricing documentation in place. The forms need to be filed together with the annual enterprise income tax return. For the tax year of 2008, the filing deadline is May 31, 2009.

Read More for a Summary of Transfer Pricing Documentation

China Issues Guidance on 15% Tax Rate for High/New Tech Enterprises

Excerpt from Practical Asian Tax Strategies by Todd Landau and Edward Shum (PricewaterhouseCoopers, China)

A new joint circular recently issued by the Chinese authorities provides important guidance on the availability of Chinese tax incentives under the new Corporate Income Tax (“CIT”) law, including the preferential 15% tax rate, for investments in High/New Tech Enterprises (“HNTE”). These rules have retrospective effect from January 1, 2008.

According to the new Chinese CIT law, effective from January 1, 2008, HNTEs can enjoy tax incentives, including a preferential CIT rate of 15%. In order to further clarify the criteria for qualifying as HNTEs, the Ministry of Science and Technology (“MST”), Ministry of Finance (“MoF”) and StateAdministration of Taxation (“SAT”) have issued the “Administrative Measures for Assessment of High-New Tech Enterprises” (“Measures”) andthe “Catalogue of High/New Tech Domains Specifically Supported by the State” (“Catalogue”) by way of a joint circular GuoKeFaHuo (2008) No.127,with retrospective effect to January 1, 2008.

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2008 Tax Reform in Japan

Excerpt from Practical Asian Tax Strategies by Yumiko Arai and Al Zencak
(PricewaterhouseCoopers, Tokyo)

The 83 trillion yen Japanese state budget and tax reform bill for fiscal 2008 passed the House of Representatives with a majority vote by the ruling parties. The budget and the tax reform bill cleared the lower house with an approval of the ruling Liberal Democratic Party and its coalition partner New Komeito party, making sure that the budget will pass through the parliament in time for the beginning of the new business year (April 1). The following excerpt reviews some of the major corporate taxation changes currently contained in the 2008 tax reform legislation.

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Implementation Regulations for the New Enterprise Income Tax Law of China

Excerpt from Practical China Tax and Finance Strategies by Fuli Cao (Jones Day)


In December, the long-awaited new Enterprise Income Tax (EIT) Regulations were finally released. They define resident enterprise, reduce the tax rate and eliminate taxes on certain kinds of dividends. Many uncertainties still remain.


The EIT Law and the New EIT Regulations made major changes and clarifications, including the following:

• Defined “resident enterprise” as an enterprise either established under the law of China or effectively managed in China.


• Confirmed transfer pricing rules.


• Introduced controlled foreign corporation rules.


• Introduced thin capitalization rules.


• Reduced the regular income tax rate from 33 percent to 25 percent.


• Introduced a 20 percent tax rate for small-scale enterprises earning small profit.

More changes and clarifications:

Setting Up an Entity in India

Excerpt from Practical Asian Tax Strategies
article by Jon Eichelberger, Brendan Kelly, Eugene Lim & Beng Ti Tan (Baker & McKenzie, Beijing)

While the U.S. is the oldest, India is the biggest democracy in the world. India has a large pool of educated human resources and a well-developed legal and banking system, and English is the business language, making the country a favored destination for foreign investment.

An offshore entity interested in establishing a presence in India should first determine short- and long-term objectives. This includes the mission of the entity in India, the type of operations to be conducted and the timelines for site selection, hiring personnel, etc. Based on the initial analysis, the next important step is to determine the type of entity that should be set up. The new entity can be a Liaison office (LO), Project office (PO), Branch office (BO), or an incorporated company, public or private (Company). If the objective is short-term, a foreign entity can also post a representative in India to carry out its activities.

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Recent Developments to China’s Export VAT Refund Regime

The latest VAT adjustments have caused significant concern for many enterprises operating in China, as well as for companies overseas that source materials and products from China. One of the major concerns stems from the lack of notice given for the latest change which was published June 19, 2007 with an effective date of July 1, 2007. For some foreign investors, the changes have resulted in a significant increase in the cost of procuring and producing goods in China for export. In some cases, these cost increases potentially frustrate the business and economic objectives of moving global sourcing and production activities to China by not allowing ample time for adjustments to their operations to cope with these changes.

There are some planning techniques to mitigate the VAT impact on business sourcing and exporting.

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Tax Reform in Japan 2007

An interview with Al Zencak (Zeirishi-Hojin PricewaterhouseCoopers, Tokyo)


As reported in the previous issues of Practical Asian Tax Strategies, 2007 has brought significant tax reform for Japan. To get a better understanding of what this means for your multinational operations, we went to the experts at PricewaterhouseCoopers to discuss the major changes that were made and what opportunities and challenges these changes mean, along with some actions that your company should be taking to position itself to benefit from these recent changes.


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