On November 26 2008, the State Administration of Taxation (SAT) issued a tax circular concerning enterprise income tax (EIT) consolidation and prepayment by wholly foreign-owned banks, Guoshuihan (2008) 958 (Circular 958). Circular 958, which took effect retroactively from January 1 2008, specifies that wholly foreign-owned banks are also required to follow the Interim Procedures for the Administration of Income Tax Collection from Enterprises that Operate Across Different Administrative Regions and File Consolidated Enterprise Income Tax Returns (Interim Procedures), issued by the SAT under cover of Guoshuifa (2008) 28.
Under the Interim Procedures, both the head office and second-tier branches with principal production or business functions are required to file provisional EIT returns with their respective competent tax authorities in their locality based on a fixed formula for allocating taxable income and income tax payable by head office and branches. This represents a change, as branches of Chinese companies were not required to file provisional EIT returns with, and pay EIT to, their competent tax bureau under the old dual enterprise income tax system (the Interim Regulations of the People's Republic of China on Enterprise Income Tax applicable to domestic enterprises and the Foreign Investment Enterprise and Foreign Enterprise Income Tax Law of the People's Republic of China applicable to foreign-invested enterprises), which was repealed at the end of 2007.
Under Circular 958, the branches of a wholly foreign-owned bank will be required to file, monthly or quarterly (as determined by the tax authorities), provisional EIT returns with, and pay provisional EIT to, the local tax authorities (as opposed to the tax authority having jurisdiction over the head office of the wholly foreign-owned bank) pursuant to the Interim Procedures. However, a newly-established branch of a wholly foreign-owned bank will not be required to file provisional EIT returns and make provisional payment of EIT with respect to the year in which the branch was established pursuant to the Interim Regulations, and with respect to the first half of the second year since its establishment if the head office has not made allocation of income tax payable to the newly-established branch due to its inability to gather the relevant data relating to the operating income, gross payroll and total assets of the new branch in the preceding year. The foregoing three factors are integral parts of the fixed formula used to calculate how much taxable income or income tax payable should be allocated to a certain branch.
Circular 958 further stipulates that, where the branches of a wholly foreign-owned bank filed or failed to file provisional EIT returns and pay provisional EIT locally before the promulgation of Circular 958, they are not required to rectify the past practice. Instead, they are only required to follow the Interim Procedures from the date on which Circular 958 was issued.
Ding Fa Liu
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