Sep 2011, Issue 25
New breakthroughs in the foreign tax credit mechanism in China
In the Jan 2010, Issue 1 and the Jul 2010, Issue 12 of our China Tax and Business News Flashes, we reported the legislative framework of the Foreign Tax Credit ("FTC") Mechanism in China and its latest development. The legal framework of the prevailing FTC Mechanism consists of the following three major components:
- Specific provisions on FTC stipulated in Chapter 3 of the Corporate Income Tax Law ("CIT Law") and the respective provisions in the Detailed Implementation Regulations ("DIRs") to the CIT Law;
- Caishui [2009] No.125, "Notice Regarding Relevant Issues on Tax Credits for Foreign Income Derived by Enterprises" ("Circular 125"), jointly issued by the Ministry of Finance ("MOF") and the State Administration of Taxation ("SAT") on 25 December 2009; and
- SAT Public Notice [2010] No.1, "Notice Releasing the <Implementation Guideline on Foreign Tax Credit of Enterprises>" ("Public Notice 1"), issued by the SAT on 2 July 2010.
This framework applies to all of industries. At the end of May 2011, almost one year after the issuance of Public Notice 1, there are breakthroughs in the FTC Mechanism. The MOF and the SAT jointly issued two industry-specific FTC circulars. They are Caishui [2011] No.23 ,"Notice Providing Special FTC Rules to Domestic Petroleum Enterprises with Overseas Oil and Gas Exploitation Projects" ("Circular 23"), issued on 24 May and Caishui [2011] No.47, "Notice Clarifying the Applicable CIT Rate and Foreign Tax Credit for Foreign Sourced Income Derived by New-High Tech Enterprises" ("Circular 47"), issued on 31 May. The petroleum industry and the new-high tech industry have always received public attention because of their importance in China and their specific industry features. As these two circulars provide new breakthroughs or supplements to the prevailing FTC Mechanism in relation to these two industries, they received attention soon after their release.
In this issue of News Flash, we like to highlight the key features of the breakthroughs in these two circulars and share our observations.
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