China Tax Administration Guide (6) – Calculation of Tax Liability
6.1 Basic Regulations
6.1.1 Enterprise Income Tax of enterprises with foreign investment and the Income Tax payable by foreign enterprises on the income of their organizations or sites in China for production or business purposes, shall be calculated on taxable income at a rate of 30%; local Income Tax shall be calculated on taxable income at a rate of 3%.
6.1.2 Enterprises with foreign investment may, when filing a consolidated Income Tax return, deduct from the amount of tax payable the foreign Income Tax already paid abroad in respect of income derived from sources outside China. The amount deducted, however, may not exceed the amount of Income Tax otherwise payable under this Law with respect to income derived from sources outside China.
(ZHU XI LING [45] 1991.4.9)
6.1.3 Income Tax already paid abroad in Article 12 of the Tax Law refers to the Income Tax actually paid outside China, by an enterprise with foreign investment, on the income received from sources within China. It does not include any tax paid but later compensated, or any tax borne by others.
(GUO WU YUAN LING [85] 1991.6.30)
6.2 Calculating Tax Deductions and Exemptions
6.2.1 The Income Tax otherwise payable under this Law with respect to income derived from sources outside China in Article 12 of the Tax Law refers to the tax payable on taxable income calculated from the income derived outside China by the enterprise with foreign investment, after deducting the costs, expenses and losses incurred in earning that income and which are allowed under the relevant provisions of the Tax Law and these Rules. That tax payable shall be the limit of the deductions, and it will be calculated country by country, but not item by item. The formula for calculation is as follows:
the deduction limit for tax on income derived from sources outside China = total tax sourced inside and outside China calculated according to the Tax Law x income sourced from foreign countries / total income sourced inside and outside China.
(GUO WU YUAN LING [85] 1991.6.30)
6.2.2 The term, the total tax from sources inside and outside China calculated according to the Tax Law shall be calculated according to the total income from sources inside and outside China on the basis of the Enterprise Income Tax rate and the local Income Tax rate according to Article 5 of the Tax Law.
(GUO SHUI FA [039] 1993.7.14)
6.3 Methods of Deduction and Exemption
6.3.1 When the Income Tax paid on the income derived from sources outside China, by an enterprise with foreign investment, is less than the deduction limit calculated according to Article 84 of these Rules, the foreign Income Tax actually paid outside China may be deducted from the tax payable. If it exceeds the credit limit, the excess portion may not be allowed as a deduction from the tax payable, nor can it be itemized as expenses; but the balance of the foreign tax paid may be offset against the balance of the deduction limit in subsequent years, with a carryover period not exceeding five years at a maximum.
(GUO WU YUAN LING [85] 1991.6.30)
6.3.2 The provisions of Articles 83 to 85 of these Detailed Rules apply only to enterprises with foreign investment which have their head offices in China. Enterprises with foreign investment who apply tax deductions in accordance with Article 12 of the Tax Law may shall submit the original tax payment certificates of the same year issued by the relevant taxation authorities outside China. Duplicates, or tax payment certificates of different tax years, are not acceptable as supporting documents for tax deductions.
(GUO WU YUAN LING [85] 1991.6.30)