Summary: Prior to the unification of PRC Enterprise Income Tax (EIT) systems for domestic enterprises and Foreign Invested Enterprises (FIEs), different rules were applied to combined EIT filing by domestic enterprises and FIEs having trans-regional branches. The EIT laws and regulations governing domestic enterprises (the Old EIT Regime) use "independent economic accounting" criteria to define a taxpayer. The authors write: A branch would be recognized as a unit of "independent economic accounting", if it:
Under the EIT Laws and regulations governing FIEs and foreign companies (the "Old FEIT Regime"), headquarters shall file and pay EIT on a consolidation basis for the all the incomes (including manufacturing incomes, operation incomes, other incomes, etc.) derived by all its branches from both inside and outside of Mainland China. The Old FEIT Regime also provided practical details on the combined EIT filing, e.g. requirements for combined EIT filing, process on combined EIT filing, determination of applicable tax rates of different branches, offset of profit & loss among branches and losses carried forward by branches, etc.
The new EIT laws and regulations (the "New EIT Regime") unifies the systems of EIT combined filing by headquarters and branches. Under the New EIT Regime, it is clarified that the headquarters shall compute the overall taxable income by combining the profit & loss of the headquarters and all the branches; the headquarters and the branches shall make provisional EIT filings at their respective locations on a monthly or quarterly basis; after the end of the fiscal year, the headquarters shall conduct final settlement of the annual EIT. Due to the fact that many branches of domestic enterprises have been making EIT provisional filing locally before the implementation of the New EIT Regime, the impact of applying the new combined EIT filing system to the domestic enterprises is relatively small. However, for FIEs, the new combined EIT filing system might increase the overall tax costs and compliance costs of the headquarters and their branches in the following ways:
Under the Old FEIT Regime, as EIT of branches should be combined by headquarters, tax bureaus in charge of the branches would only require the headquarters to provide Confirmation Letter on Combined EIT Filing and Payment and would be less likely to carry out close scrutiny upon the branches. However, under the New EIT Regime, the tax bureaus local to the branches would strengthen their supervision upon the branches. For example, the branches shall not only submit tax filing materials, but also present financial materials to their local tax bureaus; the branches shall obtain the Confirmation on Items under Verification and Record from the tax bureaus; and each tax bureau in charge of each branch shall have the right to check the EIT apportioned to the branch at its locality as well as indicators for the calculation of such apportionment. Therefore, the compliance costs for FIEs would significantly increase, and the financial reports of headquarters shall be disclosed to all the local tax bureaus.
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