1. General Principal

Where the permanent representative offices (ROs) provide intermediary, agenting services that generate income in the form of commission, kickbacks, services charges and remuneration, business taxes should be assessed based on the income; the tax rate is 5 per cent. The enterprise income tax is levied at a rate of 30 per cent and local income tax at a rate of 3 per cent. The taxable income is computed in one of the three ways as appropriate, i.e., levying upon actual income, assessing the income or taxable income, and compile taxable income according to corresponding expenses.

2. Levying upon actual income

Where the permanent ROs are able to provide contracts and all the other documents required (on the commission rate for example), maintain account books on income and expense and present the certificates from local public certified accountant on overseas expenditures, upon the approval of the tax authority, taxes could be levied upon the actual income.

3. Assessing income or taxable income

Where the permanent ROs are only able to provide contracts of intermediary service, agent service within China, taxes can be levied on the amount of the commission clearly specified in the contracts. If the amount of the commission is not clearly stated, or for a series of contracts from the same RO, only part of the commission is specified without precise certificates on the accurate amount of income, or the RO fails to provide precise cost and expenditure certificates for computing the income, upon the approval of the tax authorities, taxes should be levied on the assessed income.

Assess the amount of business income: 3 per cent of the transaction value (commission rate) will be deemed as commission income (or business income). For permanent ROs such as advertisement agents, 15 per cent of the contractual transaction value will be deemed as business income.

Assess the amount of taxable income: 10 per cent of the permanent RO¡¦s business income will be deemed as the taxable income.

If the RO could provide the certificates or documents, for instance, the entrustment agreements or other supporting papers, verifying part of the agenting business is carried out by its head office outside China, 50 percent of its income may be deemed as the PRC-sourced income as approved by the local tax authority and the taxable income be computed based on the deemed profitability.

4. Computing taxable income according to expenditure

Where some permanent ROs are engaged in intermediary or agenting services for head offices¡¦ clients, other companies, their parent companies or subsidiaries (except for those directly dispatching such ROs) and are unable to present contracts, agreements or documents to prove the declared income; or the permanent ROs cannot provide materials to distinguish the trading of own products from the agenting of others¡¦ products, the amount of taxable income will be determined according to the amount of expenditure.

(1)Permanent ROs¡¦ expenditure includes: salary, bonus, subsidy, welfare, procurement cost (including cars, houses, computers, office facilities and fixed assets), house decoration fees, communication, allowances for business trip, house rent, equipment rent, transportation, entertainment and other costs (including payments on purchasing sample goods in China for the head office and on shipment; warehousing cost and customs declaration charges incurred within China for the samples from abroad; interpreter fees for the visiting head office staff; fees to buy bidding documents when the head office enters a bid in China, etc.)

Since April 1st, 1998, the cost of fixed assets (such as houses, cars, computers and so on) incurred by the permanent RO and the cost for house decoration due to the establishment or removal of the RO could be taken as one-off expenditure arised and compute income of the RO accordingly. Where the amount of the above costs is huge, making it difficult for RO to compute taxes according to the costs, and where the account books are maintained to compute and record accurately the amortization of the said costs for the reference of the tax authority, the following arrangements may be made: for the purchasing expenses of fixed assets, the cost may be amortized during the minimum depreciation years as that for the same category of fixed assets specified in Article 35 of the implementation rules of the Tax Laws with no salvage value retained, and then the conversion may be made; for the house decoration cost, it could be amortized in five years and then the conversion may be made. The monetary donations made by the RO within China for the purpose of public welfare and relief are deductible from the expenses to be converted into taxable income.

(2)The following payments made by permanent ROs for the head offices and arising from business activities other than their own are excluded from the expenses of the ROs:

a. Payments made by the ROs for the airline tickets of visitors arranged by the head offices; Expense payed by the ROs for the accommodation, of a delegation to visit China organized by the head office. However, the expenses payed for a delegation that visits to China with the purposes such as business negotiations, signing contracts should not be covered.

b. When the headquarter holds a grand exhibition in China, the RO pays for the disposal fee, customs duty for sample goods, domestic shipment etc..

c. When the headquarter holds workshops that have nothing to do with business negotiations or contract signing, the permanent RO pays the rent for the meeting place.

d. When the headquarter signs contracts with Chinese entities yet fails to perform the contracts, the permanent RO pays for the default penalties and other indemnities.

e. When the headquarter delivers tools for the provision of labor services in China, the permanent RO pays for the guarantee deposit and caution money at the Custom.

(3)Formula of computation

Income:

Assessble Income= Current expense / (1- deemed profit rate of 10%-business tax rate of 5%)

Taxable income: Assessable Income x 10% (the deemed profit rate) = Taxable Income

Tax payable: Taxable Income x 33%= Tax Payable