Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value-Added Tax

Article 1 These Detailed Rules were formulated according to the provisions of Article 28 of "Provisional Regulations of the People's Republic of China on Value-Added Tax" (hereinafter referred to as 'these Regulations).

Article 2 "Goods" in Article 1 of these Regulations refers to tangible moveable goods, including electricity, heat and gas.

"Processing" in Article 1 of these Regulations refers to the business of contracting to process goods, where the contractor supplies the raw materials and major materials and the sub-contractor manufactures the goods in accordance with the requirements of the contractor and receives a processing fee.

"Repairs and replacements" in Article1 of these Regulation refers to the business of contracting to carry out repairs _ damaged or malfunctioning goods, so as to restore them to their original condition and functions.

Article 3 "Sales of goods" in Article 1 of the Regulations refers to the transfer of ownership of goods for any compensation.

"Provision of processing, repairs and replacement services" in Article 1 of the Regulations refers to the provision of processing, repairs and replacement services for any compensation. However the provision of processing, repairs and replacement services by the staff employed by the units or individual business operators for their units or employers shall not be included.

" Compensation" in these Detailed Rules includes money, goods or any economic benefit obtained from the purchaser.

Article 4 The following activities of units or individual operators shall be deemed as sales of goods:

A. consignment of goods to others for sale;

B. sale of goods on consignment;

C. transfer of goods from one establishment to other establishments for sale by a taxpayer that maintains two or more establishments and adopts consolidated accounting, unless the relevant establishments are maintained in the same county city);

D. application of self-produced or processed goods to produce nontaxable items;

E. provision of self-produced, processed or purchased goods to other units or individual operators;

F. distribution of self-produced, processed or purchased goods to shareholders or investors;

G. use of self-produced or processed goods for collective welfare or personal consumption;

H. giving out self-produced, processed or purchased goods to others as free gifts.

Article 5 A sales activity that involves goods and non-taxable services is a mixed sales activity. Mixed sales activities of enterprises, enterprise units or individual business operators engaged in production, wholesaling or retailing of goods shall be regarded as sales of goods which shall be subject to VAT. Mixed sales activities of other units or individuals shall be regarded as sales of non-taxable services which shall not be subject to VAT.

Whether or not a taxpayer's sales activity is a mixed sales activity shall be determined by the taxation authorities under the State Administration of Taxation.

"Non-taxable services" as mentioned in the first paragraph of this Article refers to the services subject to Business Tax within the scope of the taxable items under communications and transportation, construction, finance and insurance, post and telecommunications, culture and sports, entertainment, and service industries.

"Enterprises, enterprise units or individual business operators engaged in production, wholesaling or retailing of goods" in the first paragraph of this Article includes enterprises, enterprise units, and individual business operators principally engaged in the production, wholesaling or retailing of goods and also engaged in non-taxable services.

Article 6 Taxpayers also engaged in non-taxable services shall account separately for the sales amount of goods and tax- able services and non-taxable services. Without separate accounting or where accurate accounting cannot be made, the non-taxable services and goods and taxable services shall together be subject to VAT.

Whether or not the non-taxable services a taxpayer also provides should pay VAT shall be determined by the tax collection authorities under the State Administration of Taxation. .

Article 7 "Sales of goods within the borders of the People's Republic of China" (hereinafter referred to as "within the borders" ) as mentioned in Article 1 of the Regulations means the place of dispatch or the location of the goods sold is within the borders.

"Sales of taxable services within the borders" in Article 1 of the Regulations refers to the sale of taxable services that takes place within the borders.

Article 8 "Units" in Article 1 of the Regulations, refers to State-owned enterprises, collectively-owned enterprises, privately-owned enterprises, joint-stock enterprises, other enterprises, administrative units, institutions, military units, social organizations and other units.

"Individuals" in Article 1 of the Regulations, refers to individual operators and other individuals.

Article 9 Where enterprises lease or contract management to others, the lessees or the sub-contractors shall be the payers.

Article 10 Where taxpayers selling goods or taxable services with different tax rates also provide non-taxable services subject to VAT, the highest of the tax rates on goods or taxable services shall apply to the non- taxable services.

Article 11 For taxpayers other than small - scale taxpayers (hereinafter referred to as "general taxpayers"), the VAT refundable to purchasers due to returns inward or discounts allowed shall be deducted-from the output tax for the period in which the returns inward or discounts allowed takes place. The VAX recovered due to the returns outward or discounts received shall be: deducted from the input tax for the period in which the returns outward or discounts received takes place.

Article 12 "Other charges" in Article. 6 of the Regulations refers; to handling fees, subsidies, funds, fund raising fees, profits shared, incentive bonuses, damages for breach of contract (interest on deferred payments), packaging charges, rentals on packaging materials, contingency charges, quality charges, freight and loading and unloading charges, commission fees, commissioned disbursement and charges of any other nature which are in addition to the price charged to the purchaser. The following items nevertheless shall not be included:

A. the output VAT collected from purchasers;

B. the Consumption Tax withheld on processing of consumer goods subject to Consumption Tax;

C. commissioned disbursement of freight charges that satisfies both the following conditions:

a. a freight invoice from the transportation department was is sued to the purchaser;

b. the same invoice is turned over by the taxpayer to the purchaser.

All other charges, regardless of the treatment under the accounting system adopted, shall be included in the sales amount in calculating tax payable.

Article 13 Where the taxpayer is engaged in mixed sales activities and non-taxable services that are subject to VAT in accordance with Article 5 and Article 6 of these Detailed Rules, his sales amount shall be, respectively, the sum of his sales amounts of goods and non-taxable services, and the sum of the sales amounts of goods or taxable services and the non-taxable services.

Article 14 For general taxpayers selling goods or taxable services that adopt the pricing method of combining the sales amount and the output tax, the sales amount shall be calculated according to the following formula:

Sales amount = Sales amount including tax / ( 1 + Tax rate)

Article 15 Pursuant to the stipulations of Article 6 of the Regulations, if a taxpayer settles the sales amount in foreign exchange, the Renminbi conversion rate for the sales amount can be the foreign exchange rate quoted by the State (the median rate in principle) prevailing on that date or on the first day of the month in which the sales take place. Taxpayers shall determine in advance the conversion rate to be adopted but once determined, it cannot be changed for one year.