|Measures for Pre-tax Deductions from Income Tax for Enterprises|
| Guo Shui Fa  No.84
To： the bureaus of state taxation and local tax bureaus of each province， autonomous region， municipality and the cities under separate state planning：（The circular is omitted）
Measures for Pre-tax Deductions from Income Tax for Enterprises
Chapter I General Provisions
Article 1 These Measures are hereby formulated in accordance with the Interim Regulations of the People's Republic of China on Income Tax for Enterprises （the "Regulations"） and implementing rules thereof （the "Rules"）。
Article 2 According to Article 4 of the Regulations， the balance of total annual income to the taxpayer in each tax year less the allowed deductions shall be the taxable income. The allowed deductions mean all necessary and normal costs， expenses， taxes and losses of the taxpayer in each tax year arising in connection with the acquisition of taxable income.
Article 3 The deductions declared by the taxpayer shall be true and legitimate. Truthfulness means the evidence is available that related expenditure has arisen. Legitimacy means conformity with the state tax regulations. In case of discrepancy between other regulations and the tax regulations， the latter shall prevail.
Article 4 Unless otherwise stipulated by the tax laws and regulations， the confirmation of pre-tax deductions shall comply with the following principles：
（1） Accrual basis principle： The taxpayer shall confirm the deductions at the time when the expense accrues rather than at the time of payment.
（2） Matching principle： The expenses of the taxpayer shall be declared for deduction in the period when the expense shall be matched or distributed. The deductible expenses that the taxpayer shall declare in a certain tax year shall not be deducted earlier or later.
（3） Principle of relevance： The expenses that the taxpayer may deduct shall be relevant to the taxable income in nature and at root.
（4） Principle of certainty： No matter when the deductible expenses of the taxpayer are paid， the amount shall be certain.
（5） Principle of reasonableness： The computing and distribution methods for the deductible expenses of the taxpayer shall comply with the general operating rules and accounting practices.
Article 5 The expenditure of the taxpayer must be strictly divided into operating expenditure and capital expenditure. Capital expenditure shall not be directly deducted in current period， and instead it shall be depreciated， amortized in several periods or recognized in the costs of related investments in accordance with the provisions of tax laws and regulations.
Article 6 Except for the provisions of Article 7 of the Regulations， the following expenditures shall not be deducted from the taxable income：
（1） Illegal expenditure such as bribe；（2） Fine， penalty and overdue fine paid for violation of laws and administrative regulations；（3） Provision for impairment of inventories， impairment of short-term investment and impairment of long-term investment， risk reserve funds （including investment risk reserve fund）， and any other reserves other than those set aside in accordance with state tax laws and regulations；（4） the part in excess of the statutory deduction scope and standard （proportion or amount） specified by tax laws and regulations.
Article 7 The confirmation of the costs of such assets as inventory， fixed assets， intangible assets and investments of the taxpayer shall comply with the historical cost principle. In case of restructuring of the taxpayer， including merger， split-up and capital structure adjustment， if the potential appreciation or losses of related assets have been confirmed and realized in tax payment， the cost of related assets may be determined according to the appraised value.
Chapter II Cost and Expense
Article 8 Cost means the cost arising from the taxpayer's sales of commodities （including products， materials， leftovers， waste products and old and waste materials）， provision of labor services， and transfer of fixed assets and intangible assets （including technology transfer）。
Article 9 The taxpayer shall reasonably divide the cost arising from operating activities into direct cost and indirect cost. Direct cost means the direct materials and direct labor in the operating cost that may be directly stated for related cost computing objective or labor. Indirect cost means the joint cost of services provided by several departments to the same cost objective or the joint cost of the same input that may manufacture and provide two or more products or labor services.
Direct cost may be directly included in the operating cost of related cost objective or labor service according to relevant accounting vouchers and records. Indirect cost must be reasonably allocated to related cost objectives according to the cause and effect between cost objectives and the output of cost objectives.
Article 10 The inventories of the taxpayer shall be priced at the actual cost when it acquires them. The actual cost of inventories purchased by the taxpayer includes purchase price， purchase expense and tax. T ax included in the inventory cost means consumption tax， customs duty and resource tax paid for purchase， production or entrusted processing of inventories and the input value-added tax （VAT） that can not be deducted from the output VAT.
The cost of inventory production by the taxpayer includes such indirect expenses as manufacturing expense.
Article 11 The taxpayer may adopt the pricing methods， such as individual pricing method， first in， first out method， weighted average method， moving average method， planning cost method， gross profit margin method or retail price method， for outgoing inventories. In case of discrepancy between the inventory process used by the taxpayer and the last in， first out method， the taxpayer may also confirm the cost of outgoing inventories by the last in， first out method. If the taxpayer confirms the inventory cost or selling cost by planning cost method or the retail price method， it must carry forward the cost difference or the margin between the selling and purchasing prices on merchandise at the time of year-end declaration of tax payment.
Article 12 The cost computing methods， indirect cost distribution methods， inventory pricing methods of the taxpayer shall not be changed once they are confirmed. If the change is necessary， the taxpayer shall apply to the competent tax authority for approval before the beginning of the next tax year. Or the tax authority shall have the right to make adjustment if the taxable income is affected.
Article 13 Expense means the selling expense， administrative expense and financial expense that the taxpayer occurs in each tax year and may be deductible， except for the expenses that have been included in the cost.
Article 14 Selling expense means the expenditure arising to the taxpayer for sales of commodities， including advertising expense， transportation expense， loading and unloading expense， packing expense， exhibition expense， insurance premium， sales commission （adjustment of commodity purchase price cost for the import commission able to be directly confirmed）， handling charge for agency sales， operating lease fee， traveling expense of marketing department， salaries and welfare expense.
Such commodity purchase expenses as the packing expense and transportation expense arising to the taxpayer engaged in commodity circulation for the purchased inventories before being warehoused， insurance premium and loading and unloading expenses arising in course of transportation and storage， reasonable losses in transportation， and selection and clear-up expenses before warehousing may be directly included in the sales expense. If the taxpayer has included the said commodity purchase expenses in the inventory cost according to the need of accounting， it shall not declare the deductions repeatedly in the name of sales expense.
The sales expense of the taxpayer engaged in real estate development also includes the refitting and repair expense， maintenance expense and heating expense occurring before sales of the development products.
If the sales expense of the taxpayer engaged in post and telecommunications has been included in the operating cost， it shall not be included in the sales expense for deduction again.
Article 15 Administrative expense means the expense arising to the administrative department of the taxpayer for provision of various supporting services for management and organizing of operating activities. Administrative expense shall include the head office （corporate） outlay borne by the taxpayer， research and development expense （technical development fee）， social security contribution， labor protection expense， business entertainment fee， trade union fee， staff education outlay， expenses of the shareholders' meeting or board of directors， amortization of start-up expense， amortization of intangible assets （including land use fee and land loss compensation）， mineral resource compensation， bad debt loss， stamp duty， fire fighting expense， pollutant discharge fee， afforestation fee， foreign affairs fee， legal， financial， material processing and accounting affairs costs （consulting fee， legal cost， fee of engagement of intermediary agencies， trademark registration fee）， and reasonable administrative fees relevant to its for-profit activities paid to the head office （the head office of the same legal entity in the nature of headquarters）。 Unless with approval of the State Administration of Taxation or its authorized tax authorities， the taxpayer shall not recognize the administrative expense paid to its affiliated enterprises.
The head office outlay， also called corporate outlay， includes the salary， welfare fee and traveling fee of the administrative officers of the head office， and the office fee， depreciation expense， repair expense， material consumption and amortization of low-value consumables.
Article 16 Financial expense means the expense arising from raising of operating funds， including net interest expense， net exchange loss， handling charge of financial institutions， and other non-capital expenditure.
Chapter III Payroll Expenditure
Article 17 Payroll expenditure means all the labor compensations in or not in cash paid by the taxpayer to the employees hold positions in or have employment relationship with the taxpayer in each tax year， including base salary， reward， allowance， subsidy， year-end salary increase， overtime salary and other expenditures concerned.
Regional subsidy， commodity price subsidy and lunch subsidy shall be treated as payroll expenditure.
Article 18 The following expenditures of the taxpayer shall not be treated as payroll expenditure：
（1） Dividends paid to employees for their investment in the taxpayer；（2） Social security contribution paid by the taxpayer for employees according to provisions of central or provincial governments；（3） Various welfare expenditures （including employee living allowance and family-visit traveling expense） paid out of the staff welfare fund；（4） Various labor protection expenditures；（5） Traveling expense and setting-in allowance for work transfer of employees；（6） Various expenditures for retirement and resignation of employees；（7） The only-child allowance；（8） Public housing reserve fund assumed by the taxpayer；（9） Other items that， according to the State Administration of Taxation， do not belong to the payroll expenditure.
Article 19 Employees holding positions in or with employment relationship with the enterprise include regular employees， contract workers and casual laborers with the exception of the following cases：
（1） The employees of the clinic， staff bathroom， hairdresser's room， kindergarten， nursery school that shall be charged to the staff welfare expense；（2） The retirees， laid-off workers and post-waiting workers who have received pension and unemployment benefits；（3） Administrative service persons of the houses sold or leased with rent income included in the housing turnover fund.
Article 20 Unless otherwise stated， payroll expenditure adopts tax salary deduction methods， with taxable salary deduction standards referring to the provisions of the Ministry of Finance and the State Administration of Taxation.
Article 21 The salaries paid to employees by the taxpayer which adopts the performance-linked salary measures and the salaries paid by the catering service industries from retained profit may be deducted according to the actual payment.
Chapter IV Asset Depreciation or Amortization
Article 22 The depreciation expense of the fixed assets and the amortization expense of intangible assets and deferred assets used by the taxpayer in operating activities may be deducted.
Article 23 The pricing of fixed assets of the taxpayer shall conform to the provisions of Article 30 of the Rules. After confirmation of the value of a fixed asset， it shall not be adjusted unless in the following special cases：（1） Asset liquidation and capital verification required by the state；（2） Dismantlement of a part of the fixed asset；（3） If the fixed asset has been damaged perpetually， with approval of competent authority， the value of the fixed asset may be adjusted to the recoverable value and the loss shall be recognized；（4） Adjustment of the original valuation based on the actual value or finding mistakes with the original price.
Article 24 The depreciation scope of fixed assets of the taxpayer shall conform to the provisions of Article 31 of the Rules. Unless otherwise stipulated， no depreciation or amortization shall be made for the following assets：
（1） The housing sold to employees or rented to employees with rent income failing to be included in the total income but in the housing turnover fund；（2） Goodwill independently developed or purchased；（3） Fixed assets and intangible assets donated.
Article 25 Unless otherwise stipulated， the minimum depreciation life of fixed assets is as follows：
（1） Housing and building： 20 years；（2） Train， steamship， machinery and other production equipment： 10 years；（3） Electronic equipment， other transportation tools other than train and steamship and the devices， tools and furniture relating to production and operation： 5 years.
Article 26 With respect to the key equipment that promotes technical advance， environmental protection or encouraged for investment by the state， and the machinery and equipment that is often in a state of shock， used beyond normal strength， or seriously eroded by acid or alkali， the taxpayer may reduce the depreciation life or adopt the accelerated depreciation method after being reviewed by the local competent tax authority and approved by the State Administration of Taxation.
Article 27 The deductible depreciation of fixed assets of the taxpayer shall be accounted for by the straight-line depreciation method.
Article 28 The value of intangible assets purchased by the taxpayer includes purchase price and related expenses arising in course of purchase.
With respect to the intangible assets independently developed by the taxpayer， the research and development expenses shall be accurately summarized. Those which have been directly deducted as research and development expense shall not bee amortized in use of such intangible assets.
Article 29 The land transfer payment made by the taxpayer to the state or other taxpayers for acquisition of the land use right shall be treated as an intangible asset which shall be amortized averagely in the period not less than the use life specified in the contract.
Article 30 The software attached to the hardware of computer purchased by the taxpayer and not priced separately shall be included in the hardware and treated as the fixed assets； if the software is priced separately， it shall be treated as intangible assets.
Article 31 The repair expenditure of the fixed assets of the taxpayer shall be directly deducted in the period of occurrence. Fixed asset betterment expenditure of the taxpayer may add the value of fixed asset if it has not been fully depreciated； if the fixed asset has been fully depreciated， the expenditure may be treated as deferred expense and amortized averagely in a period of not less than five years.
If any one of the following conditions is satisfied， repair of fixed asset shall be treated as fixed asset betterment expenditure：
（1） Repair expenditure reaches 20% or more of the cost of fixed asset；（2） The economical use life of a repaired fixed asset is extended two years or more； or（3） The repaired fixed asset is used for new or different purpose.
Article 32 The investment cost of the taxpayer shall not be depreciated or amortized， nor shall it be directly deducted as expense of current expense. However， the cost may be deducted from the property transfer income at the time of transfer or disposal of related investment asset， in order to compute the property transfer gain or loss.
Chapter V Borrowing and Rent Expenses
Article 33 Borrowing expense means the interest fees relating to the borrowings that the taxpayer shall assume for the purpose of operating activities， including：
（1） Interest of long and short-term borrowings；（2） Amortization of discount or premium relating to the bonds；（3） Amortization of supporting expenses arising for arrangement of borrowing；（4） Difference of foreign currency borrowing as the adjustment to the interest expense relating to the borrowed fund.
Article 34 The operating borrowing expense of the taxpayer may be directly deducted if meeting the interest conditions specified in the Regulations. With respect to the borrowing for purchase， construction and production of fixed and intangible assets， the borrowing expense arising in purchase or construction of related assets shall be recognized as capital expenditure and charged to the cost of related assets； the borrowing expense arising after delivery of related assets may be deducted in current period of occurrence. If the taxpayer is unable to specify the use of borrowing， the borrowing expense shall be reasonably divided into the expense included in asset cost and the deductible expense according to the proportion of funds occupied by operating activities and capital expenditure.
Article 35 The borrowing expense arising to the taxpayer engaged in real estate development business for the purpose of development of real estate shall be stated in the development cost of real estate if it occurs before the completion of real estate projects.
Article 36 If a borrowing received by the taxpayer from its related parties exceeds 50% of its registered capital， interest expenditure on the excess shall not be deducted before tax.
Article 37 The borrowing expense arising to the taxpayer for investment shall be stated in the cost of related investment and shall not be deducted before tax as the operating expense of the taxpayer.
Article 38 With respect to the fixed asset acquired by the taxpayer from the leaser by way of operating lease， the rent income may be deducted averagely according to the beneficial time， if it conforms to the independent taxpayer trading principle.
Article 39 With respect to the fixed asset acquired by the taxpayer from the leaser by way of financial lease， the rent income shall not be deducted but may be depreciated as required. Financial lease means the lease whereby the entire risks and benefits relating to the ownership of an asset have been substantially transferred.
The lease meeting any one of the following conditions shall be financial lease：
（1） The ownership of the leased asset is transferred to the leasee upon expiration of the lease term；（2） The lease term accounts for a majority （75% or more） of the service life of the asset；（3） During the lease term， the minimum rent payment is larger than or basically equal to the fair value of the asset on the commencement date of lease.
Chapter VI Advertising and Entertainment Expenses
Article 40 The advertising expense of the taxpayer which does not exceed 2% of sales （operating） income every tax year may be deducted according to the actual amount incurred. The part in excess may be carried forward in the coming tax years. Advertising expense of grains and liquor shall not be deducted before tax. If the taxpayer needs to raise the proportion of deduction of advertising expense for industrial characteristics and other special reasons， it shall apply to the State Administration of Taxation for approval.
Article 41 The advertising expense declared by the taxpayer for deduction shall be strictly separated from the sponsorship expenditure. The advertising expense declared by the taxpayer for deduction must meet the following conditions：
（1） The advertisement is produced by the specialized agencies approved by the administration for industry and commerce；（2） The taxpayer has paid the expense and acquired relevant invoice；（3） The advertisement has been disseminated by media.
Article 42 The business publicity expense （including the expenditure on the advertisements not published by media） of the taxpayer every tax year may be deducted according to the actual amount incurred without exceeding 0.5% of the sales （operating） income.
Article 43 The business entertainment expense of the taxpayer relating to its business may be deducted according to the actual amount incurred within the ratio specified below：Not more than 0.5% of the sales （operating） income if the annual net sales （operating） income is not more than RMB15 million； not more than 0.3% of the sales （operating） income if the annual net sales （operating） income is more than RMB15 million.
Article 44 When the taxpayer declares the business entertainment expense for deduction， if the competent authority requires it to provide evidence， the taxpayer shall provide enough true evidential documents or materials. In case of failure to provide such evidence， the expense shall not be deducted before tax.
Chapter VII Bad Debt Loss
Article 45 The bad debt loss of the taxpayer， in principle， shall be deducted according to the actual amount incurred. With approval of the tax authority， the taxpayer may set aside bad debt provision. If the taxpayer has set aside bad debt provision， the bad debt provision shall be written down in case of bad debt loss. If the bad debt loss occurs and exceeds the bad debt provision， the excess may be directly deducted in current period. When a bad debt that has been written off is recovered， the taxable income of current period shall be raised accordingly.
Article 46 With respect to the taxpayer allowed to set aside bad debt provision， unless otherwise stated， the ratio of bad debt provision shall not exceed 0.5% of the balance of accounts receivable at the end of current year. The year-end accounts receivable for which bad debt provision has been set aside is the sum that the taxpayer shall collect from the customers to which the taxpayer sells commodities and products or provides labor services. The year-end accounts receivable include bills receivable.
Article 47 If any of the following conditions is satisfied， the account receivable of the taxpayer shall be treated as bad debt：
（1） The debtor is declared bankrupt or dissolved with remaining property unable to pay up the account receivable；（2） The debtor is declared deceased or missing according to law with property or heritage unable to pay up the account receivable；（3） The debtor suffers huge losses due to the major natural disasters or accidents with property （including insurance indemnity） unable to pay up the account receivable；（4） The debtor fails to perform its debt service obligation on schedule and， according to the decision of a court， is unable to pay up the account receivable；（5） The account receivable has been overdue for more than three years； or（6） The account receivable that shall be written off according to requirement of the State Administration of Taxation.
Article 48 No bad debt provision shall be made for the accounts receivable for the non-purchase or sales activities of the taxpayer and any current account between the taxpayer and its related parties. Current account between the taxpayer and its related parties shall not be recognized as bad debt.
Chapter VIII Other Deduction Items
Article 49 The basic old age insurance premium， basic medical insurance premium， and basic unemployment insurance premium paid by the taxpayer to the tax authorities， labor and social security authorities or their designated institutions for its employees， the disabled employment security fund paid according to the standard set by the provincial-level tax authorities， the statutory personal safety insurance paid for employees engaged in special jobs according to state provisions may be deducted before tax.
Article 50 The life insurance or property insurance purchased by the taxpayer for its investors or employees to commercial insurance institutions and the supplementary insurance other than basic insurance purchased by the taxpayer for its employees shall not be deducted.
Article 51 The consumption tax， business tax， resource tax， customs duty， urban maintenance and construction fee， educational surcharge， product sales tax and surcharge， house property tax， vehicle and vessel usage tax， land use tax and stamp tax paid by the taxpayer may be deducted before tax.
Article 52 With respect to the traveling expense， meeting fee and board of directors expense incurred to the taxpayer in relation to its operating activities， if the competent tax authority requires the taxpayer to provide evidence， it shall provide legal proof that may testify its truthfulness， or such expenses shall not be deducted before tax.
The evidence for traveling expense shall include the name， place， time， tasks of traveling staff， and payment vouchers.
The evidence for meeting expense shall include the meeting time， venue， attendees， contents， objective， expense standards and payment vouchers.
Article 53 The commissions of the taxpayer may be stated in sales expense if meeting the following conditions：
（1） There is legal and true evidence；（2） The payment object must be an independent taxpayer or individual entitled to be engaged in intermediary service （the payment object shall not be the employees of the taxpayer）；（3） Unless otherwise stipulated， the commission paid to individuals shall not exceed 5% of the service charge.
Article 54 The reasonable and actual labor protection payment of the taxpayer may be deducted before tax. Labor protection payment means the expenditure on the provision of working clothes， gloves， security protection articles and heatstroke protection articles to employees due to the need of work.
Article 55 The inventory loss of assets and net loss of scraps of the taxpayer may be deducted after minus the compensation of responsible persons and the insurance indemnity and being approved by the competent tax authority. The property loss on the housing sold to employees by the taxpayer shall not be deducted before tax.
Article 56 The liquidated damage （including default interest of banks）， fine and legal cost paid by the taxpayer according to economic contract may be deducted before tax.
Chapter IX Supplementary Provisions
Article 57 In accordance with these Measures and pertinent tax regulations， with respect to pre-tax deductions subject to the review and approval of tax authorities， provincial-level tax authorities may require the tax payer to submit the audit certificate issued by a certified tax accountant or a certified public accountant of China when filing an application to the tax authorities for approval.
Article 58 These Measures shall come into effect on January 1， 2000.
Article 59 In case of discrepancy between these Measures and previous regulations， the former shall prevail. The outstanding issues of these Measures shall be governed by related regulations.
Ministry of Finance and the State Administration of Taxation
May 16， 2000