National income registration and local income tax registration. Both registrations are mandatory and the registration application must be submitted within 30 days of obtaining the business license from the local office of “State Administration of Industry and Commerce” at the city level or above;

Value added tax registration – General taxpayer who sells goods or imports goods into the PRC, or provides taxable services shall apply for a VAT registration certificate.
VAT export rebate registration – VAT taxpayers applying for tax rebate on the VAT paid for the inputs in the manufacture of export goods shall apply for a VAT export rebate registration;
Temporary tax registration – Non-residents having the obligation to pay tax may apply for a temporary tax registration through its appointed tax agent or the withholding entity to do so.
Tax withholding registration – Entity or individuals who has an obligation to withhold tax and pay it to the tax authority shall apply for a tax withholding registration.

Withholding obligations
Individual income tax – Under the PRC Individual Income Tax Law (The IIT Law) and the PRC Tax Collection and Administration Law, the employee is required to pay the tax each month while the employer or the entity at which the employee performs duty is obliged to withhold payment by making deductions from the payroll and pay it over to the local tax bureau. Failure to comply with the withholding obligation will be subject to fines and in serious cases, invite criminal consequences.
Social security contributions – Social security is a staff cost, which includes payments for unemployment, retirement, personal injury, and medical insurances. Both the local employee and the employing entity as the paying unit must make prescribed contribution to the pool of social security funds. The social security is computed by reference to the employee’s average wages, as announced by the provincial offices of the Ministry of Labor and Social Security. The social security regulations specify that the employing entity are under an obligation to withhold a certain sum from the payroll of the employees and pay it over to local tax office who collect the payments for social security funds.
License fee and royalty – Non-residents foreign enterprises or nationals receiving license fee or royalty arising from the use of intellectual property rights inside China are subject to PRC income taxes. The resident company or enterprises are required to withhold and pay the tax on behalf of the non-residents.
Legal responsibility – The withholding entity has the obligation to comply with the requirement under the PRC Tax Levy and Administration Law. Non-compliance shall invite administrative punishment or in serious cases criminal consequences.

Non-arm’s length transfer pricing
Under article 24 of the PRC Tax Levy and Administration Law, the tax authority has the power to make adjustment to the transaction prices fixed between related parties which are different from that fixed between independent third parties.

Legal liability for breach
There are two kinds of legal liability depending on which institutions impose the punishment for breaching the tax law. If the PRC tax authority imposes the penalty under the PRC Tax Levy and Administration Law, that will be an administrative liability. If the amount is large and that the case is brought to the People’s Court under the PRC Criminal Law, that is criminal liability.
Administrative punishment

The tax authority shall impose a fine of not exceeding RMB2,000 or a fine between RMB2001 and RMB10,000 for serious breaches, and order the taxpayer to put things right within a specified period of time in respect of the following non-compliance: -
Failure to apply for tax registration, amending, or canceling the tax registration within the statutory time; failure to keep books of accounts and information; failure to submit reports of financial statement, accounting policies and treatment. Article 37 of the PRC Tax Levy and Administration Law refers.

The tax authority shall order withholding entity or agent who fails to set up accounting records, keeps tax withheld and pays tax to put things right within a specified period. If the tax withholding agent does not make the correction within the specified period, the tax authority shall impose a fine of not exceeding RMB2,000 and a fine between RMB2001 and RMB5,000 for serious breaches. Article 39 refers.

Tax evasion
What is it?
Article 201 of the PRC Criminal Law provides that any individual or entity who by means of farcified accounting records or hiding accounting information from the tax authorities, understates its income or overstates its expenses, or refuses to submit a correct tax declaration as ordered by the tax authority, or refuses to pay tax or pays a lesser amount of tax, is considered to have evaded tax.

Consequences of tax evasion

All of the sentences shall be increased to more than 3 years if the revenue loss to the tax authority is greater than the above-mentioned amount.

It has been a 13-year journey from the preliminary work in 1994 to the passing of thePRC Enterprise Income Tax Law (referred to as “the EIT Law” hereafter) on 16th March 2007, which marked the completion of the unification of two tax systems for  domestically funded and foreign funded enterprises in China. It is a system innovation in the process of building socialism and a harmonized society within the country. To reap the benefits of the new tax system depends very much on its implementation in an effective manner. A few days ago, the State Council announced the long-awaited  Implementation Regulations of the PRC EIT Law (referred to as “the Implementation Regulations” hereafter), which is to come into play with the implementation of the  EIT Law.

To enable the taxpayers and the tax administrators to better understand and  follow the spirit inside the Implementation Regulations, the reporter interviewed theofficials in charge of the State Administration of Taxation on certain questions about  the Implementation Regulations. The officials in charge made the remarks that the drafting of the Implementation  Regulations followed the principles of legality, practicality, global convergence,conservatism, and easy operability. The drafts have brought the existing tax policyinto the contents of the Implementation Regulations and demonstrated the continuity  of the tax policies, without stepping outside the scope of the EIT Law. The Implementation Regulations give details to the EIT Law taking into account the economic activities and the latest development of the economic systems, and this hasdemonstrated the scientific properties of the current policies. In addition, the drafting  committee borrowed the prevailing international income tax policies and learned from  the experiences of international tax reforms. The Implementation Regulations have  embodied international custom and shows the forward-lookingness of the tax policies.According to the officials in charge, the Implementation Regulations contain 8 chapters with 133 clauses, mainly giving details to the provisions in the EIT Law. The  officials in charge gave detailed elaborations on certain key policies and designs in  the EIT Law.

The definition of actual management organization is to protect tax sovereignty.

To share the international experiences, the EIT Law expressly lays down the legal person income tax system, adopting the defined concept of resident and non-resident   enterprises.

The key to define the taxpayer under the legal person income tax system is the  criteria for resident enterprises and non-resident enterprises. The EIT Law uses the  place of incorporation and actual management organization as the criteria todetermine the resident and non-resident enterprises. It is easier to understand and  apprehend place of incorporation but it is difficult to understand the criteria for placeof actual management. How is the place of actual management determined in theImplementation Regulations and what are the relevant considerations?

The officials in charge made the remarks that from the experiences of international practices in recent decades, the place of actual management is in general the place where the enterprise carries on its daily production and business activities. From a legal perspective, it also includes the place where important business decisions are made. From an administrative perspective, the tax law only lays down the principle or

does not lay down anything, leaving the detailed rules to be developed from decided tax cases. To protect tax sovereignty and the willful tax evasion, the Implementation Regulations have expanded the scope for place of actual management and provide that it is the place where the enterprise exercises actual and overall management and control over its production, staff, books of accounts and assets. That helps the issue of administrative decisions later with reference to the actual situations of the enterprises, better protect the tax sovereignty of our country. Detailed criteria can be developed by issuing ministerial rules from the practices in tax collections and administrations.

Budgeted fiscal appropriation is non-taxable income

The EIT Law introduces the concept of non-taxable income. Fiscal appropriation is one of the three items of non-taxable income. What about the various types of subsidies enterprises receive from local governments at the provincial levels or below? How is it provided under the Implementation Regulations?

The officials in charge remarked that the fiscal appropriation, defined as non-taxable income under the Implementation Regulations, is the funds appropriated to the institutions, social bodies and organizations administered under the budget of the local governments, with the exceptions that the State Council, the Ministry of Finance and the State Administration of Taxation provide otherwise. That in general excludes the subsidies and the rebates of local taxes that the enterprise receives from various local governments, and narrows down the scope for fiscal appropriations as an item of nontaxable income. The main considerations for these are (i) the various types of subsidies that the enterprise receives not only include exemption and reduction of turnover taxes, but also include special subsidies for the enterprises to carry on designated activities, both resulting in the increase in net assets and economic benefits flowing in, thus the imposition of income tax being lawful; (ii) the imposition of income tax on the enterprises that receive subsidies from local governments strength the dministration of tax exemption and reduction since the local governments offer various types of tax exemption and reduction in disguise in luring inbound investments, resulting in the erosion of the tax base at the national level; and (iii) the existing legal rules on accounting for government subsidies classify government subsidies as non-operating revenue. That tax rules should be consistent with the accounting rules on government subsidies.

Deduction of reasonable wages and salaries before tax

The EIT Law unifies the deduction of actual payments for various items of expenses,and provides that enterprises can claim deductions of actual and reasonable cost and expense before tax. The Implementation Regulations make specific provisions for the items to be deducted and the criteria for deduction before taxes.

According to the officials, in respect of deduction of wages and salaries, the Implementation Regulations provide that actual and reasonable wages and salaries can be deducted from income. It means that scrapping the limited deduction of wages and salaries for domestically funded enterprises in the past years relieve them of the tax burden. The amount of deducted wages and salaries must be reasonable. Obviously unreasonable amount is not deductible. To the employees in general, the remunerations that the enterprise pays should be considered to be reasonable. There

may be exceptions. Where the shareholders and their close relatives work as the employees in the company, the payment of excessive wages and salaries is thedistribution of dividends in disguise. Alternatively the wages and salaries of the management working for the state owned enterprises are raised in breach of the rules of the departments for the supervision and administration of state owned assets. All

these complicated cases relating to wages and salaries will erode the tax base of the enterprise income tax. To strengthen the administration over tax bases, the Implementation Regulations add the qualification “reasonable” to wages and salaries.The official revealed that the State Administration of Taxation shall issue the 5 “Administrative Measures for the Deduction of Wages” to clarify what is considered

to be “reasonable” wages and salaries in the Implementation Regulations.

60% of the incurred business entertainment expenses are deductible, not exceeding 0.5% on the sales (business) turnover for current year

The Implementation Regulations provide that 60% of the business entertainment expenses incurred in connection with production and business activities shall be deductible from income, but the maximum amount shall not exceed 0.5% of the sales (business) turnover for the current year. What are the policy considerations lying behind this rule?

The official said that the amount of business entertainment expenses is a mix of corporate entertainment and personal consumption. Among them, the personal consumption falls under non-business expenses that should not be deducted before tax. Therefore, there is a requirement to limit the amount of business entertainment to a certain percentage. However, it is difficult to distinguish between business entertainment and personal consumption. The international practice is to arbitrarily set

a relative percentage between the two. In Italy 30% of the business entertainment expenses is deductible before tax. In Canada, the amount is 80%. In the US and New Zealand, the amount is 50%. Taking into consideration of international practices and the existing practice of limiting the deduction of business entertainment to a percentage of the sales amount, we combine the two practices as per experts’ recommendations on the adoption of a strict policy: business entertainment is subject to a 60% deduction and not exceeding 0.5% of the sales amount (business turnover) for the current year.

Limiting the deduction of advising expenses to 15% on sales revenue, and remaining amount being carried over for deduction in future years

The Implementation Regulations consider the combined amount of advertising expenses and business promotion expenses, and provide that the amount of deductible advertising and promotion expenses shall not exceed 15% of the sales amount (business turnover), except for the provisions of the Ministry of Finance and the State Administration of Taxation to the contrary. The amount exceeding the prescribed 15%

can be carried over to future tax years for deduction.

The officials in charge explained that advertising expenses that possess the properties of one-off payment of a large sum and benefit the enterprise for a long period of time should be regarded as a capitalized payment and cannot be deducted in whole in the current tax year. Business promotion has similar properties and should be subject to limits on deduction. The Implementation Regulations permit the deduction of advertising and promotion expenses up to 15% of the sales amount (business turnover), and that the portion in excess of the 15% can be carried over to future tax

years for deduction. The administration has given due consideration to the advertising and business promotion expenses in some industry sectors that require specific

measures to be adopted. In the light of expert opinions and views from relevant departments, the qualification “except for the provisions of the Ministry of Finance and the State Administration of Taxation to the contrary” has been included in the Implementation Regulations with a view to making ministerial rules on the deduction of advertising and business promotion expenses for different industry sectors, in accordance with the provision for the delegation of rule making power in the EIT Law.

Indirect credit helps Chinese enterprises “go abroad”

In accordance with the EIT Law, the corporate income tax the resident enterprises bear indirectly on the dividend and bonus issues from equity investment outside China is eligible for indirect credit. The Implementation Regulations provide that the resident enterprise should hold 20% controlling interest in the equity of the foreign company. What are the policy considerations on this?

The officials said that the PRC EIT law retains the direct credit for tax paid on dividends and bonus issues at the shareholder level and it also introduces the indirect credit for tax on profits earned at the company level out of which the dividends and bonus issued are paid. The adoption of direct and indirect credits gives a helping hand to Chinese resident enterprises going international and increases their competitiveness

in international market. From the perspective of international practices, indirect credit are given on condition that resident enterprises should have actual equity investments in foreign companies. In accordance with the tax laws in the US, Canada, the UK, Australia, and Mexico, resident enterprises holding 10% or more voting rights in the equity investment in foreign companies are eligible for indirect credit. The tax law

requires the equity interest in foreign companies to be 25% for Japanese and Spain investors. It is the first time the PRC EIT law adopts the indirect credit method. The Implementation Regulations provide that the equity interest in foreign companies is 20% for resident enterprises to receive the indirect credit.

New and high technology enterprises by industry sectors

In the light of the requirement for national economic and social development,successful international experiences and the requirement for simple tax system, broad tax bases, low tax rates, and stringent tax collections and administration, the PRC EIT Law adjusts and integrates the tax preferential policies for both domestically and foreign funded enterprises, and gives effect to changes in two dimensions: the tax

policy changes from region-specific preferences to industry-specific preferences,which is to be supplemented by regional tax preferences; the form of tax preferential treatment changes from direct tax exemption and reduction to direct tax exemption and reduction, which is to be combined with reduction in tax bases for indirect taxes.The Implementation Regulations make clarifications on the scope, the conditions, and

the recognition criteria for tax preferential treatments as laid down in the EIT Law.

The officials in charge said that there are three important issues in the recognition of new and hi-tech enterprises. The first is the scope of new and hi-technology enterprises. The Implementation Regulations change the classification of new and high technology by products to classification of the new and high technology by sectors. The Implementation Regulations provide that the products (services) of new and hi-tech enterprises should fall under the scope of <the new and hi-technology industry sectors that receive prior supports from the State> so that it can avoid the problems that product listing and coverage under existing policies are too narrow and that the existing policy is not forward looking. The second issue is the recognition criteria. The Implementation Regulations provide those criteria in principle: the amount of research and development as a percentage to sales; the sales revenue of new and hi-tech products (or services) as a percentage of total revenue; the ratio of employees who possess technical qualifications to the total number of employees in

the company, and other conditions to be met. The Ministry of Science and

Technology, the Ministry of Finance, and the State Administration of Taxation shall formulate policies on this and give the detailed benchmarks with the flexibility to make adjustments for later development.

The third issue is the core proprietary IP rights. The Implementation Regulations lay down the primary requirement for getting recognized as new and high technology enterprises is the ownership in “proprietary IP rights”. In view of the fact that there is no official definition of “proprietary IP rights”, the inclusion of trademark rights, exterior design, copyright that may not have bearing on the core technological

competitiveness of the enterprise into the “proprietary IP rights” will make the scope too wide. The Implementation Regulations finally adopt the “core proprietary IP rights” as one of the criteria for getting recognized to be new and hi-tech enterprises. It is relatively easy to operate and has pointed out the direction for technological innovation. The key point is the IP rights that the enterprise owns and that give core

technical support to the main products and services of the enterprise.

Annual taxable income of small and low profit-making enterprise not exceeding

RMB300,000

The Implementation Regulations give the amount of annual taxable income, the number of employees and the amount of total assets as the benchmark for small profit-making enterprises. Specifically for production enterprises, the annual taxable income shall not exceed RMB300,000, total number of employees shall not exceed 100, and the total asset amount shall not exceed RMB 30 million; for non-production enterprises, the annual taxable income shall not exceed RMB300,000, the number of employees shall not exceed 80, and the total amount of assets shall not exceed RMB 10 million. The scope of the tax concession is larger and the magnitude of tax concession is higher than that as given under the old tax law for domestically funded enterprises.

The officials said that the dividing line that the annual taxable income is RMB300,000 drawn under the Implementation Regulations results from careful testing. About 40% of the enterprises shall be taxed at 20% given that this benchmark is adopted.

The business profits that non-profit making organizations earn are taxable

The PRC EIT Law provides that the income of qualified non-profit making

organizations is exempted from tax. Article 85 of the Implementation Regulations provides that the income of the qualified non-profit making organizations excludes the income derived from profit-making activities of the non-profit making organization. Why is it?

The officials in charge said countries all over the world make a distinction between profit-making and non-profit making activities and give tax preference to non-profit making activities. The relevant legal rules in China provide that non-profit making organizations cannot carry out profit-making activities. To regulate these organizations and plug the loophole that may arise from the profit making activities

carried out by these tax-exempt organizations, the Implementation Regulations expressly provide that the income derived from the profit-making activities would not be exempted from tax. Where some non-profit making organizations derive income from profit-making activities and use them in whole for charitable events, that should

be primarily encouraged under the national policies. Therefore, the Implementation Regulations include the qualification “except for the provision of the Ministry of Finance and the State Administration of Taxation to the contrary”.

Dividend and bonus issue derived from investment over 12 months being exempted from tax

The PRC EIT Law provides that dividends, bonus issues and income from equity investment are tax-exempt income if they are distributed by resident enterprises that satisfy prescribed conditions. What are differences between the conditions to be met by the resident enterprises and the provisions on the taxation of dividends and bonus issues in the old tax law for domestically funded enterprises? What are the policy

considerations?

The officials in charge said that the exemption of income tax on dividend and bonus issues that are distributed among resident enterprises is to eliminate double taxation. Under the old tax regulations for domestically funded enterprises, the distribution of dividends from an enterprise that pays tax at a lower rate to an enterprise that pays tax at a higher rate attracts additional taxes for the high-tax enterprise on the rate

differences. In order to make the tax preferential treatment available to enterprises created in the development of the Western region, the new and high technology enterprises, and the small and low profit-making enterprises, the new EIT Law scraps the practice of imposing additional tax on the rate difference and exempts the income tax on dividend and bonus issues that are distributed by unlisted companies and listed companies, of which the ownership in the investment in the listed companies is over

12 months. To encourage direct investment in production and business activities, the stock speculations in the secondary capital market that is characterized by short-term ownership (less than 12 months) without the primary objective of receiving dividends and bonus issues should not become targets for tax preferential treatments.

The tax exemption and reduction commencing in the year the first sales transaction is reported

The Implementation Regulations provide that enterprises deriving income from the investment in projects of public basic infrastructure that receive primary support from the state shall enjoy tax preferential treatment in the form of “three years’ tax exemption and three years’ tax reduction”, commencing from the tax year in which the first sales transaction for the project is reported. The old tax law for foreign

invested enterprises provided that the year for tax exemption and reduction commences from the first profit-making year. The EIT Law has changed the previous practice from the first profit-making year to the year the first sales transaction occurs. What is the reason for this?

The officials in charge said that the old tax law for foreign invested enterprises adopted the first profit-making year as the year in which the tax exemption and reduction period commenced. That would in practice encourage the postponement of the first profit-making year to avoid paying taxes and made the tax collection and administration a difficult job. The Implementation Regulations adopt a new method under which the tax exemption and reduction commence from the year in which the first sales transaction is recorded. On one hand, this policy change can avoid the

practices by the foreign invested enterprises of putting off the first profit-making year to later years. On the other hand, this policy change can address the issue that the investment scale is big with long period of construction. It is more realistic to the situation under which the domestically funded enterprises receive tax preferences from the date of incorporation. It also encourages the enterprises to shorten the construction period, make the project profitable at the earliest possible moment and improve the return on investment.

Tax adjustment to strengthen the anti-tax avoidance measures

To comply with the relevant provisions on special tax adjustments in the EIT Law and learn from international experiences, the Implementation Regulations expressly lay down provisions for the related parties or associated enterprises in the transactions

with related parties, the adjustment methods for related party transactions, the principle of arm’s length transactions, advanced pricing agreements, the obligations for providing information, collecting taxes as per prescribed profit margins, preventing the use of controlled foreign corporations, prevention on thin capitalization,

general anti-tax avoidance, and the imposition of additional interest on overdue taxes.

The officials in charge said that these provisions strengthen the measures to combat tax avoidance, help prevent and stop acts of tax avoidance and safeguard the interests of the nation. He specially emphasized that after tax adjustments taking effects, the taxpayer, in addition to the payment of additional tax, is liable to a penalty interest that is computed with reference to the bank’s lending rate plus 5% in the period for which additional tax is collected. Where the taxpayer can submit the information to

the tax authority on time, it can be exempted from the payment of additional interest on tax.

Separate rules to be made for filing consolidated tax returns

The EIT Law follows model of the income tax on legal persons. Organizations that are not legal persons should file income tax returns that forms part of the consolidated tax turn for the head office. The filing of consolidated tax returns by head offices would relocate the tax revenues between different regions in the country. Both the taxpayers and local governments are very much concerned about this issue. The Implementation Regulations only lay down one provision in principle. What are the

policy considerations for this?

The officials in charge told us that in accordance with the EIT Law, business organizations that are not legal persons should file tax returns to the tax bureau in the city where the head office is located. That will cause relocation of tax revenue among different regions in the country, and should be dealt with in a reasonable way. We have performed many studies in order to solve the problem of relocation of tax revenues among different regions in a reasonable and proper way and balance the

interests among them after the implementation of the EIT Law and the

Implementation Regulations. The detailed measures shall be formulated by the Ministry of Finance and the State Administration of Taxation, and submitted to the State Council for approval before taking effect. Therefore, the Implementation Regulations only state the principles in general.

Parent and subsidiary companies no longer file group tax returns

The EIT Law provides that except for the provisions by the State Council to the contrary, enterprises should not file group income tax returns. However, the Implementation Regulations do not make relevant provisions for group of companies to file tax returns on a group basis. How will this problem be solved in future?

The official in charge said that as from 1994, the State Council has given approval to 120 large groups of corporations/enterprises to file group tax returns on a trial basis. The policy objective at that period of time is to relieve the enterprises of tax burden and support the development for the groups of enterprises because the operating results of the parent and individual subsidiaries did not present the true information

and it is difficult to distinguish between the enterprises that are operated in accordance with commercial principle and the enterprises that form part of the governmental organizations. With the implementation of the EIT Law, the parent and subsidiary corporations that are legal persons shall file tax returns and pay tax separately. Where there is a requirement to file group tax returns, the State Council shall make separate regulations. Implementation Regulations need not deal with this again since the EIT Law has already made the provisions and delegated the authority on this.

(1) to impose a lower rate of tax on non-generable mineral resources is not consistent with the requirement for energy conservation and environmental protection;
(2) low tax rate will reduce the revenue of the region with the resource deposits and weaken the region’s capability to provide public goods;
(3) the effectiveness of the policy is not prominent. The tax saving to the mining enterprises will result in the users of the mineral products paying more tax equal to the tax saving. It is because users in the next stage of the VAT chain have paid less  input VAT for the goods purchased; and
(4) the taxpayer and the tax authorities will incur additional administrative costs to handle the payment and collection of tax for goods subject to different tax rates.

After the transformation reform, mining enterprises will have a lower tax burden since the VAT paid for the purchased capital goods fall under the scope of input credit. To achieve a level playing field for taxpayers, make a uniform tax system, promote energy conservation and the synergistic utilization of resources requires the reinstatement of the tax rate for extracts of metallic and non-metallic mineral products to 17%.

After raising the VAT rate for mineral products, the tax burden will only reallocated between the mining enterprises and the enterprises using minerals as inputs, without causing an overall increase in VAT amount.

According to statistics, the input VAT for purchased capital equipment in the experimental trial areas of northeast and central provinces amounted to RMB 24.4 billion. The cumulative offset and refund amount of VAT is RMB18.6 billion. The experimental trial worked smoothly and helped promote the economic development, capital asset replacement and technology improvement in the region. It also helped acquire the experiences for introducing the VAT transformation reform throughout the country.

As compared to the experimental trial, there have been three adjustments in the nation-wide VAT transformation reform: the first is abolition of VAT refund for purchased capital goods. Instead, the input credit method is used in the same way as in the purchase of raw materials for production; the second is the application of VAT transformation reform on a nation-wide basis, eliminating the restriction imposed on some regions and industries; the third is to ensure the positive impact of VAT transformation reform for expanding domestic demand, the credit for input VAT paid for purchased capital goods is no longer restricted to the increase in VAT payable amount.

In view of such situation, the introduction of VAT transformation reform will perform the important function of boosting the development of the enterprises, improving the competitiveness of the Chinese enterprise and the capability to cope with risks, and overcoming the adverse influences on China economy brought about by the international financial crises. According to estimates, the reform will cause fiscal revenue to drop by over RMB120 billion, and is the single largest tax cut in the history of the PRC. It is believed that the reform policy will have a positive impact on the sustained steady and relatively fast development of our country’s economy.

The VAT reform plan was tabled during the third plenary session of the 16th Central Committee of the Communist Party of China (the CPC), and the reform must be completed during the period of the 11th five-year plan in China. Since 1st July 2004, the experimental trials have been completed in the North East and Central part of China. The experimental trials were successful and have achieved the expected target. The 2008 State Council Work Report officially kicked off the reform plan for VAT system transformation. In the same year the 11th Session of the National People’s Congress examined and approved the report of the fiscal budget committee of the 11th Session of the NPC, which provides that the reform shall commence in 2009. The State Council decides to commence the transformation reform and perfect the VAT system of our country in order to meet the requirement of scientific
development of the tax system, finally perfect the VAT system and create the condition for the enactment of the VAT law by the NPC Standing Committee in five years’ time.

OF
AAA, INC.
(a _________(PLACENAME) Corporation)
The original Certificate of Incorporation of the corporation was filed with the Secretary of State of _________(PLACENAME) on _________(M,D,Y) and a restated Certificate of Incorporation was filed on _________(M,D,Y). The following Restated Certificate of Incorporation (the Restated Certificate) has been duly adopted by the Board of Directors and the Stockholders pursuant to Sections 242 and 245 of the _________(PLACENAME) General Corporation Law.

1. The name of the corporation is AAA, INC.

2. The address of its registered office in the State of _________(PLACENAME) is _________. The name of its registered agent at such address is BBB Company.

3. The nature of the business or purposes to be conducted or promoted is:

Specifically, to engage in the research, development, manufacture and marketing of chemicals, chemical compounds and products and related instruments and apparatus.

Generally to conduct and carry on the business of manufacturing, selling and distributing chemicals, chemical preparations, compounds, and materials of every kind and description and all instruments, apparatus, articles and products related thereto; and to purchase, manufacture, produce, refine, mine or otherwise acquire, invest in, own, hold, use, mortgage, pledge,sell, assign, transfer, or otherwise dispose of, trade and deal in and with, any and all kinds of chemicals and source materials, ingredients, mixtures, derivatives, and compounds thereof, and any and all kinds of products of which any of the foregoing constitutes an ingredient or in the production of which any of the foregoing is used, including, without limitation, industrial chemicals of all kinds.

To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of _________(PLACENAME).

(a) The total number of shares of all classes of stock which the corporation shall be authorized to issue is _________ shares, divided into three classes of shares of stock as follows: _________ shares of Class A Common Stock, par value $,_________ per share (Class A Common), _________,shares of Class B Common Stock, par value $,_________ per share (Class B Common), and _________ shares of Preferred Stock, par value $,_________ per share (Preferred Stock).

(b) Except as set forth in this Article 4.(b), the Class A Common shares and Class B Common shares shall be identical in all respects and shall have equal rights and privileges.

A. Dividends.

(1) Subject to paragraph (2) of this paragraph A, whenever a dividend is paid to holders of Class B Common shares, the corporation shall also pay to holders of Class A Common shares a dividend at least equal in amount per share. The corporation may pay dividends to holders of Class A Common shares in excess of dividends paid, or without paying dividends, to holders of Class B Common shares.

(2) If at any time a dividend is to be paid in Class B Common shares or Class A Common shares (a Stock Dividend), such Stock Dividend may be declared and paid only as follows:

(i) So long as no Class A Common shares have been issued or are outstanding, Class A Common shares may be paid to holders of Class B Common shares; or

(ii) Class A Common shares may be paid to holders of Class A Common shares and Class B Common shares may be paid to holders of Class B Common shares.

Whenever a Stock Dividend is paid, the same number of shares shall be paid in respect of each outstanding Class A or Class B Common share. The corporation shall not combine or subdivide shares of either of such classes without at the same time making a proportionate combination or subdivision of shares of the other of such classes.

B. Voting. The holders of Class B Common shares shall have exclusive voting power except as may be provided to holders of the Preferred shares pursuant to Article 4.(c) of this Restated Certificate and except as follows:

(1) With respect to the election of directors, the holders of Class A Common shares voting as a separate class shall be entitled to elect that number of directors which constitutes twenty-five percent of the authorized number of members of the Board of Directors and, if such twenty- five percent is not a whole number, then the holders of Class A Common shares shall be entitled to elect the nearest higher whole number of directors that is at least twenty-five percent of such membership. Holders of Class B Common shares voting as a separate class, subject to voting rights that may be granted to holders of Preferred shares pursuant to Article 4.(c) of this Restated Certificate shall be entitled to elect the remaining directors. Unless, and to the extent that, the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot.

(2) The holders of Class A Common shares shall be entitled to vote as a separate class on the removal, with or without cause, of any director elected by the holders of Class A Common shares and the holders of Class B Common shares (subject to voting rights of Preferred shares granted pursuant to Article 4.(c) of this Restated Certificate) shall be entitled to vote as a separate class on the removal, with or without cause, of any director elected by the holders of Class B Common shares; provided that any director may be removed for cause by vote of the holders of the Class A and Class B Common shares voting as a single class, in which event the holders of Class A Common shares shall have one-tenth vote per share and the holders of Class B Common shares shall have one vote per share.

(3) The holders of the Class A Common shares and the holders of the Class B Common shares shall be entitled to vote as separate classes on such other matters as may be required by law or this Restated Certificate to be submitted to such holders voting as separate classes.

(4) The holders of Class A and Class B Common shares shall in all matters not specified in paragraph (1), (2) or (3) of this paragraph B vote together as a single class (subject to voting rights that may be granted to any holders of Preferred shares pursuant to Article 4.(c) of this Restated Certificate); provided that the holders of Class A Common shares shall have one-tenth of a vote for each share and the holders of Class B Common shares shall have one vote for each share.

(5) Any vacancy in the office of a director elected by the holders of the Class A Common shares may be filled by a vote of such holders voting as a separate class and any vacancy in the office of a director elected by the holders of the Class B Common shares may be filled by a vote of such holders voting as a separate class (subject to voting rights of the Preferred shares granted pursuant to Article 4.(c) of this RestatedCertificate) and, in the absence of a stockholder vote, in the case of a vacancy in the office of a director elected by either class, such vacancy may be filled by the remaining directors as provided in the by-laws. Any director elected by the Board of Directors to fill a vacancy shall serve until the next annual meeting of the stockholders and until his or her successor has been chosen and has qualified. If permitted by the by-laws, the Board of Directors may increase the number of directors, and any newly created directorships so created may be filled by the Board of Directors; provided that, so long as the holders of Class A Common shares have the rights provided in paragraphs B.(1) and B.(5) of this Article 4.(b) in respect of the next previous annual meeting of stockholders, the Board of Directors may be so enlarged by the Board of Directors only to the extent that at least twenty-five percent of the enlarged Board consists of directors elected (a) by the holders of the Class A Common shares, (b) by persons appointed to fill vacancies created by the death, resignation or removal of persons elected by the holders of the Class A Common shares, (c) by directors elected by the holders of the Class A Common shares, or (d) by persons elected to fill newly created directorships in the manner provided by clauses (a), (b) or (c) above.

(6) The Class A Common shares will not have the rights to elect directors set forth in paragraphs B.(1) and B.(5) of this Article 4.(b) if, on the record date for any stockholder meeting at which directors are to be elected, the number of issued and outstanding Class A Common shares is less than ten percent of the aggregate number of issued and outstanding Class A Common shares and Class B Common shares. In such case, all directors to be elected at such meeting shall be elected by holders of Class A Common shares and Class B Common shares voting together as a single class (subject to voting rights that may be granted to any holders of Preferred shares pursuant to Article 4.(c) of this Restated Certificate); provided that, with respect to said election, the holders of Class A Common shares hall have one-tenth of a vote for each share and the holders of Class B Common shares shall have one vote for each share.

(7) Notwithstanding anything in this paragraph B to the contrary,the holders of Class A Common shares shall have exclusive voting power on all matters, except as may be provided to holders of the Preferred shares pursuant to Article 4.(c) of this Restated Certificate, at any time when no Class B Common shares are issued and outstanding.

C. Conversion. Each holder of record of Class B Common shares may at any time or from time to time, in such holders sole discretion and at such holders option, convert any whole number or all of such holders Class B Common shares into fully paid and non-assessable Class A Common shares at the rate (subject to adjustment as hereinafter provided) of one Class A Common share for each Class B Common share surrendered for conversion. Any such conversion may be effected by any holder of Class B Common shares surrendering such holders certificate or certificates for the Class B Common shares to be converted, duly endorsed, at the office of the corporation or any transfer agent for the Class B Common shares, together with a written notice to the corporation at such office that such holder elects to convert all or a specified number of Class B Common shares and stating the name or names in which such holder desires the certificate or certificates for such Class A Common shares to be issued. Promptly thereafter, the corporation shall issue and deliver to such holder or such holders nominee or nominees, a certificate or certificates for the number of Class A Common shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made at the close of business on the date of such surrender and the person or persons entitled to receive the Class A Common shares issuable on such conversion shall be treated for all purposes as the record holder or holders of such Class A Common shares on that date.

The number of Class A Common shares into which the Class B Common shares may be converted shall be subject to adjustment from time to time in the event of any capital reorganization, reclassification of the stock of the corporation, consolidation or merger of the corporation with or into another corporation or sale or conveyance of all or substantially all of the assets of the corporation to another corporation or other entity or person. Each Class B Common share shall thereafter be convertible into such kind and amount of securities or other assets, or both, as are issuable or distributable in respect of the number of Class A Common shares into which each Class B Common share is convertible immediately prior to such reorganization, reclassification, consolidation, merger, sale orconveyance. In any such case, appropriate adjustments shall be made by the Board of Directors of the corporation in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Class B Common shares, to the end that the provisions set forth herein (including provisions for adjustment of the conversion rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other assets thereafter deliverable on conversion of the Class B Common shares.

No fraction of a Class A Common share shall be issued on conversion of any Class B Common share but, in lieu thereof, the corporation shall pay in cash therefor the pro rata fair market value of any such fraction. Such fair market value shall be based, in the case of publicly traded securities, on the last sale price for such securities on the business day next prior to the date such fair market value is to be determined (or, in the event no sale is made on that day, the average of the closing bid and asked prices for that day on the principal stock exchange on which Class A Common shares are traded or, if the Class A Common shares are not then listed on any national securities exchange, the average of the closing bid and asked prices for that day quoted by the NASDAQ System) or, in the case of other property, the fair market value on such day determined by a qualified independent appraiser expert in evaluating such property and appointed by the Board of Directors of the corporation. Any such determination of fair market value shall be final and binding on the corporation and on each holder of Class B Common shares or Class A Common shares.

The corporation shall at all times reserve and keep available out of the authorized and unissued Class A Common shares, solely for the purpose of effecting the conversion of the outstanding Class B Common shares, such number of Class A Common shares as shall from time to time be sufficient to effect the conversion of all outstanding Class B Common shares and if, at any time, the number of authorized and unissued Class A Common shares shall not be sufficient to effect conversion of the then outstanding Class B Common shares, the corporation shall take such corporate action as may be necessary to increase the number of authorized and unissued Class A Common shares to such number as shall be sufficient for such purposes.

(c) The Preferred shares may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, of such Preferred shares, including without limitation of the generality of the foregoing, dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices and liquidation preferences of any wholly unissued series of Preferred shares, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

5. The corporation is to have perpetual existence.

6. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the corporation.

7. A director of the corporation shall not be personally liable to the corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the _________(PLACENAME) General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the _________(PLACENAME) General Corporation Law is amended after approval by the stockholders of this Article 7 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the _________(PLACENAME) General Corporation Law, as so amended. Any repeal or modification of any provision of this Article 7 by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification.

8. The corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of _________(PLACENAME) at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article.

IN WITNESS WHEREOF, the undersigned have executed this certificate as of _________(M,D,Y).

/s/ _________(NAME), _________(TITLE)

/s/ _________(NAME), _________(TITLE)
The undersigned, the President and Secretary of AAA, Inc., a _________(PLACENAME) corporation, declare under penalty of perjury that the matters set out in the foregoing Restated Certificate of Incorporation are true of their own knowledge.

/s/ _________(NAME), _________(TITLE)

/s/ _________(NAME), _________(TITLE)

The second is to plug the tax loophole arising from the transformation. The revised VAT regulations provide that the input VAT for consumables (like vehicles and yachts) is not allowed to get deduction from output VAT since it is easy to mix up corporate consumption with personal consumption that is not relevant to the technological improvement of the enterprise.

The third is to reduce the levy rate for small-scale taxpayer. Before the amendment,small-scale taxpayer who is engaged in production activities is subject to VAT at a 6% levy rate. According to the original VAT regulations, with the approval from the State Council, small-scale taxpayers carrying on production activities and nonproduction activities are taxed at a levy rate of 6% and 4% respectively. After the transformation reform, the tax burden of the VAT ordinary (general) taxpayer has been reduced across the board. To balance the tax burden between the VAT ordinary taxpayer and the small-scale taxpayer and promote the growth of small and medium size enterprises to raise employment level, it is necessary to reduce the tax burden of the small-scale taxpayer. Taking into account the fact that it is commonplace for the small-scale taxpayer to carry on production and non-production activities at the same time, it is difficult to distinguish between the small-scale taxpayer who is doing production business and the one who is not. Therefore, the revised VAT regulations no longer provide for two levy rates for different line of businesses, and fix the levy rate at 3% across the board for the small-scale taxpayer.
The fourth is to incorporate some current VAT policies into the revised VAT regulations, mainly including the deduction rates for agricultural produce and transportation charges, the provisions for the qualifications for being recognized as the VAT general taxpayer, and the abolition of tax exemption for the equipment 5 imported for use in export processing with supplied materials, export processing with samples, and compensation trade.

The fifth is to extend the VAT filing deadline from 10 days to 15 days after the month end in order to provide convenience to taxpayers, improve revenue service level and relieve the workload for handling VAT filing at the counter of the local tax bureaus in accordance with the practices of tax levy and administration. The revised VAT regulations also clarify the issue how to determine the tax withholding agent, the time the tax liabilities arise, the location of paying taxes and the period within which payments should be made for the taxpayer situated outside China.

(1) Ensuring the major point of reform without an amendment across the board, and that provides for the legal base for the VAT transformation reform;
(2) Keeping policy stable and linking the current policy and regulations with relevant provisions to show that the requirement for the rule of law has been followed;
(3) Satisfying the requirement for tax collection and administration, optimizing the tax services, enhancing the standard of tax collection and administration, and the standard of conduct in law enforcement.