China Tax/Business News Flash 

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Please click on the links below to view more:   An Update on Windfall Gain Levy on Oil Exploitation Business    On 25 March 2006, the Ministry of Finance ("MOF") issued the "Administration Measures on Collection of Windfall Gain Levy on Oil Exploitation Business" (the "Measures") under which oil exploitation enterprises working in China, including joint venture enterprises, are subject to the Windfall Gain Levy (the "Levy"), if the sales price of crude oil is above US$40 per barrel.  Such Levy is imposed at the progressive rates from 20% to 40% on the portion of sales price exceeding US$40 per barrel.  For details, please refer to our News Flash Issue # 8 in April this year. Since the issuance of the Measures, a lot of practical questions have arisen.  In an attempt to resolve these issues, MOF has issued a Supplementary Notice for the Administration Measures on Collection of Windfall Gain Levy on Oil Exploitation Business (the "Supplementary Notice") on 30 June 2006.  The salient points of the Supplementary Notice are as follows.   Read more...... Expand / Collapse Taxation scope   It has clarified that oil exploitation enterprise is required to pay the Levy as long as it has exploited oil in the territory of China even though the relevant sales of oil is not made in China.   Taxable amount   Foreign partner of any cooperative oil exploitation project should be subject to the Levy to the extent that the oil is lifted.  It is understood that such amount of oil should not include the portions to be paid as VAT, oil field royalty and oil retained for the nation.  In addition, the price which is used for computing oil sharing amount ("oil sharing reference price") will be regarded as the sales price for the Levy calculation purpose.  More importantly, unlike VAT or oil field royalty, the Levy must be paid in RMB cash.  Furthermore, such Levy should not be treated as joint account cost and hence is not eligible for cost recovery.   Filing and payment responsibilities   It has further clarified that the compliance filing for the Levy should be consolidated and performed by the partner of the concerned oil project holding the oil exploitation and development permit.  Documentation showing details of sales price/oil sharing reference price of each month should also be filed.  After confirmation by MOF on the respective payable amounts of the Levy of joint venture partners, the Levy should be paid directly by joint venture partners (on an individual basis) to the specific account of MOF.  Late filing or payment will result in surcharge and penalty to the responsible party(ies).   Although there are still issues which need to be resolved, the Supplementary Notice has indeed helped the oil industry players to have a better understanding on how Windfall Gain Levy regime works.   Close Relaxation of Controls on Outbound Investment by Chinese Investors    In support of China's "Going Out" strategy, the State Administration of Foreign Exchange ("SAFE") has issued various circulars in the past year to liberalise policies governing outbound investments by Chinese investors.  Alongside with this same objective, Hui Fa [2006] 27 ("Circular 27") was issued on 6 June 2006.  This latest circular announced measures to further facilitate Chinese investors' overseas investments and help Chinese investors stay competitive in an international arena.   Read more...... Expand / Collapse One of the key liberalisation measures provided in Circular 27 is the removal of quota limit imposed on the amount of foreign exchange a Chinese investor can obtain for an overseas investment.  With the liberalisation, Chinese investors face lesser constraints and holdbacks when developing their outbound investment strategy.   Another liberalisation measure introduced in Circular 27 is to allow Chinese investors to remit foreign exchange for pre-investment costs on an overseas investment project upon approval.  Examples of pre-investment costs include: Guarantee deposits required in share or asset acquisitions Bidding deposits required in bidding projects Expenses in connection with pre-investment / market feasibility studies Other pre-investment expenses There are however certain restrictions on the outbound remittance of pre-investment costs, including: The outbound remittance required for pre-investment costs is not expected to exceed 15% of the total outbound remittance required for the investment.  In the event that the pre-investment costs will exceed 15%, approval for a higher ratio should be applied through SAFE.   In the event that the requisite approval for the overseas investment project is not completed within 6 months from the date of outbound remittance for the pre-investment costs, the unspent portion of the outbound remittance would have to be remitted back to China.  In this respect, Chinese investors should plan and manage their outbound remittance application process carefully to avoid having to remit any unused portion of their pre-investment funds back to China when the 6-month time limit has lapsed. The above liberalisation measures take effect from 1 July 2006.   Close

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