WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/30 
14 September 2007 
 (07-3834) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES 
 
Replies to the Questions Posed by AUSTRALIA1  
Regarding the New and Full Notification of CHINA2 
  
 The following communication, dated 7 September 2007, is being circulated at the request of 
the Delegation of China.    
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A. QUESTIONS REGARDING NOTIFIED PROGRAMMES 
 
II. Preferential tax policies for fo reign-invested export enterprises 
 
Question 1 
  The notification indicates that foreign in vested and operated enterprises which have 
exported seventy per cent or more of their output  value of their products may pay enterprise 
tax calculated at a rate which is equivalent to 50 per cent less than that specified for enterprise 
tax rate in the Tax Law.  This subsidy appears to be contingent upon export performance in the 
same sense as Article 3 of the ASCM.  Please:  
(a) indicate when China intends to bring this measure in conformity with its obligations 
under the WTO Agreements, including its Accession Protocol?   
 
Reply
 
 
 This policy will be adjusted with the implem entation of the new Income Tax Law of the 
People's Republic of China for En terprises on 1 January 2008.   
 
(b) specify other criteria, if any, for foreign in vested/operated enterprises to meet in order 
to qualify for the reduced enterprise tax rate?   
 
Reply  
 
 Item II of the notification is based on Article 75.7 of the Rules for the Implementation of the 
Income Tax Law of the People's Republic of Chin a for Enterprises with Foreign Investment and 
Foreign Enterprises (1991).  Criteria specified in th is article granting this preferential tax treatment 
have been reflected in the notification.    
                                                     
 
1 G/SCM/Q2/CHN/21.   
2 G/SCM/N/123/CHN.   G/SCM/Q2/CHN/30 
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  (c) explain how an enterprise could apply to benefit from this preferential tax policy? 
 
Reply
 
 
 In order to enjoy the preferential tax policy,  an enterprise shall also provide following 
documents when submitting its annual VAT declarat ion form:  documents proving that the products 
of the enterprise are exported in the year, and that the export covers more than 70 per cent of the total 
production value.  The tax authorities in charge w ill verify on the production and export value of the 
enterprise of the year.    
(d) specify the amount of revenue foregone by  the government during the notification 
period in granting this subsidy? 
 
Reply
 
 
 The amount of tax forgone as a result of the im plementation of preferential tax policies is not 
available because currently China does not have a sta tistics system for tax expenditure.  It is still in 
the process of being established.    
(e) specify which sectors have benefited from this subsidy during the notification period? 
 Reply
 
 
 Information requested by Australia in the ques tion is not available because the policy is not 
specific to any particular industry.  It is appli cable to all production-oriented foreign invested 
enterprises regardless which in dustries they are in.   
 
IV. Preferential tax policies for foreign -invested enterprises engaged in energy, 
transportation infrastructure projects 
 
Question 2 
 
 What are the criteria for qualifying for the reduced income tax rate?  What types of 
energy and transportation infrastr ucture projects have benefited from this subsidy?  How many 
projects during each year of the notified peri od have benefited from this subsidy?  Which 
industry sectors has this benefited? 
 Reply
 
 
 There are no criteria other than those provide d for in Article 73 of the Rules for the 
Implementation of the Income Tax Law of the People's Republic of China for Enterprises with 
Foreign Investment and Foreign Enterprises (1991).  Neither is there explanatory note defining energy 
and transportation infrastructure projects for implemen tation of the policy.  The policy is implemented 
with reference to the general rule for classification of industries in statistics, and major types of the 
projects include for example electricity and road construction projects.  On number of projects and 
sectors which benefited with the result of this policy, there are no statistics available.   
 
X. Preferential tax policies for enterprises wi th foreign investment established in special 
economic zones (excluding Shanghai Pudong area)  
Question 3 
  The notification indicates that enterprises with foreign investment established in the 
Hainan special economic zones and engaged in cert ain infrastructure projects such as coal  G/SCM/Q2/CHN/30 
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  mines are exempt from enterprise income tax for a specified period of time of starting to make a 
profit and then subject to a reduced enterprise income tax thereafter.  What are the criteria for 
infrastructure projects concerning coal mi nes to qualify for this advantageous tax 
arrangement?  How many projects have benefite d from this subsidy during each year of the 
notified period?   
 
Reply  
 
 In this case the criteria are: firstly it should be established in the Hainan Special Economic 
Zone; secondly its operation should be for more than 15 years;  and thirdly it should apply to the tax 
authorities in the Hainan province for approval. On number of projects, there are no statistics 
available.    
XI. Preferential tax policies for enterprises with  foreign investment established in the costal 
economic open areas and in the economi c and technological development zones 
 
Question 4 
  How many projects engaged particularly in “energy resource, transportation and port 
construction projects” have benefited from this preferential tax policy during each year of the 
notified period?   
 
Reply
 
  There are no statistics available in this respect.    XII. Preferential tax policies for enterprises with foreign in vestment established in Pudong 
area of Shanghai 
 
Question 5 
  The notification indicates that enterprises with foreign investment engaged in energy 
resources and transport construction projects where the period of operations is fifteen years or 
more may be exempt from enterprises taxes for a certain period.  How does China assess the 
“period of operations”?  What specific industry sectors have benefited? 
 
Reply
 
 
 According to Article 74.1 of the Rules for the Implementation of the Income Tax Law of the 
People's Republic of China for Enterprises with Fo reign Investment and Foreign Enterprises (1991), 
the period of business operations means the period comme ncing on the date an enterprise with foreign 
investment actually begins production or business operations (including tr ial production and trial 
business operations) and ending on the date the en terprise ceases production or business operations.  
On sectors which benefited with the result of this policy, there are no statistics available in this 
respect.    
XIII. Preferential tax policies for enterprises wi th foreign investment established in the Three 
Gorges of Yangtze River Economic Zone  
 
Question 6 
  Please explain what is meant by “enterprises with foreign investment of a production nature”.  What “other projects encouraged by the State” have qualified for this preferential tax 
policy during the period of notification?   G/SCM/Q2/CHN/30 
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  Reply
 
 
 Definition of “FIEs of production nature” is found in Article 72 of the Rules for the 
Implementation of the Income Tax Law of the People's Republic of China for Enterprises with 
Foreign Investment and Foreign Enterprises ( 1991), which reads: “Enterprises with foreign 
investment of a production nature” mentioned in Artic le 7, paragraph 1 and pa ragraph 2 and Article 8, 
paragraph 1 of the Income Tax Law of the People’ s Republic of China for Enterprises with Foreign 
Investment and Foreign Enterprises means enterprises with foreign investment engaged in the following industries:  (1) machine manufacturing and electronics industries;  (2) energy resource industries (not including exploitation of oil and natu ral gas);  (3) metallurgical, chemical and building 
material industries;  (4) light industries, and tex tiles and packaging industries;  (5) medical equipment 
and pharmaceutical industries;  (6) agriculture, forestry, animal husbandry, fisheries and water conservation;  (7) construction industries;  (8 ) transportation industries (not including passenger 
transport);  (9) development of science and technol ogy, geological survey and industrial information 
consultancy directly for services in respect of production, and services in respect of repair and 
maintenance of production equipment and precision inst ruments;  (10) other industries as specified by 
the tax authorities under the State Council”.     Definition of foreign investment projects wh ich are “encouraged by the State” is found in 
Article 4 and 5 of the Provisions on Guiding Dir ection of Foreign Investment (State Council Decree 
No. 346) which was promulgated on 11 February 2002 and became effective on 1 April 2002.   
 
 Article 4 of the Provisions provides:  Foreign invested projects shall be classified into four categories:  projects to be encouraged, permitted, restricted or prohibited.     Foreign invested projects to be encouraged, rest ricted or prohibited are listed in the Catalogue 
for the Guidance of Industries for Foreign Investment .  Those other than foreign invested projects to 
be encouraged, restricted or prohibited shall be fo reign invested projects to be permitted, which are 
not listed in the Catalogue for the Guidance of Industries for Foreign Investment.     Article 5 of the Provisions reads:  Foreign invested projects under one of the following circumstances shall be listed as encouraged ones:   
 
(1) projects applying new agricultural technology,  for comprehensive agricultural development, 
and for development of energy, communicati ons or industry of key raw materials;   
 (2) projects employing new high technology and advanced practical technology which can 
improve performance of products, increase tech-economic efficiency of enterprises, or 
manufacture new equipment or new materials wh ile the domestic productivity is deficient;   
 (3) projects that can meet the demands of ma rket, raise the grade of products, open up new 
markets or increase the competitive strength of  products in international market;   
 
(4) projects adopting new technology or equipment that can conserve energy and raw materials, 
utilize resources and renewable resources in a co mprehensive way or prevent environmental 
pollution;   
 (5) projects that can make full use of the superi ority in human and natural resources in the Mid-
west regions and that are in conformity with  the industrial policies of the State ;  or 
 (6) other circumstances provided for in la ws and administrative regulations.   
  Regarding the Catalogue for the Guidance of I ndustries for Foreign Investment mentioned in 
the Provisions, the currently applicable versi on was promulgated on 30 November 2004 by a joint  G/SCM/Q2/CHN/30 
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  Decree No. 24 of the State Development and Reform Commission (NDRC) and the Ministry of 
Commerce (MOFCOM).  It became effective on 1 Janua ry 2005. Further revision of the Catalogue is 
now under way.     Apart from that, there was a Catalogue of Pr iority Industries for Foreign Investment in 
Central and Western Region promulgated jointl y by NDRC and MOFCOM for the central and 
western region of China according to the Provisions on Guiding Direction of Foreign Investment.  Projects covered by the Catalogue are also encouraged  by the State.  The currently applicable version 
of the Catalogue was promulgated on 23 July  2004 by a joint Decree No. 13 of NDRC and 
MOFCOM.  It became effective on 1 September 2004.   
 
XXXIII. Fund for international market exploration by SMEs 
 Question 7  
 The notification indicates that the funding is provided after the applicant has completed 
the market exploration activities.  Is this program discretionary?   
 
Reply
 
 
 This policy is not implemented discretionarily.  As indicated in the notification, the grant is 
allocated according to the pre-approved applicati on for fund and the amount as approved after market 
exploration activities are completed.    
LVIII. Preferential tax policies for foreign in vested enterprises and foreign enterprises which 
have establishments or place in China and a re engaged in production or business operations 
purchasing domestically produced equipments  
Question 8 
  The notification indicates that certai n foreign invested enterprises and foreign 
enterprises engaged in production or business operations may deduct forty percent of the 
expenses on purchasing domestically produced equi pments from the increment of income tax of 
that year compared to the previous year.  This subsidy appears to be contingent upon the use of 
domestic over imported goods within the sense of Article 3 of the ASCM.  Please: 
 
(a) if any, specify other criteria for foreign invested/operated enterprises to meet in 
order to qualify for this preferential tax policy?   
 
Reply
 
 
 Criteria to be met to enjoy this preferential tax treatment are found in the legislation granting 
this preferential treatment, i.e. Ministry of Fina nce Circular Cai Shui No. 49 of 2000, and have been 
reflected in the notification.  Specifically, for inv estment projects listed as encouraged category in the 
Catalogue for the Guidance of the Foreign Investme nt Industries of foreign invested enterprises and 
foreign enterprises which have establishments or  place in China engaged in production or business 
operations, 40 per cent of the expenses on purchasing  domestically produced equipments within the 
total investment of the project, or beyond the total investment of the project but for the purpose of 
upgrading the existing equipments and crafts, shall be  deducted from the increment of income tax of 
that year compared to the previous year.  Th e “domestically produced equipments” do not include 
those imported directly by other enterprises, or those produced by processing trade and compensatory 
trade, or those falling in the Catalogue of Import Products in Foreign Investment Projects not Subject 
to Import Duty Exemption as stipulated in the State Council Circular No. 37 of 1997.   
 G/SCM/Q2/CHN/30 
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  (b) explain how an enterprise could apply to be nefit from this preferential tax policy?   
 
Reply
 
 
 The procedure under this policy is as follows: th e foreign-invested enterprise shall submit an 
application for the VAT deduction to the taxation ad ministration in charge within 2 months of its 
purchase of domestic equipments, and provide rele vant proving documents including invoices;  the 
taxation administration in charge shall then report it to the provincial taxation administration after 
receiving the application;  the provincial taxation administration shall review the application and 
approve within one month after receipt of the appli cation.  A copy of the approval document shall also 
be sent to the applicant.   
 
(c) specify the amount of revenue foregone by the government during the notification 
period in granting this subsidy?   
 Reply
 
 
 As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because cu rrently China does not have a statistics system for 
tax expenditure.  It is still in th e process of being established.   
 
(d) specify which sectors have benefited from this subsidy during the notification 
period?   
 
Reply  
 
 Information in this respect is not available b ecause the policy is not specific to any particular 
industry.  It is applicable to all foreign invest ed enterprises meeting the sp ecified criteria regardless 
which industries they are in.    
LIX. Preferential tax policies for domestic enterprises purchasing domestically produced 
equipments for technology upgrading purposes 
 
Question 9 
  The notification indicates that domestic enterprises that purchase domestically produced equipments for technology upgrading  purposes may deduct forty per cent of the 
expenses on purchasing such goods.  This subsid y appears to be contingent upon the use of 
domestic over imported goods within the sense of Article 3 of the ASCM.  What are the “state industrial policies of the domestic enterprises”?   
 
Reply
 
 
 According to Article 6 and 7 of the Ministry of Finance Circular Cai Shui No. 290 of 1999 as 
referred to in the notification, projects consistent w ith state industrial policies refer to those consistent 
with the Current Priorities for Fixed Assets Investme nt in Industrial and Commercial Sectors issued 
by State Economic and Trade Commission (SETC) in its Circular Guo Jing Mao Tou Zi No.256 of 1999.  However, the Current Priorities for Fi xed Assets Investment in Industrial and Commercial 
Sectors issued by SETC in 1999 has been replaced  by the Catalogue for the Guidance of Industrial 
Structure Adjustment (2005), which was issued by National Development and Reform Commission in 
its Decree No. 40 of 2005.    G/SCM/Q2/CHN/30 
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  LXXV. Refund of import VAT of raw copper materials  
 
Question 10 
  What are the environmental protection criteria?  At what point of importation of the 
raw copper materials is “collectio n”?  The notification indicates that only enterprises that have 
production or refining capacity over a certain threshold may qualify for this preferential tax treatment.  What is meant by “imported within the approved quantitative scope”? 
 
Reply
 
 
 The environmental protection criteria refer to  those environmental criteria generally 
applicable in China.  On “collection”, from th e wording of the question there seems to be a 
misunderstanding.  It means that the enterprise should “firstly pay import duty” when importing the 
raw copper materials and then 30 per cent of the paid  import VAT will be refunded at a later stage.  
The “approved quantitative scope” for the raw materi als means the total annual import volume of a 
copper refinery which may enjoy this 30 per cent impo rt VAT refund has to be approved in advance.   
 
B. QUESTIONS CONCERNING SUBSIDIES NOT  INCLUDED IN THE NOTIFICATION 
 
 In Paragraph 173 of the Report of the Working Party on the Accession of China3, the 
existence of subsidies to the telecommunications, fo otwear, coal and shipbuilding sectors was noted.   
 
Question 11 
  Can China clarify what subsidies are provided to its coal industry?  In particular, could 
China confirm that it maintains the following subsidies noted in the Report of the Working 
Party on the Accession of China:  
(a) exemptions from government port charg es for coal exporting companies;   
 
(b) exemptions for coal exporting companies from  paying construction levies for railways;   
 
(c) a maximum limit established by the Chinese government on the commission that 
China’s coal exporting companies can charge  coal producers for facilitating export 
transactions. 
 Reply
 
 
 Information collected during the preparation of the notification did not show that there are 
subsidies specific for the coal industry.  Curren tly, the Chinese government does not exempt the coal 
industry from the port charges nor construction levies for railways.   
                                                      
3 WT/ACC/CHN/49. G/SCM/Q2/CHN/30 
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  Question 12 
  Could China elaborate on the subsidies, including through tax relief, it provides to its fisheries sector? 
 Reply
 
  Information collected during the preparation of the notification did not show that there are subsidies specific for the fisheries sector.    
 
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