WORLD TRADE  
ORGANIZATION  WT/DS358/14 
4 January 2008 
 
 (08-0025) 
 Original:   English 
  
 
CHINA – CERTAIN MEASURES GRANTING REFUNDS, REDUCTIONS OR 
EXEMPTIONS FROM TAXES AND OTHER PAYMENTS 
 
Communication from China and the United States
 
 
 
 The following communication, dated 19 Dece mber 2007, from the delegation of China and 
the delegation of the United States, is circulated at the request of those delegations.  
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  The Governments of the People's Republic of China and the United States of America wish to 
notify the Dispute Settlement Body that we have reached an agreement with  respect to the matter 
raised by the United States in the dispute China – Certain Measures Gran ting Refunds, Reductions or 
Exemptions from Taxes and Other Payments  (WT/DS358). 
 
Please find attached the text of the agreement, in the form of a memorandum of 
understanding.  We ask that you circulate this notification and the attachment to the Dispute 
Settlement Body.  
 WT/DS358/14 
Page 2  
 
  Memorandum of Understanding between the United States of America  
and the People's Republic of China Regarding Certain Measures  
Granting Refunds, Reductions or Exempt ions from Taxes or Other Payments 
 
 
Whereas the United States of America ("United Stat es") filed requests for consultations with the 
People's Republic of China ("China") on 2 Februa ry 2007 and 27 April 2007 pursuant to Articles 1 
and 4 of the World Trade Organization (WTO) Un derstanding on Rules and Procedures Governing 
the Settlement  of Disputes, Article XXII:1 of the WTO General Agreement on Tariffs and Trade 
1994, Articles 4 and 30 of the WTO Agreement on Subsidies and Countervailing Measures, and 
Article 8 of the WTO Agreement on Trade-Related I nvestment Measures, regarding certain measures 
granting refunds, reductions or exemption from taxes or other payments (DS358); 
 Whereas the United States and China held constr uctive consultations in Geneva on 20 March and 
22 June 2007;  
 
The United States and China have agreed as follows:  1. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of tax preferences provided under:   
 (a) the Circular of the Ministry of Finance and the State Administration of Taxation 
Concerning the Issues of Tax Credit To Enterprise Income Tax for Purchase of 
Domestically Produced Equipment by En terprises with Foreign Investment and 
Foreign Enterprises , CaiShuiZi [2000] No. 49, issued on 14 January 2000, and the 
Circular of the State Administration of Taxation on Printing and Issuing the 
Measures On Tax Credit To Enterprise In come Tax for Purchase of Domestically 
Produced Equipment by Enterprises with Foreign Investment and Foreign 
Enterprises , GuoShuiFa [2000] No. 90, issued on 18 May 2000; and  
  (b) the Circular on Printing and Issuing the In terim Measures on Credit and Exemption 
of Enterprise Income Tax for Investment in Domestically Made Equipment for 
Technological Renovation , CaiShuiZi [1999] No. 290, issued by the Ministry of 
Finance and the State Administration of Taxation on 8 December 1999.   
  In this regard, China has explained that legal in struments of at least equal legal stature to the 
circulars identified in sub-paragr aphs (a) and (b) above, will contai n provisions stating that these 
circulars are repealed, and will be issued by th e competent authorities, by 31 December 2007, 
effective no later than 1 January 2008.  China conf irms that the tax preferences under the circulars 
identified in sub-paragraphs (a) and (b) above will not be reinstated.  
 2. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of tax preferences provided under:   
 
 (a) Article 9 of the Provisions of the State Council on the Encouragement of Foreign 
Investment , GuoFa [1986] No. 95, issued on 11 October 1986 (hereinafter " State 
Council Provisions "); Article 6 of the Income Tax Law of the People's Republic of 
China on Enterprises with Foreign Investment and Foreign Enterprises , Order No. 
45, promulgated on 9 April 1991 (hereinafter " FIE Income Tax Law "); and Article 75, 
paragraph 1, section 8 of the Rules for the Implementation of the Income Tax Law of 
the People's Republic of China on Enterp rises with Foreign Investment and Foreign 
Enterprises , Decree No. 85, issued by the State Council on 30 June 1991 (hereinafter 
"FIE Income Tax Implementing Rules ");   WT/DS358/14 
 Page 3 
 
 
   
 (b) Article 8 of the State Council Provisions ; Article 6 of the FIE Income Tax Law ; and 
Article 75, paragraph 1, section 7 of the FIE Income Tax Implementing Rules ; and 
  (c) Article 10 of the State Council Provisions ; Articles 6 and 10 of the FIE Income Tax 
Law; and Article 81 of the FIE Income Tax Implementing Rules . 
  China confirms that, effective 1 January 2008, the Enterprise Income Tax Law of the People's 
Republic of China , Order No. 63, promulgated on 16 March 2007 (hereinafter " Enterprise Income Tax 
Law"), repeals the FIE Income Tax Law .  In addition, China has explained that legal instruments to be 
issued by, and made effective no later than, 1 Janua ry 2008, will contain provisions stating that the 
FIE Income Tax Implementing Rules  are repealed.  With the abolition of the FIE Income Tax Law  and 
the FIE Income Tax Implementing Rules , Articles 8, 9 and 10 of the State Council Provisions  will no 
longer be valid.  China has further explained that , in accordance with its schedule of administrative 
regulations revision, Articles 8, 9 and 10 of the State Council Provisions  will be eliminated by a legal 
instrument no later than 1 January 2009.   The legal instruments repealing the FIE Income Tax 
Implementing Rules  and Articles 8, 9 and 10 of the State Council Provisions  will be issued by the 
competent authorities and be of at least equal legal stature to the legal instruments being repealed.  
China confirms that the tax preferences under the lega l provisions identified in sub-paragraphs (a), (b) 
and (c) above will not be reinstated.   
3. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of tax and other preferences provided under:   (a) Article 7 of the FIE Income Tax Law ; Article 73, paragraph 1, section 6 of the FIE 
Income Tax Implementing Rules ; and Section XIII of the Catalogue of Encouraged 
Foreign Investment Industries (hereinafter " Encouraged Catalogue ") within the 
Catalogue for the Guidance of Foreign Investment Industries , Order [2004] No. 24, 
issued by the National Development and Reform Commission and the Ministry of Commerce on 30 November 2004 (hereinafter " Catalogue ");  and 
  (b) the Circular of the State Council Concerning the Adjustment in the Taxation Policy of 
Imported Equipment , GuoFa [1997] No. 37, issued on 29 December 1997; and 
Section XIII of the Encouraged Catalogue . 
  In this regard, China has explained that , in accordance with its economic and social 
development, it revised the Catalogue  on 31 October 2007, which revision will take effect as of 1 
December 2007.  China confirms that Section XIII of the Encouraged Catalogue  dated 30 November 
2004 will not be reinstated.  4. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of the Enterprise Income Tax Law , including Articles 25, 28, 31 and 57 thereof.  China has explained 
that these provisions do not provide for the offering of  any income tax preference contingent upon the 
use of domestic over imported goods or upon export performance.  China has further explained that, 
notwithstanding the fact that Article 57 of the Enterprise Income Tax Law  authorizes the continuation 
of certain income tax preferences beyond 1 January 2008, it will not be implemented or applied so as 
to introduce or permit the continuation of the income  tax preferences being repealed by virtue of the 
actions described in paragraphs 1 through 3 of this Memorandum of Understanding.  These limitations 
will be made explicit under fully authoritative legal measures, and w ill be effective, no later than 
1 January 2008.  WT/DS358/14 
Page 4  
 
  5. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of an exemption for certain foreign-invested en terprises from payments to the State for worker 
allowances, provided under Article 3 of State Council Provisions . 
  China has explained that, at the time the State Council promulgated the State Council 
Provisions , Article 11 of the State Council Regulations on Labor Management in Sino-Foreign Joint 
Ventures , GuoFa [1980] No. 199 (26 July 1980), required foreign-invested enterprises to make such 
payments to the State.  China has confirmed, howev er, that because this requirement was eliminated 
by the State Council Decision on Abolition of Certain Administrative Regulations Promulgated Prior 
to the End of 2000 , Order No. 319 (6 October 2001), the ex emption provided under Article 3 of the 
State Council Provisions is no longer operative.  China confirms that Article 3 of the State Council 
Provisions may no longer serve as a legal basis to exempt foreign-invested enterprises from making 
payments required by Chinese law, regulation, or other official measure.    6. During the consultations, the United States descr ibed its concerns about the WTO-consistency 
of value-added tax (VAT) refunds provided under the Circular of the State Administration of Taxation 
on Printing and Issuing the Interim Measures for the Administration of Tax Refund to Enterprises 
with Foreign Investment for the Purcha se of Domestically Produced Equipment , GuoShuiFa [1999] 
No. 171, issued on 20 September 1999, and the Circular of the State Administration of Taxation and 
National Development and Reform Commission on Prin ting and Issuing the Interim Measures for the 
Administration of Tax Refund for the Purchase of  Domestically-Produced Equipment in Foreign 
Investment Projects , GuoShuiFa [2006] No. 111, issued on 24 July 2006. 
  In this regard, China has stated  that these circulars do not create a preference, either in law or 
on a de facto  basis, for the use of domestic over impor ted goods in connection with purchases of 
domestically-produced equipment when viewed in relation to the Circular of the State Council 
Concerning the Adjustment in the Taxation Policy of Imported Equipment , GuoFa [1997] No. 37, 
issued on 29 December 1997, in connection with  purchases of imported equipment.  China has 
confirmed that, in implementing the above-mentione d legal instruments as well as any new legal 
instruments that affect the operation of the above -mentioned legal instruments, it will ensure that 
imported equipment receives VAT treatment under term s and conditions no less favorable than those 
applicable to domestically-produced equipment. 
 
7. The United States and China agree to communi cate in a timely manner with respect to the 
implementation of the actions described above, includ ing provision of related new legal instruments. 
 8. This Memorandum of Understanding is without prejudice to the rights and obligations of the 
United States and China under the WTO Agreement. 
  Done in Geneva, on 29 November 2007, in two copi es in English and Chinese respectively, each text 
being equally authentic.    
 
    (signed) (signed)   For the Government For the Government 
 of the United States of America of the People's Republic of China 
  
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