WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/18 
26 July 2006 
 (06-3581) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES  
 
Questions from CANADA Regarding the New and  
Full Notification of CHINA1 
 
  The following communication, dated 24 July 2006, is being circulated at the request of the Delegation of Canada.  
_______________ 
 
 
Question 1  I. PREFERENTIAL TAX POLICIES FOR FOREIGN-INVESTED ENTERPRISES  
 Based on the description of this program, it a ppears that the entire portion of enterprise 
income tax that has been paid on any direct re-i nvestment in China by foreign investors in the 
organization or expansion of export oriented ente rprises, may be refunded.  To the extent that 
incentives through this programme are contingent upo n export performance, this programme could be 
considered a prohibited subsidy as provided unde r Article 3 of the Agreement on Subsidies and 
Countervailing Measures (ASCM).   
 
• Please explain how this programme complie s with China’s WTO commitment under 
Article 3.1(a) of the ASCM not to provide prohibited subsidies.  
• Could China also provide information regard ing the amount of tax forgone under this 
programme and the industries which have b een the largest users of the programme?  
 Question 2  II. PREFERENTIAL TAX POLICIES FO R FOREIGN-INVESTED EXPORT 
ENTERPRISES   
 Based on the description of this programme, it a ppears that foreign invested enterprises that 
export more than 70 per cent of their products, or that utilize foreign advanced technology to produce 
products for export, have their tax rate cut in half.  As incentives through this programme are 
contingent upon export performance , this program appears to be a prohibited subsidy as provided 
under Article 3 of the Agreement on Subsidies and Countervailing Measures (ASCM).   
• Please explain how this programme complie s with China’s WTO commitment under 
Article 3.1(a) of the ASCM not to provide prohibited subsidies.  
• Could China also provide information regard ing the amount of tax forgone under this 
programme and the industries which have b een the largest users of the programme?  
                                                     
 
1 G/SCM/N/123/CHN G/SCM/Q2/CHN/18 
Page 2  
 
  Question 3 
 XIV.  PREFERENTIAL TAX POLICIES IN THE WESTERN REGIONS 
 
 This programme is described as providing prefer ential tax treatment (i.e., tax rate reductions) 
for domestic and foreign-invested “industries encour aged by the State”, established in the western 
regions.  Are there any export-performance (or impor t-substitution) requirements associated with 
industries encouraged by the State?  
Question 4 
 
XXIII. PREFERENTIAL TAX POLICIES FOR ENTERPRISES MAKING LITTLE 
PROFITS   
 
 The intent of this programme is describe d as being “to reduce the burden of enterprises 
making little profits to maintain job opportunities”.  In this regard, we understand that the programme 
provides for scaled income tax reductions based on an levels of income, with the income tax level of 
enterprises with an annual taxabl e income of less than RMB 30,000 being reduced to eighteen per 
cent and that of enterprises with an annual taxabl e income of less than RMB 100,000 but more than 
RMB 30,000 being reduced to twenty-seven per cent.  In this regard:  
• Are these tax reductions available across industrial sectors or are they limited to specific 
industries/enterprises?  If the latter, wh ich industries/enterprises are covered? 
• Where a firm operates at a loss in a particular ta x year, can it carry forward part or totality of 
the loss to a subsequent year to reduce taxabl e income and therefore benefit from a lower tax 
rate in that year?  
 
Question 5 
 
LVIII. PREFERENTIAL TAX POLICIES FO R FOREIGN-INVESTED ENTERPRISES AND 
FOREIGN ENTERPRISES WHICH HAVE ESTABLISHMENTS OR PLACE IN 
CHINA AND ARE ENGAGED IN PRODUCTION OR BUSINESS OPERATIONS PURCHASING DOMESTICALLY PRODUCED EQUIPMENTS   
 
 Based on the description of this programme, it appears that foreign-invested enterprises and 
foreign enterprises are provided preferential ta x treatment to purchase domestically produced 
equipment.  As incentives through this programme  are specific to purchases of domestically produced 
equipment, this programme appears to be a pr ohibited subsidy as provided under Article 3 of the 
Agreement on Subsidies and Countervailing Measures (ASCM).   
 
• Please explain how this programme complie s with China’s WTO commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies.  
• Could China also provide information regard ing the amount of tax forgone under this 
programme and the industries which have b een the largest users of the programme?  
• In addition, could China please supply the legisl ation which provides the legal definitions for 
what constitute processing trades and compensation trades? 
 Question 6  LIX. PREFERENTIAL TAX POLICIES FO R DOMESTIC ENTERPRISES PURCHASING 
DOMESTICALLY PRODUCED EQUIPMENTS FOR TECHNOLOGY UPGRADING PURPOSE    G/SCM/Q2/CHN/18 
 Page 3 
 
 
   Based on the description of this programme, it appears that domestic enterprises are provided 
preferential tax treatment to purchase domestically produced equipment.  As incentives through this 
program are specific to purchases of domestically pr oduced equipment, this programme appears to be 
a prohibited subsidy as provided unde r Article 3 of the Agreement on Subsidies and Countervailing 
Measures (ASCM).   
 
• Please explain how this programme complies w ith China’s commitment under Article 3.1(b) 
of the ASCM not to provide prohibited subsidies.  
• Could China also provide information regarding the amount of tax forgone under this 
programme and the industries which have b een the largest users of the programme?  
• In addition, could China provide the legisla tion that defines which technological renovation 
projects would be in compliance with State industrial policies?  
 Question 7  LXXVI. PREFERENTIAL TAX TREATMENT FO R CASTING AND FORGING PRODUCTS   
 
• Please explain in further detail the conditions th at must be met for a company to qualify for 
refunds under this programme. 
• Please explain the eligibility criteria used in  the selection of the 284 approved domestic 
enterprises from which the casting and forging prod ucts must be purchased in order to qualify 
for the preferential tax treatment. 
• Has this programme been extended beyond 200 5 or has a similar one been created? 
• Could China provide information regarding th e amount of tax forgone under this programme? 
• Please explain how this programme complies with China’s commitment under Article 3.1(b) 
of the ASCM not to provide prohibited subsidies . 
 
Question 8 
 
LXXVII.  PREFERENTIAL TAX TREATMENT TO DIES PRODUCTS  
 
• Please explain in further detail the conditions th at must be met for a company to qualify for 
refunds under this programme. 
• Please explain the eligibility criteria used in  the selection of the 160 approved domestic 
enterprises from which the casting and forging prod ucts must be purchased in order to qualify 
for the preferential tax treatment. 
• Has this programme been extended beyond 200 5 or has a similar one been created? 
• Could China provide information regarding th e amount of tax forgone under this programme? 
• Please explain how this programme complies with China’s commitment under Article 3.1(b) 
of the ASCM not to provide prohibited subsidies.  
 
Question 9 
 
LXXVIII.  PREFERENTIAL TAX TREATMENT TO NUMERICALLY CONTROLLED 
 MACHINE TOOL PRODUCTS   
 
• Please explain in further detail the conditions th at must be met for a company to qualify for 
refunds under this programme. 
• Please explain the eligibility criteria used in the selection of the approved domestic 
enterprises from which the casting and forging prod ucts must be purchased in order to qualify 
for the preferential tax treatment. 
• Has this programme been extended beyond 200 5 or has a similar one been created? G/SCM/Q2/CHN/18 
Page 4  
 
  • Could China provide information regarding th e amount of tax forgone under this programme? 
• Please explain how this programme complies with China’s commitment under Article 3.1(b) 
of the ASCM not to provide prohibited subsidies.  
 
Question 10 
 
 Canada is aware of a number of other specific subsidies provided by the government of 
China, which were not notified in China’s 2006 Ne w and Full Notification pursuant to Article 25 of 
the Agreement on Subsidies and Countervailing M easures (ASCM).  Could China please provide 
information regarding the following programmes:  (a) VAT refunds on domestic equipment purchases fo r foreign-invested enterprises that buy new 
domestic equipment instead of ne w imported equipment, as provi ded for in Article 4 of the 
Interim Measure for the Administration of Tax Refund to Enterprises with Foreign 
Investment for their Domestic Equipment Purchases [GuoShuiFa 1999 No. 171] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this programme complies with China’s WTO 
obligations, particularly with regard s to Article 3.1(b) of the ASCM? 
• Could China also provide information rega rding the amount of VAT forgone under this 
programme and the industries which have b een the largest users of the programme?  
 
(b) Foreign-invested enterprises that export more than 50 per cent of their products, or that utilize 
foreign advanced technology to produce produc ts for export, are exempt from mandatory 
contributions that help the Chinese government pa y for worker/staff benefits.  This subsidy is 
provided for in Article 3 of the Provisions of the State Council on the Encouragement of Foreign Investment  [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this programme complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
• Could China also provide information regard ing the specific payments forgone under this 
programme and the amount these payments repr esent as well as the industries which have 
been the largest users of the programme?  
 
(c) Profits distributed to foreign investors by fo reign-invested enterprises that export more than 
50 per cent of their products, or that utilize fo reign advanced technology to produce products 
for export, are exempt from income tax.  This subsidy is provided for in Article 7 of the 
Provisions of the State Council on the Encour agement of Foreign Investment [GuoFa 1986 
No. 95] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this programme complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
• Could China also provide information regard ing the amount of income tax forgone under 
this programme and the industries which have  been the largest users of the programme?  
 (d) Export products of enterprises with foreign investment, except crude oil, oil products and 
other products subject to special State provisi ons, shall be exempt from the consolidated and  G/SCM/Q2/CHN/18 
 Page 5 
 
 
  commercial tax.  This subsidy is provided for in  Article 11 of Provisions of the State Council 
on the Encouragement of Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this programme complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
• Could China please provide an explanation of, as well as the legislation guiding, 
“consolidated and commercial tax”? 
• Could China also provide information re garding the amount of consolidated and 
commercial tax forgone under th is programme and the industries which have been the 
largest users of the programme?  
 
(e) Imported products used by foreign-invest ed enterprises to produce goods for export are 
exempt from import licensing and other import pr ocedural requirements.  This subsidy is 
provided for in Article 13 of the Provisions of the State Council on the Encouragement of 
Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to why this program was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this program complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
• Could China also provide information rega rding the cost of the procedural import 
requirements referred to under this programme  and the industries which have been the 
largest users of the programme?  
 (f) Foreign-invested enterprises that meet certa in export criteria receive a 10 per cent discount on 
lending rates from the People's Bank of China.  This subsidy is provided for in Article 6 of 
the Detailed Rules on Rewarding and Punishme nt Concerning Provisional Regulations over 
Examination of Export Collections of Foreign Exchange [YinFa 2000 No.58] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this program complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
• Could China also provide data regarding the use of this programme, including the 
industries which are the highest users, the actual rates received by benefiting enterprises, 
and the amount of interest foregone as a result of the programme? 
 (g) Catalytic agents, grinding materials and fuel  that are imported by Enterprises with Foreign 
Investment and subsequently consumed in th e production of goods for export, are exempt 
from import duties as well as from industrial and commercial consolidated tax.  This is 
provided for in Article 19 of the Measures of the Customs of the People's Republic of China on the Control over and the Levy and Exemption of Tax for Import and Export Goods of Enterprises with Foreign Investment.  
 
• Could China please provide an explanation as to why this program was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this program complies with China’s WTO 
obligations, particularly with regards to Article 3.1(a) of the ASCM? 
•
 Could China please provide an explanation of, as well as the legislation guiding, 
“industrial and commercia l consolidated tax”? G/SCM/Q2/CHN/18 
Page 6  
 
  • Could China also provide information re garding the amount of import duties, and 
industrial and commercial consolidated tax fo rgone under this program and the industries 
which have been the largest users of the programme?  
 
(h) "By-products, substandard prod ucts and leftover industrial surp lus" generated by FIEs while 
producing goods for export, are exempt from re payment tax when sold domestically.  Such 
products, if generated while pr oducing goods for domestic consumption are not exempt.  This 
subsidy is provided for in Article 20 of the M easures of the Customs of the People's Republic 
of China on the Control over and the Levy a nd Exemption of Tax for Import and Export 
Goods of Enterprises with Foreign Investment [Decree 1992 No. 29 of the General Administration of Customs] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China’s subsidy notification? 
• In addition, could China please explain how this programme complies with China’s WTO 
obligations, particularly with rega rds to Article 3.1 of the ASCM? 
• Could China please provide an explanation of, as well as the legislation guiding, 
“repayment tax”? 
• Could China also provide information rega rding the amount of repayment tax forgone 
under this programme and the industries whic h have been the largest users of the 
programme?  
 
Question 11 
 
 Concerns have been raised regarding alleged subsidies provided by the Government of China 
to the Chinese iron and steel industries, however, Cana da notes that there are no subsidies specific to 
the iron or steel sectors mentioned in China’ s 2006 new and full subsidy notification.  
 
• Could China please provide information on any government assistance (i.e., tax refunds, 
grants, discounted interest rates, funds for rese arch and other policy support) made available 
to the iron and steel industries in China during the period under review (i.e., 2001-2004)? 
• Could China please confirm that it does not maintain subsidies specific to the iron and steel 
industries? 
 
Question 12 
 
 Concerns have been raised regarding funding provided by the Government of China under the 
Central Foreign Trade Development Fund. According to information received by the Government of 
Canada, the Central Foreign Trade Development Fund, established in 1996, is managed by the 
provinces under the direction of the Chinese Ministry  of Commerce (MOFCOM).  It also appears that 
a Chinese bank, the ICBC, is res ponsible for managing the transacti ons under this Fund.  The alleged 
purpose of the Fund is: to regulate and promote fo reign trade; to encourage the development and 
export of new electronic, deep processing, high-tech  and high value-added pr oducts; and to increase 
Chinese export capacity and competitiveness.  Canada  notes that no such subsidy was mentioned in 
China’s 2006 new and full subsidy notification.   
• Could China please confirm the existence of the Central Foreign Trade Development Fund 
(or similar programme)? 
• Could China please provide the guidelines for the functioning of this Fund? 
•
 Could China please provide information regarding the dollar value of the Fund? 
 
__________