./.  WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/12 
22 September 2005 
 (05-4191) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO 
SECTION 18 OF THE PROTOCOL ON THE ACCESSION 
OF THE PEOPLE'S REPUBLIC OF CHINA 
 
Questions from the EUROPEAN COMMUNITIES to  
CHINA with regards to Ch ina's Transitional Review  
Mechanism on Subsidy Practices  
 
 
 The following communication, dated 20 Septembe r 2005, is being circulated at the request of 
the Delegation of the European Commission.  
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1.  Despite the assurances given by China to  the SCM Committee that it would do its best to 
provide a New and Full Subsidy Notification, to da te, nearly four years after China’s accession to the 
WTO, there is still no such notification.  The EC re iterates its dissatisfaction that China has so far not 
fulfilled this obligation resulting from its accession to  the WTO and strongly urges China to provide a 
subsidy notification as soon as possible. 
 2.  EC noted with great disappointment in April this year that the VAT reimbursement scheme for the import of copper raw material has been prolonged for the current year.  Although some 
explanation had been provided by the delegate of  China during last year’s TRM exercise, no exact 
legal reference nor amounts of VAT reimbursed have  been provided.  The EC wants to point out 
again that in regard to the distortions caused by th is system to the world market, the overall figures of 
raw material imports showed a strong upward trend.   The figures available to the EC showed that 
30 per cent of China’s copper scrap imports and 50 per cent of the copper concentrate imports had 
benefited from the system.  The effective price reduction for Chinese smelters obtained through the 
VAT refund is substantial and enables them to pa y higher buying prices for raw materials which are 
not reflected in equally higher prices for the finished product.  The EC reiterates its strong concerns 
that this trade distorting subsidy practice had and c ontinues to cause adverse effects to its and other 
Members’ industries  and should therefore be eliminated.  3.   The EC wants to point out that it still has not  received any satisfying replies to its questions 3 
to 7 of last years TRM questionnaire (G/SCM/Q2/ CHN7 – see attachment) in regard to certain 
subsidy schemes.  The EC asks China to provide a response to these questions, and in particular, 
whether or not such subsidy programmes exist,, and if they exist to describe them in more detail. 
 4.  The EC has become aware that  the following legal provisions are apparently still in force:   
 
• Article 7 Income Tax Law of the People's Re public of China for Enterprises with Foreign 
Investment and Foreign Enterprises (passed on 9 April 1991 on the 4
th meeting of the 7th G/SCM/Q2/CHN/12 
Page 2  
 
 National Congress, and Promulgated by Decree No. 45 of the Chairman’s instruction of the 
People's Republic of China on the same day):  
 
 “ The income tax on enterprises  with foreign investment est ablished in Special Economic 
Zones, foreign enterprises which have establishm ents or places in Special Economic Zones 
engaged in production or business operations, and enterprises with fore ign investment of a 
production nature in Economic and Technological Development Zones, shall be levied at the 
reduced rate of fifteen percent.  
  The income tax on enterprises with foreign in vestment of a production nature established in 
coastal economic open zones or in the old ur ban districts of cities where the Special 
Economic Zones or the Economic and Technologica l Development Zones are located, shall be 
levied at the reduced rate of twenty four percent.  
  The income tax on enterprises with foreign in vestment in coastal economic open zones, in the 
old urban districts of cities where the Sp ecial Economic Zones or the Economic and 
Technological Development Zones are located or in other regions defined by the State Council, within the scope of energy, comm unications, harbor, wharf or other projects 
encouraged by the state, may be levied at the reduced rate of fifteen percent. The specific 
rules shall be regulated by the State Council.”  
 
• Article 75 (7) Rules for the implementation of the Income Tax Law of the People's Republic 
of China for Enterprises with Foreign Investme nt and Foreign Enterprises (Promulgated by 
Decree No. 85 of the State Council of the Pe ople's Republic of China on 30 June 1991 and 
effective as of 1 July 1991)  
 
 “ Export-oriented enterprises invested in and op erated by foreign businesses for which in any 
year the output value of all export products amounts to 70% or more of the output value of the products of the enterprise for that year may pay enterprise income tax at the tax rate specified 
in the Tax Law reduced by one half after the period of enterprise income tax exemptions or 
reductions has expired in accordance with the provisions of the Tax Law.  However, export-
oriented enterprises in the special economic zones and economic and technological 
development zones and other such enterprises subject to enterprise income tax at the tax rate 
of 15% that qualify under the above-mentioned conditions shall pay enterprise income tax at 
the tax rate of 10%.” 
 
Can China please confirm whether these provisions are still in force and if not provide the exact legal 
reference by which they have been amended? 
 
 If they are still in force:   1.  Can China please specify - with reference to  the respective legal provision - which are the 
conditions for a company to settle in the special zones mentioned in the tax law and whether there 
exist any export requirements? 
 2.  Can China please explain how the subsidy pr ovided in Article 75 (7) of the implementing 
rules is compatible with Article 3 ASCM and when it will bring its legislation into conformity with the 
WTO subsidy rules?  
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