CHINA – CERTAIN MEASURES GRANTING REFUNDS, REDUCTIONS OR EXEMPTIONS FROM TAXES AND OTHER PAYMENTS
Document: Communication from China and the United States
Date: 4 January 2008
Document codes: WT/DS358/14
Complainant: U.S.
Respondent: China
Third parties: Argentina, Australia, Canada, Chile, Colombia, Egypt, EU, Japan, Taiwan
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3.1(b), 3.2  Subsidies and Countervailing Measures (SCM)Art. III:4  GATT 1994Art. 2.1, Annex 1  Trade-Related Investment Measures (TRIMs)Part I, para. 1.2, Part I, para. 7.2, Part I, para. 7.3, Part I, para. 10.3  Protocol of Accession

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.

 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 (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.

Memorandum of Understanding between the United States of America
and the People's Republic of China Regarding Certain Measures
Granting Refunds, Reductions or Exemptions 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 (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");

 (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.

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, including 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