CHINA – CERTAIN MEASURES GRANTING REFUNDS, REDUCTIONS OR EXEMPTIONS FROM TAXES AND OTHER PAYMENTS
Document: Communication from China and Mexico
Date: 13 February 2008
Document codes: WT/DS359/14
Complainant: Mexico
Respondent: China
Third parties: Argentina, Australia, Canada, Chile, Colombia, Egypt, EU, Japan, Taiwan
Dispute stage: Mutually Agreed Solution
Agreements cited: Part I, para. 1.2, Part I, para. 7.2, Part I, para. 7.3, Part I, para. 10.3  Protocol of AccessionArt. 3.1(b), 3.2  Subsidies and Countervailing Measures (SCM)Art. III:4  GATT 1994Art. 2.1, Annex 1  Trade-Related Investment Measures (TRIMs)

Spanish

CHINA – CERTAIN MEASURES GRANTING REFUNDS, REDUCTIONS OR
EXEMPTIONS FROM TAXES AND OTHER PAYMENTS

Communication from China and Mexico

The following communication, dated 7 February 2008, from the delegation of China and the
delegation of Mexico, is circulated at the request of those delegations.

The Governments of the People's Republic of China and Mexico wish to notify the Dispute
Settlement Body that we have reached an agreement with respect to the matter raised by Mexico in
the dispute (WT/DS359).

Please find attached the texts of the agreem ent, in the form of a memorandum of
understanding. We ask that you circulate this notification and the attachments to the Dispute
Settlement Body.

Memorandum of Understanding Between the People's Republic of China and
the United Mexican States Regarding Certain Measures Granting Refunds,
Reductions or Exemptions from Taxes or Other Payments

 Whereas the United Mexican States ("Mexico") filed requests for consultations with the
People's Republic of China ("China") on 26 February 2007 and 4 May 2007 pursuant to Articles 1 and
4 of the (WTO) Unde rstanding 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 Subsidi es and Countervailing Measures, and Article 8 of
the WTO Agreement on Trade-Related Investment Measures, regarding certain measures granting
refunds, reductions or exemption from taxes or other payments (DS359);

 Whereas China and Mexico held constructive consultations in Geneva on 20 March and
22 June 2007;

 China and Mexico have agreed as follows:

1. During the consultations, Mexico described 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 Tax Credit To Enterprise Inco me Tax for Purchase of Domestically
Produced Equipment by Enterprises 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 Income 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 Int erim 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, Mexico described 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 Enterprises 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 January 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, Mexico described 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 th e 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, Mexico described 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 pe rformance. 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, Mexico described its concerns about the WTO-consistency of an
exemption for certain foreign-invested enterprises fro m 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 [2001] No. 319 (6 October 2001), the exemption 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 ex empt foreign-invested enterprises from
making payments required by Chinese law, regulation, or other official measure.

6. During the consultations, Mexico described 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. China and Mexico agree to communicate in a timely manner with respect to the
implementation of the actions described above, including provision of related new legal instruments.
8. Mexico included in its supplemental request fo r consultations the preferential treatment given
to enterprises with foreign investment and foreig n enterprises established in special economic zones
and costal economic zones in China. In light of th is agreement, Mexico is not further pursuing this
matter at this time. Nevertheless, this Memora ndum of Understanding is without prejudice to the
rights and obligations of China and Mexico under the WTO Agreement.
Done in Geneva, on 29 November 2007, in two copies in Chinese, Spanish and English, each text
being equally authentic.

For the Government
of the People's Republic of China
 For the Government
of the United Mexican States