Introduction of the new Tax Law will increase the income tax burden on some old enterprises. To ease this impact, the Draft develops some transitional preferential measures for old enterprises established before the promulgation of the new Tax Law which enjoy low tax rates or regular tax reduction and exemption treatment under current tax laws and administrative regulations. According to these transitional measures, old enterprises entitled to enjoy an income tax rate of 15 percent or 24 percent under the current tax laws may, pursuant to the regulations of the State Council, continue to enjoy a gradually increasing transitional income tax rate within five years after the new Tax Law becomes effective. Old enterprises entitled to enjoy regular tax reduction and exemption treatment under the current income tax laws may continue to enjoy remaining incentives in accordance with the requirements and period specified by the current income tax laws. However, for enterprises that have not made any profits and thus not enjoyed such preferential treatment, the period for enjoying preferential treatment shall be calculated from the year in which the new Tax Law becomes effective.

Given the policy considerations and complex background of these transitional measures, it is provided in the Draft that the State Council shall develop measures for implementing such transitional incentives (Article 57 of the Draft).

(iii) Taxpayers and their obligation to pay tax

When levying tax on organizations or entities other than individuals, most countries use "legal person" to define a taxpayer, and the reform to the enterprise income tax system should be accordingly orientated towards the introduction of a legal person tax system. Therefore, the Draft no longer uses the "independent economic accounting" criteria in the current Tax Law on Domestic Enterprises to define a taxpayer. Meanwhile, it defines a taxpayer as an enterprise or other organization that earns income. Such provision is basically in conformity with the relevant provisions of the current tax laws. To avoid double taxation, the Draft does not apply to individual proprietorship enterprises and partnership enterprises.

To be compatible with international practice, the terms of "resident enterprise" and "non-resident enterprise" are used in the Draft. A resident enterprise shall perform comprehensive obligation of tax payment and pay tax on all of its income from sources inside and outside the territory of China. A non-resident enterprise shall perform limited obligation of tax payment and generally pay tax on its income from sources inside the territory of China. In the international community, several criteria may be used to define a resident enterprise, such as the "place of registration", "place of effective management" and "place of head office"; and most countries adopt a combination of two or more above-mentioned criteria. In light of the actual conditions in China, resident enterprises and non-resident enterprises are defined in the Draft by combining the criteria of "place of registration" and "place of effective management" (Article 2 of the Draft).

(iv)Taxable income

Taxable income is the base to calculate the amount of the income tax payable by an enterprise. According to the Draft, the taxable income of an enterprise is the amount remaining from its gross income in a tax year after the excluded income, exempted income, deductions, and carry-forward loss in previous years are deducted (Article 5 of the Draft).

(a) Income

In the Draft, "gross income" is defined as "an enterprise's monetary and non-monetary income from various sources" (Article 6 of the Draft). "Excluded income" is defined as income from fiscal funds such as fiscal appropriations, administrative charges subject to fiscal administration and government funds (Article 7 of the Draft). "Exempted income" is defined as income from interests on treasury bonds and from equity investment such as dividends and bonus between eligible resident enterprises (Article 26 of the Draft). These definitions clarify the scope of the taxable income of an enterprise.

(b) Deductions and taxation of assets

Domestic enterprises and foreign-funded enterprises are now subject to different deduction of costs and other expenditures as far as income tax is concerned. For example, a limited deductible salary and wage system applies to the income tax of domestic enterprises while an actual salary and wage deduction system to the income tax of foreign-funded enterprises. The Draft unifies the policy for deducting various actual expenditures of enterprises, prescribes the standards for deducting expenditures for public welfare donations (Article 9 of the Draft) and defines the scope of nondeductible expenditures (Article 10 of the Draft). It also makes unified provisions for the deduction of expenditures related to an enterprise's fixed assets, intangibles, long-term prepaid expenses, and investment assets and inventory (Articles 11 to 16 of the Draft).

(v) Administration of tax collection

The collection of enterprise income tax shall be administered in accordance with the provisions of the Law on the Administration of Tax Collection. However, there are some special requirements for administration of enterprise income tax, such as the place of payment and consolidated tax payment for branches of an enterprise. Supplementary provisions are made in the Draft to standardize the administration of enterprise income tax, make tax payment easier and reduce the cost for both taxpayers and tax administrators.

(a) Methods of tax payment. The current practice is that domestic enterprises pay tax locally as independent economic accounting entities while the head offices of foreign-funded enterprises shall make consolidated tax payment for them. To unify the methods of tax payment and make tax payment easier, the Draft provides that a resident enterprise establishing operational entities without legal person status shall calculate and pay enterprise income tax on a consolidated basis (Article 50 of the Draft).