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Hong Kong residents working on the mainland should note that they are eligible for individual income tax reduction in the following nine items:

1.Housing allowance, food allowance, removal expenses and laundry fees received in non-cash forms or in the form of reimbursement.

2.Travel expenses at home and abroad at reasonable levels.

3.Home visit allowance, language courses expenses and children's education expenses deemed reasonable by the local tax authorities.

4.Monetary awards for reporting or assisting in the investigation of irregular acts and crimes.

5.Handling charges for withholding and paying taxes.

6.Proceeds from the assignment of one's only residential property which has been occupied for over five years.

 7.In the spirit of the Provisional Regulations of the State Council on Certain Issues Concerning the Retirement of Senior Experts in 1983 and the Circular of the General Office of the State Council on the Examination and Approval of the Temporary Postponement of Retirement of Outstanding Senior Experts in 1991, the wage and remuneration of senior experts (referring to experts and scholars enjoying special government allowance) who have reached the age of retirement and are allowed to appropriately extend their age of retirement due to the actual need of work received during the period of deferred retirement are regarded as retirement wage and are exempt from individual income tax.

8.Dividends and bonuses received from foreign-invested enterprises.

9.The wage and remuneration received by foreign experts who meet any of the following criteria may be exempt from individual income tax:

1)Foreign experts directly sent by the World Bank to work in China under special loan agreements;

2)Experts directly sent by UN organisations to work in China;

3)Experts coming to work in China on UN aid projects;

4)Experts sent by an aid-granting country to China to work specially for the project granted gratis by that country;

 5)Cultural and educational experts coming to China to work for up to two years on cultural exchange projects under agreements signed between the two governments, with wages and remuneration borne by the foreign country;

 6)Cultural and educational experts coming to China to work for up to two years on international exchange programmes of Chinese colleges and universities, with wages and remuneration borne by the foreign country;

7)Experts coming to work in China under non-government scientific research agreements, with their wages and remuneration borne by the government organisation of the country concerned.

The following incomes are also temporarily exempt from individual income tax:

1.The income of disabled, widowed old people and families of political martyrs;

2.The income of those suffering heavy losses caused by serious natural calamities;

3.Other tax concessions approved by the financial department of the State Council.

Income from Stock Trading Temporarily Exempt from Individual Income Tax

The State Administration of Taxation (SAT) has introduced a new tax return for individuals with an annual income of over Rmb120,000. Under the new rule, such taxpayers must declare their income using the new tax return after 1 January 2008. The new tax return requires taxpayers to declare income from both stock trading and real estate assignment.

This new rule once again makes the levying of stock trading tax a hot topic of debate. People are worried that SAT would start levying income tax on stock trading and even impose capital gains tax by first requiring that earnings from stock speculation be declared in tax returns.

SAT said it would not be levying tax on income from stock trading "for the time being". It has only revised the tax return to make the declaration more detailed. The self-declaration of income from stock trading does not necessarily imply the levying of individual income tax on such transactions.

Preferential Electricity Tariffs Abolished

The National Development and Reform Commission (NDRC), Ministry of Finance (MOF) and State Electricity Regulatory Commission (SERC) have jointly issued a circular abolishing the policy of preferential electricity tariffs for enterprises engaged in the production of electrolytic aluminium, iron alloy and chlor-alkali. At the same time, there will be changes in the way the increased revenue from adjusting the differential electricity tariff policy is used.

Preferential electricity tariffs applicable to iron alloy enterprises were abolished on 20 October 2007. As for the electrolytic aluminium industry, all preferential tariffs as specified in the electricity bill will be scrapped by the end of 2007, while the preferential tariffs for chlor-alkali enterprises will be abolished in 2008. NDRC and SERC will separately issue detailed measures for abolishing preferential electricity tariffs for the electrolytic aluminium and chlor-alkali industries.

In 1999, the former State Planning Commission and MOF issued a document granting an average concession of Rmb0.02 per kwh of electricity consumption to 13 electrolytic aluminium enterprises with a production capacity of over 50,000 tonnes. During 2000-2005, whenever NDRC adjusted the electricity tariffs of end-users, the increases applicable to electrolytic aluminium, iron alloy and chlor-alkali enterprises that complied with state industrial policy were always lower than those of other industries by an average Rmb0.02 per kwh.

The recent circular issued by the three departments aims to guide the development of high energy consumption industries and encourage them to save energy and lower consumption. The circular also stipulates the changes to be made in using the proceeds generated from the adjustment of the differential electricity tariffs.

The additional revenue generated by power grid enterprises from the abolition of the preferential tariffs will be 100% handed over to the local government coffers and included in the provincial budget. The funds will be spent on supporting economic restructuring, energy saving and emission reduction at the locality concerned.

The three departments also call on power grid enterprises which have collected the additional revenue generated from the adjustment of the differential tariffs but have not submitted the money to the central government coffers to hand it over to the local government coffers instead. Financial authorities at provincial level should formulate their own sets of detailed measures for the use of such revenue based on local conditions in order to expedite energy saving and emission reduction efforts.

In a bid to further implement the differential tariff policy, the circular also calls on local authorities to step up the classification of high energy consumption enterprises into encouraged, restricted and abolished categories, and to publicise the lists through the media and provide updates on the status of implementation of the differential tariff policy to NDRC and SERC for the record before 1 December 2007.

The circular also states that NDRC and SERC will carry out a nationwide campaign to monitor electricity tariffs collection in the fourth quarter of 2007 with emphasis on monitoring the implementation of the differential tariff policy at the local level, as well as illegal practices of power grid enterprises such as raising or lowering the electricity tariffs for high energy consumption enterprises.

Property Tax "Mock Payment" Pilot Extended

The levy of property tax is progressing in a steady and orderly manner. The State Administration of Taxation (SAT) and Ministry of Finance (MOF) have recently approved Anhui, Henan, Fujian and Tianjin to join the pilot scheme of making "mock payment" of property tax. Together with the first batch of pilots, including Beijing, Liaoning, Jiangsu, Shenzhen, Ningxia and Chongqing, 10 provinces and cities have now implemented the scheme on a trial basis.

Experts pointed out that the basic framework for levying property tax is now in place although the implementation date has yet to be confirmed. Under this framework, the existing real estate tax, urban property tax, land appreciation tax and land assignment fee will be combined into one unified tax chargeable for the duration of ownership of the property in questioin. In other words, the current practice of paying all the relevant taxes at the time of purchase will be changed to payment after purchase on a yearly basis. At present, the "mock payment" of property tax is implemented in cities such as Beijing, Shenzhen and Chongqing on a trial basis. Although no tax is actually paid, all the procedures follow those where real payment is made, with finance, real estate and land administration authorities jointly compiling figures on property transaction, conducting due assessments and computing tax revenue.

However, experts from the latest batch of pilot provinces such as Anhui pointed out that the time is still not ripe for full-scale implementation of property tax. In particular, consultation has yet to be carried out on technical issues such as tax threshold, tax exemption and tax rate. They also reckoned the tax should not apply to all types of property when it is first introduced but should be limited to the larger ones.

Double Audit of B-Share Companies No Longer Required

As China's accounting and auditing standards are increasingly aligned with international practice, foreign-invested companies which are listed on the mainland stock market (so-called B-share companies) will no longer be subject to double audit done in the mainland and offshore, the China Securities Regulatory Commission (CSRC) has announced recently.

Under the new rule, it is no longer mandatory for B-share companies to appoint accounting firms outside the mainland to handle share issuance and the subsequent audit work when seeking to list on the mainland bourse. Shareholders of B-share companies are free to choose accounting firms based on their needs.

Under the information disclosure rules issued by CSRC prior to the latest announcement, B-share companies had to carry out an offshore audit in addition to a domestic audit done by accounting firms that were qualified to deal in securities and futures related business.

Given China's progress made this year in aligning its accounting and audit standards with international practice, CSRC said this requirement is no longer necessary.

The CSRC announcement also stipulates that Article 87 of Rules No.1 on Information Disclosure and Formats by Companies Publicly Issuing Securities -- Prospectus (2006 revised) and Article 9 of Rules No.2 on Information Disclosure and Formats by Companies Publicly Issuing Securities -- Contents and Formats of Annual Reports (2005 revised), which concerned the requirement of offshore audit for B-share companies, will be repealed with immediate effect.

Following accounting system reforms in recent years, China's accounting standards are gradually aligned with those of international practice. China's new accounting standards, comprising a basic standard and 38 specific standards, were adopted by more than 1,400 listed companies on 1 January 2007. The new standards will be extended to all medium-to-large enterprises across the mainland over the next three years.

Tianjin Becomes First Pilot for Individual Offshore Securities Investment

The State Administration of Foreign Exchange (SAFE) has recently approved the Tianjin Binhai New Area as the first pilot for individuals investing in securities abroad. Under this scheme, residents in the pilot area may use their own foreign currency or buy hard currency to invest in foreign stock. Initially, investors may buy securities openly traded on the Hong Kong Stock Exchange.

Currently, mainland residents are not allowed to directly invest in offshore securities. They can only use their own hard currencies to invest in B shares, QDII products or foreign currency financial products launched by commercial banks, or conduct foreign currency and gold trading.

Under this scheme introduced by SAFE making the Tianjin Binhai New Area the first pilot for individuals investing in securities abroad, investors may use their own foreign exchange or buy hard currency with renminbi to invest in offshore securities and are not subject to the US$50,000 limit stipulated in the Implementing Rules for the Measures for the Administration of Individual Foreign Exchange.

To invest offshore, investors must go through the Tianjin branch of the Bank of China (BOC) and the Hong Kong-based BOC International (BOCI) Securities. They must open a foreign exchange securities investment account with BOC's Tianjin branch and ask the bank to open a securities client account for them at BOCI Securities in Hong Kong. The foreign exchange purchased with renminbi for investment in securities and the proceeds therefrom may be kept in foreign exchange or settled through their account opening bank.

The provisions of the Implementing Rules for the Measures for the Administration of Individual Foreign Exchange will apply if investors wish to settle the capital and proceeds of investment made with their own hard currencies. Investors must bear their own risks. Institutions handling such investments must truthfully remind investors of the risks involved, strictly exercise internal risk control, enforce relevant laws and regulations, and improve the information disclosure mechanism in order to protect the legitimate rights and interests of investors.

According to deputy director Deng Xianhong, SAFE is working on measures to further ease foreign exchange control under the capital account, such as foreign exchange for personal direct investment and securities investment. The general direction is to gradually lift restrictions on the purchase and outward remittance of foreign exchange for individuals directly investing in foreign markets.

SAFE pointed out that the pilot scheme is aimed at promoting order in individuals investing in securities abroad and accumulating experience in risk prevention and control. The easing of foreign exchange restrictions is a useful attempt to encourage mainland residents to make use of the international financial market to optimise their asset distribution, diversify investment risks and improve returns on funds. It is also an important measure for deepening foreign exchange reform, widening the channels for foreign exchange outflow and promoting international balance of payments.

Shanghai Cracks Down on Property Speculation

According to Shanghai's housing and land bureau, the municipality is launching a market order rectification campaign involving the self-inspection, government inspection and random inspection of all housing development projects, including property under construction and pre-sale units. Shanghai's housing and land bureau, construction and communications work committee, supervision committee, development and reform committee (price bureau), industry and commerce administration, finance bureau, state taxation bureau, local taxation bureau, statistical bureau and urban planning bureau have formed a joint committee for the task.

According to a circular issued by the joint committee, the campaign will mainly focus on two areas: first, unauthorised approval of projects, planning, design, construction and pre-sale, abuse of power for personal gains and enforcement of property tax policies; second, acts of illegal advertising, withholding properties from sale, jacking up prices, contract fraud and tax evasion by developers.

It is understood that the campaign is now in full swing and self-inspection, government inspection and random inspection of property under construction as well as pre-sale units are in progress. The housing and land departments will join industry and commerce administrations and price departments to promote self-inspection by property developers. More severe penalties will be meted out and violations will be dealt with once discovered. The joint committee will first target a number of typical cases and bring them to light.

In response to the suspicion of the general public that some property developers withhold their properties from sale upon completion of construction, the joint committee is giving greater incentive to as well as exerting more pressure on developers to start sales as soon as possible. Housing departments may issue an administrative order to developers if they do not apply for pre-sale permits for properties that have met pre-sale conditions or do not start sales after obtaining pre-sale permits.

Developers who refuse to put their properties up for sale without a good reason will be considered to be withholding sales for speculative purposes. Those who demand prices several times higher than the prices of surrounding properties and only sell less than 5% of their units in a year will be considered to be withholding sales by asking abnormally high prices. The housing and land departments will give these developers a bad mark on their credit records and may even downgrade or disqualify them.

When new property projects are put on sale, they often attract herds of homebuyers and cause chaos, such as scalpers selling places in queues, developers artificially organising queues of buyers, or offering internal sale. Under the rectification campaign, the authorities will exercise greater control over the sales venue, monitor the entire selling process online, give property developers guidelines in mapping out sales plans, and require buyers to use their real name in property transactions. The housing and land departments will send officers to keep order, answer inquiries and handle complaints on site when new properties go on sale. Members of the public are encouraged to call hotline of the housing and land bureau to report any illegal practices by developers.

Enterprises Failing to Meet Eco Standards Will be Refused Registration

The State Administration for Industry and Commerce (SAIC) posted a set of opinions on its website on 30 July 2007 on improving and strengthening enterprise registration management. SAIC may refuse registration applications of enterprises that fail to comply with state industrial policy and environmental protection standards, thereby denying them market access.

SAIC pointed out in the opinions that if an applicant is found to have problems such as excess capacity, backward technology, resource depletion activities and environmental pollution, it should consult the competent authorities promptly. No exceptions should be made in relaxing these requirements and granting market access to applicants who fail to comply with state industrial policy and eco standards.

Existing "eco-unfriendly" enterprises will be demanded to make changes in order to meet state requirements such as eliminating backward production capacity, and achieving energy efficiency, low pollutant emission levels and production safety. Enterprises failing to comply may have their registration and even business licence revoked. Small-scale brick kilns, coal kilns, mines and workshops are major targets of this rectification exercise.

In addition to disclosing the basic registration details of the enterprises, SAIC will also make publicly available information about enterprises with excellent records, law-breaking records, and their annual review data. Localities with the necessary resources may upload such information on their e-government services websites for enquiry by the public and interested parties.

Moreover, SAIC also requires all local industry and commerce administrations to establish alert mechanisms in their enterprise registration systems to keep track of information such as outstanding balance of registered capital, expiry dates of certain types of business permits, failure to make prompt application for alteration of registration details, and mandatory transfer or freezing of shares under court orders. Such alerts are intended to help reduce non-compliance which could undermine the lawful interest of others.

Sale of Small Workshop Food Products Banned in Supermarkets

The Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) recently announced a set of opinions on strengthening supervision over food products made by small workshops. The opinions require operators of small workshops to declare that their "products will not enter shopping malls or supermarkets for sale".

The opinions underpin three basic supervision systems for food products in China. First, a new set of basic requirements in terms of quality, safety and hygiene will be enforced. Small workshop operators failing to meet the new basic requirements within the specified time limit will be banned from production. Second, operators of small workshops engaged in food processing are prohibited from selling their products outside of county-level administrative districts and at shopping malls and supermarkets. Third, small workshop operators must make pledges that: non-edible substances or recycled food will not be used as ingredients, additives will not be used excessively, their food products will not enter shopping malls and supermarkets for sale, their food products will not be sold outside of their permitted districts, and their food products must meet basic safety and hygiene standards.

The opinions provide a definition for small-scale food processing workshops and stipulate that supervision over these workshops should be handled as a dedicated, location-specific task focusing on four areas. First, operators making and selling counterfeited, poor quality food products and using non-edible substances as ingredients will be strictly dealt with. Second, active support will be given to qualified small-scale food processing workshops to help them obtain food production licence. Third, small-scale food processing workshops which have developed certain strengths will be consolidated to form regional clusters. Fourth, food processing enterprises that are without health licence, business licence or food production licence will be closed down resolutely. The target is to reduce the number of small-scale food processing workshops by 50% by 2009 and to stamp out all unlicensed food makers in China by 2012.

According to an AQSIQ official, so far inspection has been carried out on 448,153 enterprises across 30 provinces, autonomous regions and municipalities (except Tibet). It was found that among these, 78.7% (or 352,815) of them have a workforce of less than 10 people; 49.8% (or 223,297) do not possess all the required licences; and 36.6% (or 164,149) do not have any licence at all. Major food products include soya products, rice, wheat flour, rice wine and edible vegetable oil.

Following the rectification campaign in the past few years, a total of 19,424 small-scale food workshops have ceased operation or switched to other businesses; 8,814 were ordered to stop operation; 19,317 were reorganised through merger and acquisition; and 206,739 have signed food quality and safety pledges. In addition, 5,385 have managed to meet market entry requirements after rectification and have obtained or applied for food production licence. Another 5,631 were closed down after failing to rectify within the specified time limit. Among workshops located in the remote rural areas which do not meet the market entry requirements but are producing food products that are closely related to people's lives, after the local government authorities and quality inspection departments at various levels have jointly evaluated their situations taking into consideration measures such as stricter supervision and geographical restriction on sales, 36,699 small workshops were tentatively allowed to stay on. Meanwhile, 26,726 small workshops that were without production licence and had violated rules and regulations were clamped down.

Tax Incentives for FIEs Hiring the Handicapped

The Ministry of Finance and State Administration of Taxation have jointly issued a circular on tax incentives for promoting the employment of the handicapped. Employers hiring handicapped workers will be eligible for preferential turnover tax and corporate income tax rates. Starting from 1 January 2008, foreign-invested enterprises (FIES) will also become eligible for the same incentives.

It is understood that the incentives include VAT rebate (within a certain limit) and reduced business tax. As for corporate income tax, the actual wage paid to the handicapped employees plus 100% of that amount will be deducted from the enterprise's total income before tax. The portion of income derived from VAT rebate or business tax reduction under these incentive measures will be exempted from corporate income tax.

From now on, the tax treatment of domestic enterprises and FIEs will gradually be synchronised with the vehicle and vessel tax and urban land use tax also applicable to FIEs and corporate income tax concession offered to FIEs as from 1 January 2008.

WIPO Internet Treaties Take Effect

With immediate effect, any individual using the online works of an author, performer or audio and video producer without authorisation in China is subject to liability for tort. The World Intellectual Property Organisation (WIPO) Copyright Treaty and Performances and Phonograms Treaty (WPPT) (both widely accepted Internet-related international treaties) are now in force in China. Individuals found to have violated the treaties will be punished by China in accordance with the relevant rules. Users should take note of this new development.

Harmonisation and standardisation on an international scale and globalisation of intellectual property right (IPR) protection laws driven by international treaties are increasingly the trend among countries in setting the standards for IPR protection. Many countries are now revising or enhancing their IPR laws under the framework of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and other latest international treaties related to IPR with a view to building an international IPR protection system together for the 21st century.

The WIPO Copyright Treaty is intended to provide copyright protection in the information and communications technology sector, especially relating to the Internet. The WPPT is intended to protect the rights of the performers and producers of audio works in the digital arena, especially relating to the Internet.

Real Estate Tax Plays Key Role in New Property Tax

According to Jia Kong, director of the Financial Science Research Institute under the Ministry of Finance, China is going to introduce property tax, of which, real estate tax will be the key component.

Experts have pointed out that property tax is a kind of supplementary tax that aims to further regulate the property owned by taxpayers on the basis of regulating income through income tax. As the wealth of the taxpayer is reflected by the worth of his/her property, wealthy people are the target of regulation by means of property tax. Strengthening the regulatory function of property tax will help narrow the gap between the rich and the poor.

The relevant authorities will step up efforts to draft the implementing rules and supporting documents for the revised Enterprise Income Tax Law passed at the National People's Congress session earlier this year.

Jia pointed out that pilot reforms on value-added tax (VAT) will likely be extended from the northeast to more locations this year. When the unified enterprise income tax goes into force next year, foreign-invested enterprises (FIEs) can expect their increased tax burden to be partly offset by the extended coverage of the transformed VAT and reduced VAT rate.

Jia noted out that the unified corporate income tax also has certain negative effects. On the one hand, foreign investors may be reluctant to further increase investment in China, with some even prepared to look for alternate investment locations. On the other hand, it may result in fiscal pressure as tax revenue will drop.

Jia said the tax burden in China in the macro sense is going to stabilise. Right now tax rate is 18% in China, and based on the experience of developed countries it should stabilise at slightly over 20%.

Proceeds from Auction of Personal Property Subject to Individual Income Tax

The State Administration of Taxation (SAT) recently issued a circular on the levy of individual income tax on proceeds from the sale of personal property at auctions. Such personal property includes calligraphy and paintings, ceramics, jades, jewellery, stamps, coins, ancient scrolls and antiques. Individuals and organisations that derive income from these auctions are also subject to tax.

Under the new rule, when an author earns a profit from auctioning a manuscript or a copy of his/her original writing, the profit is subject to individual income tax. The taxable income is determined by deducting Rmb800 (where the income is Rmb4,000 or less) or 20% (where the income exceeds Rmb4,000) from the income derived from the property transfer, and the 20% tax rate applicable to "royalties" will apply.

If the personal items sold at auctions are other than written works, the profit derived is subject to individual income tax at the 20% rate applicable to "proceeds from property transfer". The taxable income is determined by deducting the original cost and reasonable fees from the income derived from the property transfer.

The circular stipulates that the final auction price shall be deemed as the proceeds from property transfer in calculating the individual income tax on income derived from the sale of personal property at auctions.

It is emphasised in the circular that auction houses are required to act as the withholding agency and pay the individual income tax on behalf of their clients who derive income from selling personal property at their auctions. Auction houses should file the tax return with the local tax office according to the relevant rules and regulations. When making individual income tax payments on behalf of clients, the auction houses should provide taxpayers with payment receipts with breakdown by name of item, auction price and tax amount paid.

In another development, SAT and the National Development and Reform Commission announced on 25 June that in a bid to strengthen the credit guarantee system for small and medium-sized enterprises (SMEs), 255 SME credit guarantee institutions will enjoy business tax exemption in three years while the tax-free status of another 47 SME credit guarantee institutions will be removed.

China Strengthens Management over Processing Trade

The 2007 Catalogue of Products under the Prohibited Category in Processing Trade took effect on 26 April 2007. A total of 136 products under 10-digit tariff codes have been added to the new catalogue. Products newly added to the prohibited list mainly fall into three categories, namely wood pulp, animal skins and bones, and fertilisers.

Under the new catalogue, natural cork, cork waste, mechanical pulp, fibre pulp extracted from recycled paper and cardboard and other wood products are prohibited from export but can be imported. Ox or goat bone powder, whole raw mink skins, whole raw rabbit skins and other animal skins and bones that are prohibited from import under the old catalogue are also prohibited from export starting from this year. Urea and bird droppings that have not been chemically treated, and other animal and plant manure that have not been chemically treated are also prohibited from export after the earlier ban from import.

In addition to the commodities listed in the catalogue, processing trade involving the import of seeds, seedlings, breeding stock, chemical fertilisers, feeds, additives and antibiotics for the cultivation and breeding of products for export is prohibited. Also prohibited is processing trade involving the import of materials and components prohibited by the state (such as old books and magazines with obscene content and industrial waste containing hazardous or radioactive substances), as well as the production and export of imitation guns in the form of processing trade.

Processing trade contracts involving the newly added products which have been approved by the commerce departments before 26 April 2007 are allowed to be filed with Customs according to relevant regulations and completed within the validity period. Enterprises under online supervision are allowed to complete their processing trade contracts before 5 April 2008. Upon expiry of the validity period, if the contracts are still not completed, no extension will be granted and the regulations on processing trade will apply.

For the full text in Chinese of the 2007 Catalogue of Products under the Prohibited Category in Processing Trade, please visit the website of the Ministry of Commerce (MOFCOM) at: http://www.mofcom.gov.cn/aarticle/b/c/200704/20070404537238.html

Meanwhile, MOFCOM also issued a circular requiring commerce departments at all levels to check the operation and production capacity of local processing trade enterprises and use the findings as an important basis for granting approval to processing trade activities.

MOFCOM issued the Circular on Issues Concerning the Strengthening of Processing Trade Management on 12 April 2007, calling on commerce departments at all levels to strengthen their management of the market access requirements for processing trade enterprises.

The circular requires commerce departments at all levels to take environmental protection, energy consumption, employment, equipment and other factors into consideration in granting approval to processing trade. Enterprises that fail to reach environmental and energy consumption standards and those causing environmental damage will not be allowed to engage in processing trade activities. Also, those employing workers without complying with standard procedures or failing to meet local minimum wage requirements as well as those failing to comply with local social insurance requirements will not be given access to the industry. Enterprises using backward equipment and technologies that have been officially listed as obsolete will be barred from engaging in processing trade while new enterprises using equipment and technologies under the restricted category will no longer be allowed to engage in processing trade.

The circular also announces that with effect from 1 July 2007, applications by processing trade enterprises for the domestic sale of bonded materials and components will be handled by commerce departments that originally issued the Processing Trade Approval Certificate in accordance with the Provisional Administrative Measures on the Examination and Approval of Domestic Sales of Bonded Materials and Components Imported for Processing Trade. However, if the goods involve quotas, permits and other special administrative measures, they will still require the approval of provincial commerce departments or MOFCOM.

For details of this circular in Chinese, please visit the website of MOFCOM at: http://www.mofcom.gov.cn/aarticle/h/redht/200704/20070404572092.html

China Bans Foreign Animations Passing Off as Domestic Productions

The State Administration of Radio, Film and Television (SARFT) has recently introduced new measures to tighten control over the vast mainland animation market. In the past, edited versions of foreign animations including those from Hong Kong and Macau were allowed to be screened on the Chinese mainland. But now such practice is banned. Moreover, domestic animation bases will be served notices, warned or have their qualifications revoked if their volume of animation production fails to meet targets. The authorities hope that these measures can stem the influx of foreign productions into the domestic market.

According to SARFT rules, foreign animations broadcast by local TV stations are subject to stringent restrictions in terms of broadcast time and quantity. However, a SARFT circular revealed that some foreign productions have made their way to domestic screening through certain special channels. The circular pointed out that since the implementation of the distribution permit system for locally produced TV animation programmes, the market for the production, distribution, trading and broadcast of Chinese animations has been in good order. However, it has been found that there are still some foreign productions which pass off as domestic productions and obtain the distribution permit after some editing. There are also some which have applied for the same distribution permit in different regions and others which have produced fake animation distribution permits. The circular also released a blacklist of animation programmes.

On the issue of national animation bases, while recognising their significant contribution to the growth of the domestic animation industry, SARFT has tightened control over them. The circular states that SARFT will carry out annual performance appraisals of the animation bases and the appraisal results will be publicised. Those with excellent results will be recognised and rewarded. Those which fail to meet requirements, e.g. annual production under 3,000 minutes or work quality not up to standard, will be served notices, given warnings or have their qualifications as animation bases cancelled.

Film Shooting Banned from Scenic Spots

In view of the damage caused by film shooting and big-budget performing activities at natural reserves, scenic spots and historic sites, the State Environmental Protection Administration (SEPA), Ministry of Construction, Ministry of Culture and State Administration of Cultural Heritage have jointly issued a circular on strengthening supervision over film shooting and big-budget performing activities in these areas.

Under the new rule, film shooting and big-budget performing activities will be banned from the core zones and buffer zones of natural reserves and the core zones of scenic spots. Meanwhile, film shooting and big-budget performing activities will be restricted in the experimental zones of natural reserves, outer zones of scenic spots, and historic sites. Film production and performing activities organisers with genuine needs must strictly comply with the stipulations of the Law on Environmental Impact Assessment, the Regulations on Natural Reserves, the Regulations on Scenic Spots, and the Law on Cultural Relics Protection. They must also undergo the approval and verification procedures concerning environmental protection, urban construction and cultural relics protection. If the proposed film shooting or performance is likely to cause a negative impact on the environment, the party concerned should submit an environmental impact assessment report to the local environmental protection department in accordance with the Law on Environmental Impact Assessment, and propose what measures can be taken to prevent or reduce the negative impact. Duly approved environmental impact assessment reports will serve as approval documents for film shooting and performances in the locations concerned.

Serious Damage Done to Natural Reserves

Pan Yue, deputy director of SEPA, pointed out that the rapid development of China's film and TV industry in recent years has taken its toll on the ecological environment as production companies look for remote, virgin land as locations for their big-budget productions. To boost viewership of their works, production teams have been vying to do location shooting at scenic spots, natural reserves, ecological zones, and historic and cultural relic sites despite that such activities are excessively resources draining and detrimental to the ecological environment. The garbage generated during the shooting period, as well as the movements of crew and cast, transport vehicles, lighting and other activities cause highly devastating impact on the environment within a short time.

The new rule is intended to strengthen supervision in accordance with law so that filming and performance organisers may heighten their awareness of resources conservation, environmental protection and ecology protection, pay respect to nature in general, as well as foster greater harmony between man and nature.

Joint Enforcement Efforts to Punish Non-Compliance

Pan explained that under the new rule, which was formulated in accordance with existing laws and regulations, film shooting and big-budget performances in cultural protection sites and scenic spots must comply with the relevant regulations.

Pan further pointed out that the circular stipulates that SEPA, Ministry of Construction, Ministry of Culture and State Administration of Cultural Heritage will make joint efforts in enforcement on the basis of a clear division of responsibilities and synergy. At the same time, environmental protection, construction and cultural heritage departments at local level are required to continue to discharge their respective duties in strengthening supervision over film shooting and big-budget performances taking place at natural reserves, scenic spots and cultural protection sites.

The circular stipulates that supervisory government departments must stop any ecological damage, environmental pollution and damage done to cultural relics and order the responsible party to undo the damage. If the damage is irreparable, remedial measures should be taken depending on the extent of the damage done, and the responsible party will be punished. In cases where the damage or environmental pollution caused is very serious, the party and personnel concerned will also be held liable legally.

Home Electrical Appliances First to Experiment with Recall System

Mainland authorities have introduced the recall system on a trial basis and are expected to fully implement it in the near future. A series of punitive measures will be launched alongside the implementation in order to eliminate any disputes over home electrical appliances.

Prior to the recent trial launch, there was no recall of home electrical appliances in the real sense of the term in China. Even when items such as hi-fi systems, washing machines and refrigerators were recalled, it only took place at the distributor level and consumers were often kept in the dark.

An industry source pointed out that automobile was the first industry where a recall system was implemented in China in October 2006. Other industries have yet to follow suit. The recall of home electrical appliances has always been considered a thorny issue by industry players.

Xia Jianjun, director of the China Quality Certification Division, said product recall is practised in many developed countries and is a growing trend. According to the EU's export bulletins sent to China's quality inspection authorities, there have been a number of occasions on which the defective products of China's home electrical appliances exports to the EU were recalled in compliance with the relevant EU rules.

New Rules for Foreign M&A Coming Out Soon

As disclosed by officials of the Ministry of Commerce (MOFCOM), the departments concerned are discussing the law governing the joint examination of mergers and acquisitions (M&As) by foreign companies, which is expected to come out soon.

At the Foreign Investment Work Conference for departments under the National Development and Reform Commission (NDRC) at the end of last year, NDRC vice minister Zhang Xiaoqiang proposed establishing a special mechanism for the examination of M&As, preparing a list of "strategic and sensitive" industries, and taking measures to "control what should be controlled, liberalise what should be liberalised, and safeguard national economic security and industrial security".

A report compiled by NDRC's Institute of Investment also noted that China should set up a permanent body made up of relevant personnel from MOFCOM, NDRC, Ministry of Finance and other ministries and commissions for the examination of M&As by foreign companies. According to the report, these people can discharge their duties when project examination is needed and can work in their own departments at other times.

There has been a growing call for better examination of M&As by foreign companies since 2006. This is particularly true following the outbreak of controversies over foreign M&As and industrial security triggered by Carlyle's bid to acquire Xugong Construction Machinery, German-based Schaeffler's bid to acquire Luoyang Bearing, and the acquisition of Supor.

MOFCOM and five other ministries and commissions jointly promulgated the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors in September 2006. Under these provisions, M&As of domestic enterprises by foreign investors must be examined and approved by MOFCOM and relevant departments as well as go through anti-monopoly verification when necessary. MOFCOM is responsible for summoning the departments, institutions, enterprises and stakeholders concerned for hearings. However, the provisions have not specified whether or not a special organ for the examination of foreign M&As will be established.

It is understood that the existing mechanism requires enterprises concerned to submit documents relating to proposed M&As, which will be examined by the foreign investment management department or bureau under relevant ministries or commissions according to a set order. When necessary, the heads of relevant departments or bureaus may form a joint committee to discuss whether it is necessary to hold hearings.

China Encourages Legal Tax Avoidance through Donations

Cheng Siwei, vice-chairman of the National People's Congress Standing Committee, said at a recent meeting on China's taxation issues that while much controversy now surrounds tax avoidance through legal means, such acts are allowed provided that they are carried out within the law.

Cheng added that to encourage enterprises and individuals to engage in philanthropic activities, more tax incentives will be offered to the charitable donations made by them.

Legal avoidance of tax refers to the avoidance of paying tax or the reduction of tax liabilities by taxpayers using proper means in the spirit of respecting the tax law.

Cheng said that enterprises and individuals are encouraged to reduce their tax liabilities through charitable donations and participating in tertiary wealth distribution. If more tax incentives are offered, more enterprises and individuals will consider spending money on charity.

According to a circular issued by the Ministry of Finance and State Administration of Taxation last year, charitable and relief donations made by enterprises, organisations, social groups and individuals to 10 community bodies including the All-China Women's Development Foundation are fully deductible before income tax.

At present, taxpayers' donations to 38 bodies are partially or fully deductible before income tax, with donations to 22 bodies fully deductible.

Revised Catalogue of Imported Goods Not Eligible for Tariff Exemption

The Ministry of Finance (MOF) announced on 22 January 2007 that the revised Catalogue of Imported Goods Not Eligible for Tariff Exemption for Domestic-Funded Projects (2006 Edition) will be implemented from 1 March 2007 onwards. The revised edition contains the latest round of full-scale changes made to the catalogue since 2000.

According to MOF, domestic-funded projects approved after 1 March 2007 will be subject to the revised catalogue when importing equipment, while those approved before 1 March 2007 will still be subject to the 2000 edition of the catalogue if they import their equipment before 1 January 2008.

After the latest round of revision, the catalogue will have a total of 795 items, of which 192 are newly added and 207 are revised, while 36 items in the old version have been deleted or merged with others.

It is understood that the newly added 192 items mainly fall under industries which China has attained considerable manufacturing capability and technological level, as well as those with a substantial market size and China is likely to build up its own manufacturing capability in the short term. These sectors include: machinery, metallurgy, mining machinery, food, packaging, environmental protection, meters and instruments, and electronics. The 207 revised items have been revised to reflect upgraded technical specifications of the items concerned as well as enhance the accuracy of their names for the sake of effective classification by enterprises and customs.

The revision represents a major measure to create a level playing field for domestic-funded equipment manufacturing enterprises to develop along the lines of proprietary innovation, in keeping with the State Council's opinions on expediting the development of the equipment manufacturing industry.

Since 1 January 1998, no customs duties and import-related VAT have been imposed on state-encouraged domestic-funded and foreign-invested project's for the import of equipment for own use within the project's total investment amount unless the equipment concerned is listed in the Catalogue of Imported Goods Not Eligible for Tariff Exemption for Domestic-Funded Projects and Catalogue of Imported Goods Not Eligible for Tariff Exemption for Foreign-Invested Projects.

It is understood that in the last six years after the implementation of the 2000 edition of the catalogue for domestic-funded projects, China has been able to produce certain categories of equipment reaching the technological level of foreign countries. Yet, such equipment is not included in the catalogue, which means that it can be imported into China tariff-free, putting domestic enterprises producing the same equipment in a disadvantageous position. People in the trade therefore called on the authority to revise the catalogue.

China has so far adopted different import tax policies for domestic-funded and foreign-invested projects. At first, the catalogue for domestic-funded projects included over 580 kinds of equipment of different technical specifications that China was capable of producing, whereas the catalogue for foreign-invested projects only included 20 items (mainly automobile and electronic office equipment) for which the state strictly prohibited tariff-free treatment. Besides, the former catalogue was revised twice, in 2000 and 2006, to include items that the country became capable of producing, while the latter has never been revised. The gap between the two catalogues has thus widened.

Some experts pointed out that China's preferential import tax treatment was intended to attract foreign investment at a time when domestic investment was in the doldrums following the Asian financial crisis. However, since China's accession to the WTO, the investment environment has improved greatly and preferential tax treatment as a means to attract FDI has significantly lost its appeal.

Experts have also called for the merger of the two catalogues as soon as possible, arguing that it will not only help unify the import tax policies on domestic and foreign enterprises, but also effectively revitalise the equipment manufacturing industry in China.

Sewage Charge to be Introduced Nationwide

China is stepping up efforts at reforming the pricing structure of water and will be introducing the policy of sewage charge, according to director of the State Environmental Protection Administration Zhou Shengxian. The sewage charge will be applied to all localities across the mainland at a rate that will progressively increase to Rmb0.8 per tonne.

By the end of 2008, sewage charge will be levied on all users of water sources. At places where the charges collected cannot cover the costs of sewage treatment, the local finance authorities will subsidise the shortfall. Local authorities will also implement the state's preferential policies on land use and taxation in the construction of sewage treatment plants. The sewage treatment divisions of local governments are encouraged to reorganise as franchised enterprises through which the local governments can strengthen supervision over sewage treatment. Also, the policy and mechanism for conserving the ecosystem will be improved and implemented on a trial basis.

China has introduced a series of new policies on water price reform, and sewage and garbage treatment charges in recent years. About 800 urban sewage treatment plants have been built. The rate of sewage treatment in urban areas has risen by 18 percentage points from 2000 to 52% at present.

The central government has earmarked Rmb3.9 billion from the state treasury to support the construction of urban sewage treatment plants and supporting facilities this year. Local authorities are urged to expedite the construction of their urban sewage treatment projects. All urban sewage treatment projects that have been included in local government plans must be completed and become operational on schedule. The goal is to achieve a minimum 70% urban sewage treatment rate by the year 2010.

Given the steep challenges of the water environment, China is devoting great efforts to investigating and punishing law-breaking activities against the environment as well as keeping close tabs on market access in order to prevent pollution at source.

Seven ministries under the State Council have jointly launched an environmental protection campaign in 2006 to clamp down on the illegal behaviours of polluting enterprises in industrial zones in a bid to ensure the safety of drinking water and public health. By the end of October, some 500,000 enterprises were inspected, of which 19,000 were punished for breaking environmental protection rules. In addition, various departments under the State Council have conducted special inspections to verify the safety of drinking water at source. A total of over 1,400 pollution sources that may jeopardise the safety of drinking water at source were either rectified or relocated. It is understood that China will complete the planning and adjustment of drinking water source zones by the end of 2007. Direct sewage outlets within class one protected drinking water source zones will be removed by then.

No New Entertainment Establishments in Residential Districts

The Ministry of Culture (MOC) has recently issued a set of opinions regarding certain issues relating to the implementation of the Regulations on the Administration of Entertainment Establishments. According to an official in charge of MOC's cultural market department, a number of issues have emerged since the regulations went into force. For instance, whether entertainment establishments can be set up in the vicinity of residential districts, whether public hearing is mandatory for the application for establishing an entertainment establishment, and whether there is a minimum business area requirement for new entertainment establishments. To resolve these issues and strengthen the supervision of entertainment establishments at large, the opinions spell out the stipulations of the regulations in great detail.

On the location of entertainment establishments, the opinions reiterate the location requirements as follows: no new entertainment establishments must be set up in residential buildings (including commercial/residential buildings), museums, libraries, buildings listed as "heritage protection sites", residential districts, locations with heavy passenger traffic such as public transport terminals and airports, lower basements of buildings, and schools, hospitals, government organs and their vicinity. Entertainment establishments must not be located next to schools, hospitals and government organs. The minimum stand-off distance of such establishments and method of measurement will be formulated by the cultural department of the provincial, regional or municipal government concerned.

The opinions also stipulate that the business floor area of any new entertainment establishment must exceed 200 sqm. If there are cubicles in the establishment, the area of each cubicle must exceed 8 sqm. The average business floor area per customer must exceed 1.5 sqm. The cultural department of the provincial, regional or municipal government concerned may make adjustment to the minimum business floor area and customer number based on the different types of entertainment establishments and according to local conditions, but they must not be lower than the national standards.

Public hearing is required for opening a new entertainment establishment. The opinions stipulate that when processing establishment applications, cultural departments must make public announcements according to law. The purpose of the announcement is to notify interested parties such as residents' committee or villagers' committee of the place where the proposed entertainment establishment is located, as well as schools, hospitals, government organs, dangerous chemicals storage facilities etc in the vicinity so that they may send representatives to the public hearing. Details such as the time and place of the hearing should be given in the announcement. For matters requiring administrative permission where no interested parties or other parties concerned are present at the public hearing, the cultural departments will have the discretion to make decision according to law.

To avoid overlapping responsibilities among government departments concerned and double punishment, the opinions provide that entertainment establishment operators who fail to keep employee records and daily business records, or fail to report any illegal acts that come to their knowledge, will be investigated and punished by cultural departments at county level or above. Public security departments should be notified promptly in writing of the outcome of the investigation and the punishment. If an offence has been punished by the public security department, the cultural department will not impose another penalty.

Clear Policy Guidelines on Network Music

To further strengthen the management of music distributed through different kinds of networks, the Ministry of Culture (MOC) recently issued a set of opinions on the development and management of network music. An official in charge of MOC's cultural market department said the opinions spell out for the first time China's policy in this sector.

The opinions clarify for the first time that network music covers all kinds of music products distributed by wired or wireless means such as the internet and mobile telecommunications networks. Network music is characterised by music which is produced, distributed and consumed in digitalised format.

The official further explained that "network" refers not only to the internet but also to various other IP-based, intelligent networks with interactivity capabilities such as telecommunications networks, mobile internet, cable TV networks, satellite communications, microwave communications and optic-fibre communications.

In accordance with the requirements set out in the cultural development plan regarding "active promotion of cultural industries through networks" during the 11th Five-Year Programme period, the opinions call for the establishment of different promotion mechanisms to encourage more original works that are intellectually stimulating, of high artistic value, and blending music and network technology perfectly together. In so doing, steady improvement in the quality and standards of original network music products in China can be achieved.

To mobilise all walks of society in this respect, MOC has lifted various barriers to the network culture market for domestic service providers such as restrictions in terms of enterprise ownership, industry category, geographic location and supervisory government department. Domestic enterprises are strongly encouraged to develop network cultural products that are technologically advanced, with proprietary intellectual property rights, and with healthy, constructive content.

The opinions reiterate that all business operations in relation to network music must be conducted by cultural organisations approved by MOC to engage in internet-related business operations. The scope covers the import of network music. The establishment of foreign-invested cultural organisations that deal in network-related business operations is prohibited under the opinions. The MOC official pointed out that only holders of "Network Cultural Business Licence" issued by MOC whose scope of business covers network music products are qualified to operate such business.

The opinions require all imports of network music products that are intended for distribution within the Chinese territory to be approved by or filed with MOC. Imported network music products must undergo content screening by MOC before they can be released to the market. Music products which are to be distributed by networks must be handled by cultural organisations authorised to deal in internet-related business operations according to law. Only cultural organisations that are approved by MOC to deal in internet-related business operations may engage in the import of network music products.

The opinions also provide that network music products from Hong Kong, Macau and Chinese Taiwan will be treated in the same way as similar products from foreign countries.

Views Sought on Patent Law Revision

China's Patent Law will soon undergo the third round of amendments. According to the official in charge at the State Intellectual Property Office (SIPO), the draft of the revised version has been completed and public views are being sought.

The proposed amendments contained in the consultation paper cover five major areas:

First, the ownership, transfer and joint ownership of patent rights. According to the official, the definitions of service invention-creation and non-service invention-creation as well as the rights and responsibilities of joint patent owners are clearly set out in the proposed draft. The procedures for invention-creations completed in China to apply for patents overseas will also be regulated.

Second, the criteria for granting patent for utility models. "Current technology" is given a definition, and issues concerning the protection of inherited resources are also addressed.

Third, the system for protecting design patent. The consultation paper outlines six proposed changes as follows: revising the criteria for granting design patent; expanding the scope of banned subject matters for design patent applications; allowing joint application of associated design patents; making it mandatory to file a brief description with a design patent application; expanding the search and reporting system for design patent; and clearly defining the standards for determining infringement of design patent.

Fourth, the system of compulsory licence. In the consultation paper, "patent not exploited without reasonable grounds or patent not fully exploited" is added as one of the justifications for seeking a compulsory licence. It is proposed that a compulsory licence should be granted in national emergency situations such as public health crises caused by the outbreak and spread of infectious diseases. The proposed amendment will stipulate that drug makers in China may be authorised to manufacture designated patented drugs and export them to developing countries under the compulsory licence system, provided that certain criteria are met in accordance with the new rules of the World Health Organisation in this respect.

Fifth, protection of patent rights. It is proposed that administrative enforcement of patent right protection should be stepped up and amendments made to the criteria in determining infringement of patent rights. These include: adding the doctrine of equivalents to the criteria in determining infringement of invention or utility model patent; and adding to the criteria in determining infringement of design patent the doctrine of estoppel and the use of current technology as counterargument. With regard to the exceptions to the validity of patent rights, it is proposed that parallel imports should be explicitly permitted, the scope of patent rights more clearly defined, exception granted to the infringement of patent rights for the purposes of research and scientific experiment, as well as exception granted in relation to drugs and medical equipment.

It is also proposed that the litigation validity period should be stipulated in the event of successive infringing acts, and the delay on the part of the patentee to exercise his rights should also be regulated.

The Patent Law of China was first implemented on 1 April 1985. Amendments were subsequently made in 1992 and 2000 respectively.