China: Chinese Local Governments Fight For Their Share Of Tax Revenue

Last Updated: 8 April 2008
Article by Fuli Cao

In China, major taxes such as the corporate income tax ("CIT") are shared between the central government and the local governments. The current share ratio is 60 percent to the central government and 40 percent to local governments.

Prior to January 1, 2008, a foreign-invested enterprise (i.e., an enterprise with foreign ownership of 25 percent or more) filed and paid CIT in the city where its head offices were "located." The combined CIT return included the income from all branches, regardless of branch location. Under that system, the tax bureau at the enterprise's headquarters collected 100 percent of the CIT from the enterprise. The local government retained 40 percent of the CIT collected and forwarded the remaining 60 percent to the central government. Cities with branch locations generally did not receive any tax revenues from those foreign-invested enterprises. For enterprises other than foreign-invested enterprises, branches were generally considered taxpayers and filed and paid CIT locally unless otherwise approved by the Ministry of Finance and/or the State Administration of Taxation. The government at a branch location would retain 40 percent of the CIT collected and forward the remaining 60 percent to the central government.

Under the new unified Corporate Income Tax Law, which came into effect on January 1, 2008, all enterprises will file combined CIT returns, including the income or losses of headquarters and all branches, with the tax bureaus where the headquarters are located. If all CIT is paid to the tax bureaus at the headquarters locations, the tax revenues of many local governments, especially those in the inland provinces, will be reduced, as most corporate headquarters are located in the more developed cities in the coastal areas. In order to solve this revenue-shifting problem, the Ministry of Finance, the State Administration of Taxation, and the People's Bank of China issued Circular Cai Yu [2008] No. 10 ("Circular 10"), which provides the method for allocating CIT payments between the central and local governments from taxpayers with headquarters and branches across multiple provinces.

Allocation Of Provisional Tax Payment

An enterprise files quarterly or monthly CIT returns based on the income statement of the relevant period and pays provisional CIT on or before the 15th day following the end of the period. On or before the end of the fifth month after a tax year, the enterprise must file an annual CIT return and make a final CIT settlement (i.e., pay additional tax or apply for an overpayment refund). According to Circular 10, the provisional tax payment should be allocated according to the following steps:

Step 1: Identify participating branches. Participating branches are the first-tier branches with principal operational functions. The second- or lower-tier branches should be consolidated into the first-tier branches for calculation of tax payment allocation. The first-tier branches that undertake no principal operational functions and do not pay business tax or VAT at their locations do not participate in the allocation. Excludable branches include those providing after-sales services, internal R&D, warehousing, and other internal ancillary functions. A new branch does not participate in the allocation for the year in which it is set up. A dissolving branch stops participating the year after it is dissolved.

Step 2: Allocation between headquarters and participating branches. During each provisional CIT filing, the CIT payable by an enterprise will initially be allocated 50 percent to the headquarters and 50 percent to the participating branches. Accordingly, the enterprise should pay 50 percent of its CIT for the period (quarter or month) to the tax bureau at the headquarters location.

Step 3: Allocation among the participating branches. The 50 percent of provisional CIT allocated to the participating branches in Step 1 will be further allocated among those branches based on three factors: gross revenue, payroll, and total assets. CIT paid to the tax bureau at one participating branch location should be equal to the following:

The amounts of revenue, payroll, and assets used in the formula for periods from January to June should be the numbers for the year before last year; for periods from July to December, the numbers from the previous year should be used.

Distribution Of Provisional Tax Payment

The provisional tax paid to the tax bureaus at headquarters and participating branches will be distributed within the government. Sixty percent of the CIT collected by the tax bureau at a participating branch location will be forwarded to the central government, and the remaining 40 percent will stay with the local government. Sixty percent of the CIT collected by the tax bureau at the location of the headquarters will be forwarded to the central government; of the remaining 40 percent, 50 percent will stay with the local government and 50 percent will be allocated to a temporary account at the central government for distribution to local governments. This temporary account will be regularly distributed to local governments by the Ministry of Finance according to a predetermined sharing ratio.

Annual Tax Filing

Only the headquarters of the enterprise is required to perform an annual CIT filing. Provisional CIT paid at headquarters and participating branch locations will be credited against the total CIT liability of the enterprise shown on its annual CIT return. The enterprise will pay additional CIT to, or obtain an overpayment tax refund from, the tax bureau at the location of the headquarters. Sixty percent of the CIT collected for annual filings will go to the central government. The remaining 40 percent will go into a temporary account and will be earmarked for distribution to local governments.

Potential Impacts And Uncertainty

The new CIT filing system under Circular 10 appears to be the result of the ongoing revenue-sharing battle between local governments. This allocation method may not necessarily end the battle. The arbitrary 50/50 allocation of total provisional tax between headquarters and branches may have an inequitable result in many situations. For example, even if almost all of a taxpayer's operations are at the headquarters location, 50 percent of its provisional CIT would be allocated to its small operating branch in another province. As another example, if a branch was established in 2007, the branch may participate in the allocation for 2008. For calculating provisional tax payments for January through June 2008, the enterprise should use annual revenue, payroll, and asset numbers for 2006 (i.e., before the branch existed). These and other issues will need further clarification.

Under the old tax regime, some foreign-invested enterprises classified many of their branches as cost centers and did not allocate revenue to such branches. The new filing system has provided incentives for the tax bureau at branch locations to challenge this practice. If the tax bureau at a branch location successfully reclassifies the branch as a participating branch and assesses underpayment of tax, the enterprise may not be able to obtain a refund from the tax bureaus at the headquarters or other participating branch locations. Taxpayers should carefully consider all the facts and make a proper determination regarding participating branches. Classifying more branches as participating branches generally should not affect the taxpayer's CIT liability. However, it may increase the administrative burden for tax filings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.