Circular 79 was released to answer some common problem areas in the application of the country’s Enterprise Income Tax Law.
The clarifications state that income from equity transfers should be considered minus the original cost incurred to obtain the equity. Furthermore, it explains that undistributed profits cannot be deducted from the transfer price for tax purposes.
Also, an enterprise obtaining equity investment income (such as dividends) will be deemed to have received the income on the date when the board of directors or general meeting of shareholders make a decision to distribute profits.
The circular also details how enterprises should begin calculating profit and losses in the year that the business begins production.
“The cost and expense incurred during preparations before the enterprise engaged in production and operation shall not be counted as a loss of current period,” said a newsletter from Hwuason Lawyers.
Finally, any costs and expenses relating to exempt income may now be deducted when an enterprise calculates its taxable income, unless otherwise specified.
The SAT has been busy releasing circulars in recent months. At the end of 2009, Circular 601 addressed the definition of beneficial ownership. Then in February Circular 698 eliminated the traditional planning methods used by foreign investors. February also saw Circular 19 tackle the topic of collecting corporate tax for non-tax resident enterprises on a deemed basis.
