Meaning
Statutory provisions allow resident enterprises to credit income taxes paid abroad against their domestic tax obligations within specific boundaries. The prc corporate income tax law article 23 establishes the fundamental right for a Chinese company to avoid double taxation on its global income. It applies to taxes paid on profits from foreign branches and other income sourced outside the country.
This credit is limited to the amount of tax that would have been payable on that income under Chinese law.
Credit Eligibility
Only taxes that are mandatory and paid to a foreign central or local government qualify for this relief. In the context of the prc corporate income tax law article 23, the taxpayer must provide official tax payment certificates and relevant tax returns from the foreign jurisdiction. Fees, penalties and interest paid to foreign authorities are not eligible for the credit.
The income must be recognized under Chinese accounting standards to determine the corresponding domestic tax liability.
Calculation Formula
The maximum credit is determined by multiplying the total Chinese tax payable by the ratio of the foreign taxable income to the total global taxable income. Following the requirements of the prc corporate income tax law article 23, this calculation is performed to ensure the credit only offsets the tax on the foreign portion of the income. If the foreign tax rate is higher than the Chinese rate of twenty-five percent, the excess cannot be used in the current year.
This prevents foreign taxes from reducing the tax owed on income actually earned within China.
Statutory Limit
Any amount of foreign tax that exceeds the calculated ceiling may be carried forward for a period of five years. This provision in the prc corporate income tax law article 23 allows companies to utilize their foreign tax credits over a longer horizon. It is particularly useful for firms operating in countries with high statutory rates or during years where the company has a domestic loss.
Careful tracking of these carryforwards is required in the annual tax settlement filing.
