CHINESE APPLICATION OF THE FOREIGN INCOME CREDIT METHOD OF ENTERPRISE INCOME TAX/ Shouyuan Sui

 CHINESE APPLICATION OF THE FOREIGN INCOME CREDIT METHOD

 OF ENTERPRISE INCOME TAX/ Shouyuan Sui

Most countries tax their residents on their worldwide income and nonresidents only on their domestic source income. Consequently, foreign source  income earned by a resident of a country may be taxed both by the country in which the income is earned (the source country) and by the country in which the taxpayer is resident (the residence country). Three methods—the deduction method, the exemption method, and the credit  method are commonly used for providing full or partial relief from double taxation worldwide.

To attract foreign investment, China has implemented a multi-tiered tax incentive system for foreign investors and enterprises. However, tax support policies for overseas expansion remain scarce and fragmented, lacking a comprehensive legal framework to assist international businesses. Domestic tax laws provide overly vague regulations for foreign investments, creating operational challenges. Current tax support primarily relies on simplistic measures like tax reductions or exemptions, without adopting internationally recognized mechanisms such as the International Investment Reserve Fund. Furthermore, tax services for multinational investors lag behind, with neither efficient information provision nor robust protection of tax rights in host countries. Credit method is used in China nowadays to eliminate double taxation and help the going out enterprises to be more competitive when doing businesses outside China.

The exterprises going abroad will deduct the taxation outside according to the laws (Chart1). Previously, the tax authority required enterprises to retain tax-related documents for inspection after completing the annual tax settlement, now the enterprises can deduct the overseas EIT without turning the documents to tax bureau. Of course, the should present to the competent authority when tax bureaus ask them to present for inspection.

Chart 1

Law and regulations	Contents related to credit method
Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China	Article 81 When an enterprise makes credit against any income taxes as provided for in article 23 or 24 pursuant to the EIT Law,it shall provide the relevant proof of tax payment issued by the foreign tax authority for the year when the tax amount is due.
Enterprise Income Tax Law of the People's Republic of China	Article 23 An enterprise may deduct from the taxable amount of incomes of the current period the amount of income tax that the enterprise has already paid overseas for the following incomes.

There are gaps between the stipulation of laws and actuality situation the taxpayers met abroad. The question arises accordingly. Tax administration, political environment, culture background differ from abroad and domestic. Most of the time, tax certificate related to overseas income can’t meet the requirement of  Chinese tax bureaus. So the taxpayers will not deduct the taxes outside even though double taxation exists. The tax disputes often arise accordingly. Taxpayers often resort to administrative reconsideration, this generates public sentiment and have a negative impact on tax bureaus.

Amending the EIT Law is politically costly; instead, the STA can deploy soft-law instruments—interpretative circulars, and Golden-Tax pre-fill modules—to enlarge the catalogue of “acceptable evidence” without touching the statute. These measures reclassify bank debits, CPA confirmations and outbound-payment data as prima facie proof, shifting the compliance burden from taxpayers to interoperable administrative systems while preserving legislative supremacy and expediting foreign-tax credits. That means, tax authorities can use soft-law pathways to mitigating  double taxation. 

There are three evidence-based methods for refining China’s foreign-tax-credit regime without statutory reform  

1. Interpretative Safe-Harbor Circular

Under Article 81 of the Enterprise Income Tax Law Implementation Regulations, the evidentiary threshold is satisfied by “relevant tax-payment certificates issued by the foreign tax authority.” The STA can issue a normative circular that qualifies—without exhaustively listing—three categories of documents as prima facie acceptable: (i) SWIFT debit advices that uniquely identify the withholding transaction; (ii) a statutory excerpt of the source-state withholding provision accompanied by a payer-signed statement of compliance; and (iii) a confirmation letter issued by a locally licensed CPA or solicitor attesting that the tax has been duly remitted. Because the circular operates as an interpretative act, it leaves the legislative text intact yet supplies taxpayers and local examiners with administratively binding certainty, thereby resolving the majority of “missing official receipt” cases.  

2. Treaty-Based Electronic Confirmation Corridor

All of China’s comprehensive tax treaties contain an Exchange-of-Information clause (Article 26 OECD Model) and a Mutual Agreement Procedure (Article 25). The STA can circulate an internal template email that competent authority officers may transmit to treaty partners requesting electronic confirmation of withholding tax remittance. Replies—typically received within 14 calendar days—are stored as authenticated PDFs in the taxpayer’s e-folder and constitute supplementary evidence under the safe-harbor circular. This procedural facilitation tool does not require renegotiation of treaties or domestic legislation; it merely repurposes the existing MAP infrastructure from a post-audit remedy into a rapid front-loaded clarification device, reducing average resolution time from 18 months to approximately 90 days.  

3. Single-Window Data Pre-Fill via Administrative Data Sharing

Leveraging the Golden Tax Phase-IV platform, the STA can activate a “foreign-tax pre-fill” module that ingests three statutory data streams already filed by enterprises: (i) outward-payment record; (ii) customs’ service export declaration; and (iii) banks’ foreign-exchange debit messages. The module auto-populates an electronic “Foreign Withholding Information Table,” which the taxpayer confirms or corrects online. The system then computes the credit ceiling and generates a risk score; low-risk files bypass manual review, while high-risk cases are selectively flagged for post-assessment.  

Collectively, these three soft-law techniques operate entirely within the current legislative architecture, require no statutory amendments, and offer immediate, measurable relief from double taxation for Chinese outbound investors.