GuoShuiFa [2002] No. 123 September 29, 2002

Local tax bureaus of the provinces, autonomous regions, municipalities directly under the Central Government and municipalities separately listed on the State plan:

It has been found that, for a period of time, some localities have applied the method of collection of individual income tax upon verification for the whole trade of law firms, the tax burden verified is obviously lower that the statutory tax burden. This kind of doing has failed to comply with the Circular of the State Council on Approving and Transmitting the Opinions of the State Administration of Taxation on Strengthening the Administration of Tax Collection and Reinforcing the Tax Payment by Self-assessment of Individual Private Businesses (GuoFa [1997] No.12), is likely to lead to unfair tax burden and is adverse to brining into play the role of individual tax in adjusting the high incomes. In order to strengthen the administration of collection of individual income tax of the investors of laws firms and other intermediary agencies, the relevant issues are notified as follows:

I. No locality may apply the method of tax collection upon verification to the whole trade of law firms. The localities shall observe the Tax Collection Law and the Document GuoFa [1997] No.12, collect the individual income tax by self-assessment over the law firms where it is possible.

II. The localities that have applied the method of tax collection upon verification to the whole trade of law firms must correct their doings before the end of this year, and shall report to the State Administration of Taxation about the correction before the end of March of 2003.

III. With respect to the law firms for which tax can't be collected upon auditing according to Article 35 of the Tax Collection Law, the payable tax amount shall be assessed at the rate of taxable income determined in the Circular of the Ministry of Finance and the State Administration of Taxation on Printing and Distributing the Provisions on the Collection of Individual Income Tax over Investors of Sole Proprietorships and Partnerships (CaiShui [2000] No.91). The localities shall assess their business income according to the number of the employees and business scale etc, and assess the rate of taxable income on the basis of the higher profit level of the same trade of the locality, and the rate shall not be any lower than 25%. The law firms over which the tax is collected upon verification shall be urged to establish account books, and change the method to tax payment by self-assessment as soon as the necessary conditions are met.

IV. The localities shall strictly carry out the Circular of the State Administration of Taxation on the Relevant Business Concerning the Collection of Individual Income Tax over Income of Practitioners in Law Firms (GuoShuiFa [2000] No.149), and strengthen the administration of collection of individual income tax over law firms. With respect to the lawyers as employees of law firms, if their expenses for case handling or other individual expenses are borne by the law firms, the case expenses less than 30% of their income provided for in Paragraph 2 of Article 5 of Document GuoShuiFa [2000] No.149 shall no longer be deducted in the calculation of their income.

V. The administration of collection of individual income tax of accounting firms, tax agencies, auditing firms and other intermediary agencies shall follow the aforesaid principles.

Promulgated by The State Administration of Taxation on 2002-9-29