It is anticipated that manufacturers of cosmetics, pharmaceuticals and beverages will benefit from this Circular in the following tax years through to 2015
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China's Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released the "Circular Regarding Pre-tax Deduction Policies on Advertising and Business Promotion Expenses (caishui  No.28, hereinafter referred to as 'Circular')" on May 30, which is retroactively effective from January 1, 2011 and will remain in effect through December 31, 2015. The purpose of the Circular is to address the dilemma faced by enterprises which incur significant annual advertising and promotional expenses in certain industries, but cannot deduct the such expenses in excess of 15 percent of the sales revenue of the current year (according to Article 44 of Regulations on the Implementation of Enterprise Income Tax Law of the People’s Republic of China).
According to the Circular, enterprises engaged in the manufacturing and sale of cosmetics, manufacturing of pharmaceuticals, and the manufacturing of beverages (excluding enterprises producing alcoholic drinks) are eligible to deduct advertising and promotional fees which are less than 30 percent of the sales (business) incomes of the current year. The excess amounts can be carried forward to future years for deduction.
Where the affiliated enterprises have entered into advertising and business promotion expense sharing agreements (hereinafter referred to as “sharing agreements”), the advertising and business promotion expenses incurred by one party that do not exceed the pre-tax deduction limit of sales (business) revenue of the current year can be deducted from the taxable income of the said party. Alternatively, part or all of such expenses may be accumulated to the other party for deduction in accordance with the sharing agreement. When calculating the deductible advertising and business promotion expenses of the other party, the other party may exclude the advertising and business promotion expenses accumulated thereto according to the aforesaid measure.
It is anticipated that manufacturers of cosmetics, pharmaceuticals and beverages will benefit from this Circular in the following tax years through to 2015.
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