Beijing Law Review, 2011, 2, 63-73
doi:10.4236/blr.2011.22007 Published Online June 2011 (http://www.SciRP.org/journal/blr)
63
Research on the Structure of China’s Enterprise
Income Tax Law System
Yinying Wang
S.J.D., University of Wisconsin-Madison, Law School, Madison, USA.
Received March 25th, 2011; revised May 7th, 2011; accepted May 15th, 2011.
ABSTRACT
The PRC enterprise income tax law was enacted on January 1, 2008, with accordance to which the enterprise income
tax law system has been cha nging. It took a long time to promulga te the law just as it takes an d will take certain period
to integrate the system from the constitutional law to tax polices. The lack of taxing power under constitutional law, the
silence of a basic tax law, and the arbitrary of ta x policy issuan ce lea d to an un stable stru ctu re of enterp rise in come tax
law system. Lawmakers shall announce th e taxing power under the constitutiona l law, for m a g en era l ta x law, and take
time to screen tax policies to improve the system.
Keywords: Enterprise, Income Tax Law, Restructure, Comparison
1. Introduction
Corporate income tax is a tax imposed for each taxable
year on the taxable income of every co rporation [1]. It is
the term that widely used in the world, for example,
known as Corporate Tax in the US. However, the term
China adopts for the corporate income tax is “enterprise
income tax”, and it named the new law promulgate in
2008 the “Enterprise Income Tax Law of People’s Re-
public of China” (hereinafter “EIT Law”). Imposed on
various incomes of enterprises such as incomes from
sales, services, interests, or the rental property [2], the tax
is playing a more and more important role in China.
When talking about a law system, it refers to a set of
rules dispersed among various statutes while they work
together on a certain subject of law. As for the enterprise
income tax law system, it may be composed of articles in
the constitutional law clarifying the power of levying
enterprise income tax, basic principles of imposing such
taxes under the general tax act, the single enterprise in-
come tax law, collecting measures concerning such taxes,
and policies and rulings governing enterprise income
taxes. If we collect those rules and classify them by
sources, the conceptual shape of a system should be a
pyramid [3], the most stable structure. The taxation arti-
cle under the constitu tional law sits at the top leading the
basic tax law as well as enterprise income tax law fol-
lowed by tax rulings and policies at the bottom. The
lower the level is, the more rules are there in this level,
but each level shall has appropriate number of regula-
tions in order to keep the shape.
Apply pyramid theory to China’s enterprise income
tax law system. Besides the fact that the constitutional
law is the mother law of all law fields, there is no basic
law at the top while too many policies and rulings at the
bottom in the enterprise in come tax law department. Two
laws, Enterprise In come Tax Law of the Peop le’s Repub -
lic of China [4] and Law of the People’s Republic of
China on Tax Administration [5] (hereinafter “Tax Ad-
ministration Law”) lead the system. The former one is a
substantive law while the latter is a procedural law. The
next level has about 15 [6] effective administrative regu-
lations, for example, Regulation on the Implementation
of the Enterprise Income Tax Law of the People’s Re-
public of China [7] (hereinafter “Implementation Regula-
tion”). Last, 2997 [8] rules, explanations, circulars, and
notices issued by both central government and local gov-
ernment sit in the bottom level such as the Notice of the
State Administration of Taxation on Some Tax Treat-
ment Issues during the Implementation of the Enterprise
Income Tax Law [9]. Therefore, the proportion of pyra-
mid is 0:2:15:2997.
Two major reasons contribute to th is unstable structure.
First, the enterprise income tax law system is under con-
struction. Laws and regulations have been made, amend-
ed, or revised to meet the needs of society or economic
development in the past decades. The same to the history

Research on the Structure of China’s Enterprise Income Tax Law System
64
of enterprise income tax law system development. Not
only have great effo rts been made to fill the blank of en-
terprise income tax law field such as the EIT Law was
promulgated in 2008, but also regulations and rules have
been expelled or organized to meet the WTO require-
ments, for instance, the State Administration of Taxation
issued two notices to screen enterprise related tax rules,
one in the year 2006 [10] and the other in 2008 [11], es-
pecially the second notice because the EIT law was en-
acted so that old policies under old laws could not be
applied anymore. Such kind of adjusting is an ongoing
process and will continue into the future.
The country’s tax law system counters the similar sit-
uation and it is under construction as well. There is no
basic law to lead the system; three laws occupy the next
level, the individual income tax law [12], the EIT Law,
and the Tax Administration Law; about thirty adminis-
trative regulations sit in the third level followed by more
than 5500 explanations, notices, rules, measures at the
bottom [3] The unstable structure occurs again, 0:3:30:
5500, similar to the proportion of enterprise income tax
law system. It is even worse that most specific taxes such
as value-added tax, real estate tax, vehicle and vessel tax,
etc. are governed not by laws but by interim regulations
made by the State Council. For example, Interim Regula-
tion of the People’s Republic of China on Value Added
Tax [13], Provisional Regulations of the People’s Repub-
lic of China on Real Estate Tax [14], Provisional Regula-
tions of the People's Republic of China on Business Tax
[15], etc.
Second, the quick economic development involves ar-
bitrary issuance of tax policies and rulings. China is
making progress each year, accompany with which the
market changes and becomes more and more sophisti-
cated. Meanwhile, problems have appeared case by case,
some of which have similar situation while others are
particular or unique. Since making a new law requires
complicated processes and is time-consuming, a quick
and effective way instead is to issue policies. Moreover,
it is unlikely to make laws for each case unless the prob-
lem goes wild in the country. That is the reason many
explanations, measures, and notices have been issued to
rule individual cases or to deal with particular law appli-
cation proble m .
The large amount of bottom-level rulings threatens the
consistency of tax policies. Since they are issued under
the corresponding economic environment or response to
a particular case, a later ruling may, unfortunately, con-
tradict with a former one without timely updating or no-
ticing. Take the issue of foreign-funded enterprises pur-
chasing domestic equipment to get tax credit for enter-
prise income tax as an example. On January 14, 2000, the
Ministry of Finance and the State Administration of Tax-
ation issued a tax deduction and exemption policy re-
garding foreign enterprises purchasing the domes-
tic-made equipment [16]. However, such tax preferable
measure was canceled when it comes to May 16, 2008
[17]. Because it was not regulated in the EIT law, so it is
easy to be subject to change and not as stable as those
measures under the law. Furthermore, tax reforms and
tax reform trials have not been stopped these years. In
order to provide instructions to difficulties during those
periods, Department of Finance and State Administration
of Taxation issued rules or policies daily. For example,
43 rules were issued in July 2004, 25 rules in August
2004, and 43 rules in September 2004 [3].
Three aspects compose the incompleteness of the
structure of enterprise income tax law system: the lack of
taxing power under constitutional law, the silence of a
basic tax law, and the arbitrary o f tax policy issuance. In
the following sections, each aspect is discussed one after
anther through introduction of countries with compara-
tively more sophisticated corporate income tax law sys-
tem such as the US and the UK for the purpose of pro-
viding China with possible options for the restructure of
the system. When the taxing power is announced under
the constitutional law, a basic tax law is made, and tax
rulings are simplified and consistent, th e disproportio nate
layer of enterprise income tax law system will be fixed.
2. Taxing Power under the Constitutional
Law
The power to tax is a basic incident of sovereignty [18].
A tax is primarily a means of raising revenue, and the
power to tax involves the power to destroy [19]. Given
such a characteristic, this power is normally controlled
and limited by the constitutional law, the highest legal
authority within the territory, and is exercised by the top
legislature, such as the Congress or the perspective gov-
erning branch in individual countries. The purpose of
such arrangement is to lower the possibility of power
abuse in the democratic society. The enterprise income
taxing power shall be part of it. However, such mecha-
nism has not appeared in China.
In ancient times, it was easy for the King or Emperor
to issue orders to levy taxes or to make changes because
his orders were absolute regulation that all citizens had to
obey, which prevented power limitation from being es-
tablished [20]. Highly centralized government tended to
the arbitrary use of tax privilege. At that time, the domi-
nant concept was that all things within the country be-
longed to King. Therefore, he could decide when and
how to take what from his people. Taxes were among
these. People had no legal right to fight for ownership
against the authority because their ownership was not
protected. The powerless mass could only obey the order

Research on the Structure of China’s Enterprise Income Tax Law System65
and pay taxes.
The situation had not changed until the foundation of
Modern China [21]. It was the first time that the govern-
ment attempted to regu late taxing power, not specifically
enterprise income taxing power, under the constitutional
law. However, the warlord era and the political struggle
did not bring China into a democratic era [21]. As a re-
sult, the first trial failed [21]. The harsh social climate
that lacked democracy, law and order substantially de-
layed the embodiment of ideal power in the constitu-
tional law [21].
The stronger the centralized power was, the less possi-
bility the limit ation of po wer app eared. Th e similar situa-
tion appeared again under the planned economy after the
country was founded [20]. No other power had the
chance to balance it under such circumstances. To limit
the central power’s ability to impose taxes in any way
such as through the Constitution was not possible.
The “reform and open-up policy” in 1978 began to
change the country’s economic and social structures, but
it has not made any difference in regulating taxing power
in the constitu tional law till today. Only th e obligation of
citizens to pay taxes can be found under PRC Constitu-
tion [22]. The power to tax enterprises is not under the
constitution.
Why is this regulation important? It is a significant
factor in any democratic society ruled by law. Power is
derived from and limited by the law in order to protect
the rights of the people. Otherwise, it would be a repeat
of ancient Chinese history when China was ruled by
monarchy. Back then, the law was a tool to collect reve-
nue whenever the monarch desired regardless of justifi-
cation. For a long time, people did not realize the right to
protect their own properties from being invade d until the
ideals of democracy and individual rights became popu-
larized. It aroused people’s awareness of exercising their
power to win back rights. Since then efforts have been
made to implement checks and balances in the ruling
political faction.
Constitutional law is supreme to all laws in a country
and it regulates sources of powers. Basic principles, na-
tional affairs, fundamental rights of people and authori-
ties of the government are included. A power that may
limit the exercise of people’s rights or the use of personal
properties shall be declared under the constitutional law.
The tax, especially the enterprise income tax, as the
means of collecting revenue from people without consid-
erations, belongs to this kind. Without the highest-level
legal authorization, power is easily abused and the people
would have been suffered, similar to the situation in the
history. Therefore, the constitutional law, as the mother
law in a country, has to take the responsibility to draw
lines of imposing taxes with the due process.
Both the US and the UK have articles regulating tax-
ing power under constitutional laws. The British Consti-
tution, not written in one single document, is referred to
as an uncodified constitution in the sense that it can be
found in a variety of documents, which includes statutes
such as the Magna Carta of 1215, the Act of Settlement
of 1701, Laws and Customs of Parliament, political con-
ventions, case law, and constitutional matters decided in
a court of law or written by constitutional experts.
Magna Carta opens a new page of UK constitution by
limiting king’s power including imposing taxes to the
law. Originally issued in the year 1215, it was the first
document for ced onto an English K ing John I by a group
of the barons in an attempt to limit his powers by law and
protect their privileges [23]. It bound the king to grant to
all freemen the rights and liberties the great charter de-
scribed, and with Magna Carta, King John placed himself
and England’s future sovereigns and magistrates within
the rule of law [24]. It says, “No freemen shall be taken
or imprisoned or disseised or exiled or in any way de-
stroyed, nor will we go upon him nor send upon him,
except by the lawful judgment of his peers or by the law
of the land. To no one will we sell, to no one will we
refuse or delay, right or justice” [25]. That means the
principle that no one, including the king or a lawmaker,
is above the law was established. In that case, no tax
should be levied by the king arbitrarily but by the law
and the people that being taxed on.
The 1688 Bill of Rights, along with the 1701 Act of
Settlement the Bill of Rights remains, today, one of the
main constitutional laws in the UK, which further ascer-
tain the civil and political right that the agreement of
parliament became necessary for the implementation of
any new. “By Levying Money for and to the Use of the
Crowne by pretence of Prerogative for other time and in
other manner then the same was granted by Parlyament”,
and “That levying Money for or to the Use of the Crowne
by pretence of Prerogative without Grant of Parlyament
for longer time or in other manner then the same is or
shall be granted is Illegal” [26].
The Petition of Right is also a major English constitu-
tional document, which was produced by the English
Parliament in the run-up to the English Civil War, and
was passed by Parliament in May 1628, and given the
royal assent by Charles I in June of that year [26]. It sets
out specific liberties that the king is prohibited from in-
fringing, especially is most notable for its confirmation
of the principles that taxes can be levied only by Parlia-
ment [27]. It identifies that, no person should be com-
pelled to make any loans to the king against his will be-
cause such loans were against reason and the franchise of
the land; none should be charged by any charge or impo-
sition called a benevolence nor by such like charge by

Research on the Structure of China’s Enterprise Income Tax Law System
66
other laws of this realm as is provided; and no one should
be compelled to contribute to any tax, tallage, aid, or
other like charge not set by common consent in parlia-
ment by which statutes before mentioned and other the
good laws and statutes of this realm [28].
Unlike the arrangement in United Kingdom, United
States authorizes taxing power to the Congress under the
codified Constitution. Article 1 section 8 Clause 1 was
known as Taxation Clause, which says, the congress
shall have power to lay and collect taxes, duties, imposts
and excises, to pay the debts and provide for the common
defense and general welfare of the United States; but all
duties, imposts and excises shall be uniform throughout
the United States. The Congress represents the people of
the United States. Therefore, the right to tax is in the
hands of its people.
Besides general taxation clause, the Unites States
Constitution also authorizes the Congress the power to
lay and collect taxes on incomes through the Sixteenth
Amendment. It addresses that the Congress shall have
power to lay and collect taxes on incomes, from what-
ever source derived, without apportionment among the
several States, and without regard to any census or enu-
meration.
Taxing power clauses under constitutional laws gener-
ally concern all taxes instead of a particular one.
Therefore, they apply to corporate income taxes with-
out any doubt. On the other hand, to levy corporate taxes
within the power of the people through legal procedures
in two countries reveal two different formations. In the
UK, the power is put under several independen t constitu-
tional documents that claiming people’s rights. However,
the United States arranges the power in the Congress’s
rights part under the Constitution. Besides, the UK de-
clares Parliament’s consent to impose tax generally in its
Constitution while the US further confirms Congress’s
power to lay tax on incomes especially because income
tax always contributes the most internal revenue in the
country since 1960.
Except the UK and the US, there are two more types in
regulating taxing power. One is the Italian Constitution
that mentions people’s obligation to pay taxes under the
chapter of people’s political rights but withou t the clause
stating the power to tax. Under Part I Fundamental Prin-
ciples, Title IV Political Rights, Article 53 says that eve-
ryone has to contribute to public expenditure in propor-
tion to their capacity, and the tax system has to conform
to the principle of progression. It is similar to China’s
current Constitutiona l Law.
The other type is repr esented by Jap an’s Constitu tion al
Law, which includes people’s obligation to pay taxes as
well as the principle of no tax above the law. What Ja-
pan’s constitution al law Article 30 says under Chap ter III
Rights and Duties of People is that, the people shall be
liable to taxation as provided by law. Chapter VII Fin-
ance, Article 84, however, addresses that no new taxes
shall be imposed or existing ones modified except by law
or under such conditions as law may prescribe. Thus,
Japanese people are protected from being taxed without
legal due process. But compare to the US or the UK con-
stitutional laws, the gov ernment branch that is authorized
to make laws to impose taxes is not assured.
The tax clause under China’s Constitutional law only
provides people’s obligation to pay taxes, which is iden-
tical to the Italian Constitutional Law. It is under the
chapter of people’s rights and obligations. Nevertheless,
it is not enough. Many scholars argue that basic princi-
ples regarding taxation have to be put in the constitu-
tional law. For instance, fairness [29], no tax above the
law [29], right of people to supervise tax collection [30],
separation of taxing power between the central govern-
ment and local government [30], transparency and effi-
ciency [31], and basic collecting procedures [19], etc.
In my opinion, articles in the constitutiona l law should
be general, simple and highly condensed since it is the
mother law in a country’s legal system. There is no need
to specify any tax matters due to the particular need of
taxation. Principles of fairness, transparent, efficiency or
no tax above the law is suitable, but others such as basic
procedures or separation of powers are too detailed to fit
in. Another subject is very important that has to be put in
the constitutional law, the judicial review over tax legis-
lations. It is a good example of the functioning of separa-
tion of powers in a modern governmental system. Nev-
ertheless, it is left blank in current China’s tax law sys-
tem.
China has been waiting for the appropriate time to
chang e. Nowad ays ther e are th ree r easons for the co untry
to embody the taxing power and enterprise income taxing
power into the PRC Constitutional law. First, civil soci-
ety has been formed since the reform and opening-up
policy that announced the beginning of open market
economy has been a tremendous success. The adminis-
trative power in controlling market is not as strong as it
was so that people are able to enjoy free trade and com-
merce while resources are circulated quickly [42]. Under
such circumstances, people’s awareness and willingness
to embrace equality and self-protection is getting
stronger against public authorities. The legitimate au-
thority needs to clarify publicly, in an accepted and
known powerful legal document that outlines the rights
of the people.
Second, market economy provides a solid economic
basis. Both the plan and the market have become active
in resource allocation since Fourteenth Communist Party
of China National Congress, and the market’s role will

Research on the Structure of China’s Enterprise Income Tax Law System67
be more active. Unlike after foundation of the country,
for a long time, the governmen t was said to represent the
people to deal with official matters while it do minated all
social activities in th e country including production plan-
ning, resources allocation, commodity distribution, and
decided the cost and profits for the next year’s produc-
tion even social benefits. Levying taxes were not helpful
at that time because all economic activities were planned
[33].
Finally, PRC constitutional law has confirmed the pri-
vate ownership of citizen’s legitimate property under
Article 13, although the power to tax enterprises has not
been included. It says that the state protects by law the
right of citizens to own private property and the right to
inherit private property; the state may, for the public in-
terest, expropriate or take over private property of citi-
zens for public use, and pay compensation in accordance
with the law; the state protects according to law the right
of citizens to inherit private property. It makes the gov-
ernment to respect the ownership of private properties
and to protect them as well.
It was the 2004 constitution amendment that proudly
added private ownership to th is article, which has built a
most concrete wall in protecting private domain, and is
the catalyst for the development of civil society and de-
mocracy [34]. Before that, the article articulated: the
state protects the right of citizens to own legal income,
savings, houses and other lawful property; the state pro-
tects by law the right of citizens to inherit private prop-
erty.
It is a great progress and opens a new page in the his-
tory. In the past, the original socialism required proper-
ties owned and shared by the people co llectively. That is
why the private ownership was driven out of the country
before the opening up policy. It can be imagined that to
respect private ownership at that time was incompatible
with the country’s political formation. As time goes by,
market economy was adopted by the government, which
needs the support of private enterprises. The more active
the market is, the more appreciation has to be shown to
the private properties.
Besides, article 8 of the Law on Legislation of the
People’s Republic of China limits the legislative power
to tax. Those laws enacted by National People’s Con-
gress, so called “basic laws”, have the authority to regu-
late the basic taxation system, not governmental rule or
policy. According to article 26 of the PRC Constitution,
the power to enact or amend basic laws belongs to Na-
tional People’s Congress. For example, the Fifth Session
of Tenth People’s Congr ess enacted the 2008 EIT law.
Therefore, taxing power shall be granted to nation’s
supreme legislative branch, the National People’s Con-
gress, while laws have to be passed to exercise the power.
These are fundamental power issues to be included in
Chapter III The Structure of The State, Section 1 The
National People’s Congress together with the existing
legislative powers. Thus, the arrangement of tax clause in
the constitutional law is similar to Japan’s type that the
duty to pay taxes and the limitation of taxing power are
both included. In the future, the country may need new
rules or changes in the constitutional law, but for now it
is the best arrangement for the top level in the enterprise
income tax law system.
3. The Making of a Basic Tax Law
A basic tax law lays out basic principles of tax laws,
which cannot be found in any legal documents right now;
clarify authorities to issue explanations of laws, which is
left blank in current system; draw lines among powers of
public security, prosecution, or tax bureaus respectively
when dealing with tax cases; regulate principles in both
general and specific rules of tax case procedures [3]. Al-
though as a code law country, China needs these general
rules to help jud ges to form their opinions when the cor-
responding articles cannot be found anywhere else; to
make the responsible government institutions to work
without excuses; to guide the tax administration to follow
due process. What is more important is that no sources
can be found without such a law when applying lower
level rules.
Countries like the US or the UK do not have basic tax
laws. The US has one tax code featuring all tax rules
while the UK has issued separate tax acts year by year.
But other countries, like Russia, Germany, and Japan,
have basic tax laws to define general principles and rules.
Russia enacted a basic principle law of Russian federal
tax in 1991 and was replaced by Russia federal tax code
[35] except four articles. The code is divided into two
parts. Part I, considered as general rules, was enacted in
1999 [36]. It regulates tax system, tax obligators and au-
thorities, tax elements, tax payment, administrative su-
pervision, and legal liabilities in twenty chapters. Part II
includes specific rules of corporate income tax along
with other taxes, which took effect on August 5, 2000
[36].
Germany, however, published a single basic tax law
with 415 articles under nine chapters [38]. It covers defi-
nitions and application rules, tax obligators and their du-
ties, tax incentives, procedural rules of tax payment as
well as tax collection, mandatory administrative execu-
tion, and criminal and administrative penalties with their
procedures. Under the basic law, single tax laws are gov-
erned such as corporate tax law, income tax law, valued
added tax law, and so on [37].
Japan has the similar arrangement to the Germany. It
also has a basic tax rule named “Act on General Rules

Research on the Structure of China’s Enterprise Income Tax Law System
68
for National Tax” but with much less articles, 127 claus-
es in total. The rule has ten chapters ranging from general
provisions, tax obligations, tax payment and collection,
tax delay and return, surtaxes, tax adjustment, adminis-
trative and judicial pro cedures, to penalties [3 8]. Besides,
Japan has single tax laws as well, such as Corporate Tax
Act, Income Tax Act, Act on Special Measures Con-
cerning Taxation, etc.
What is China’s choice? The answer is definite either
from scholars or the government that there has a great
purpose for China to make a basic tax law. The National
Taxation Administration responded by announcing the
consideration of making a basic tax law in 1988. Since
then, the proposal of making such a law has been sub-
mitted to the National People’s Congress three times.
Unfortunately, the drafting procedure is still under the
process.
Scholars, on the other hand, have their own thoughts.
Some think that the enactment of the law meets the re-
quirement of rule-by-law; provides standards on common
grounds for all specific tax laws; regulates important
principles and the structure of the tax system; works as a
substantive law with tax collection law as procedural law;
brings a significant change to the system. Some argue
that the law could fill the blank in the system though the
tax law legislation has a long way to go; contributes to
the legal system in the needs after entering WTO; pro-
vides an alternative for writing taxing power into consti-
tution. Others state that the law may correspond to the
principle of “no tax above the law”; may improve the tax
system in a more scientific and systematic way; may
make tax powers especially in administrative procedure
under control and supervision.
I agree with all points of views stated above. But the
scholars have raised the function of the law to a macro
and abstract level, which makes it too great to be real or
believable. I would rather express more practical and
specific because the law is made for certain goals. The
goal, I think, is that many important and common rules
cannot be found anywhere in the system. For example,
fundamental principles or rules th at help judges to decide
a case if no substantive article is applicable; the separa-
tion of powers among tax administrations, or between
taxation administrations and other government institu-
tions or public securities when a violation of tax law
happens; an d pr ivileg e s in co llecting taxes that are shared
by central government and local government, which af-
fect the use or flow of the tax revenue. Since there are
areas left unregulated, the best way to make up for those
opens is to make new laws. This is my explan ation to the
meaning of making a basic tax law in China.
Which model would China prefer, the US code model,
or the single law style like German, Japan or Russia?
Voices from scholars are unanimous that they would pick
up a single law model. The codified law is made when
the legal system is complete or at least is stable otherwise
the code has to be modified constantly. Taking into con-
sideration that China is still constructing the tax system
and for the convenience of amending, correcting, or de-
leting rules, it is better of leaving the substantiv e tax law
and the procedural law separate instead of making a code
but breaking its stability from time to time. Furthermore,
China is a developing coun try with its first trial to make a
basic tax law, a single and simple model will be more
suitable than a complicated one although maybe the co-
dification would be the final goal.
As for this issue, I would like to add a couple more
points. Making a tax code like the U.S. IRC has its ad-
vantages since it may avoid contradictions or overlapping
legislations to the large extent; however, the way is not
realistic in China in short term. Many single tax rules
have been made, and the codification process will take a
lot of time, efforts, or costs, which is much more than
making a new law. Apparently, it is not a wise choice to
pick the difficult one. On the other hand, there are two
types under the single law model, the German or Japan
type and Russia type. The German or Japan model is
more complex because both substantive and procedural
rules are included while Russia model focuses on sub-
stantive rules only. What China needs is a basic substan-
tive law parallel with the basic procedural rule, the tax
collection law, to keep the balance under the system.
Therefore, the model of Russia, the simple single basic
tax law model, wins finally.
4. The Screening of Tax Policies and Rulings
Most enterprise income tax policies or rulings are issued
by national tax administrations upon official opinions of
applying rules. They are bridging over demands of indi-
vidual taxpayers and the application of rules. When an
enterprise income tax issue arises without recognized by
laws, a ruling is used to explain how the case shall be
dealt with. In the case that nowhere else could find any
opinion on the situation, then rulings are required to fill
the blank in the area. Countries like the US, the UK,
Germany, and France circulate tax policies although
forms and authorities in charge are different.
The United States has two government administrations
to issue tax rulings. One of them is the Office of Tax
Policy of the Department of Treasury. As one of its
component office, the office assists the Secretary in de-
veloping and implementing tax policies, establishing
policy criteria reflected in regulations and rulings and
guides preparation of them with the Internal Revenue
Service to implement and administer the Internal Reve-
nue Code, and providing economic and legal policy

Research on the Structure of China’s Enterprise Income Tax Law System69
analysis for domestic and international tax policy deci-
sions [40]. The office is composed of two office, one of
which is the Office of the Tax Legislative Counsel de-
velops and reviews policy, legislation, regulations, reve-
nue rulings, revenue procedures, and other published
guidance dealing with all aspects of domestic federal
income tax law [40].
The other is the Intern al Revenu e Service (“IRS”). Th e
IRS is a bureau of the Department of the Treasury. It is
organized to carry out the respon sibilities of the secretary
of the Treasury which has full authority to administer and
enforce the internal revenue laws and has the power to
create an agency to enforce these laws [41]. The mission
of the IRS is to help America’s taxpayers understand and
meet their tax responsibilities; to correctly app ly the laws
enacted by Congress; to determine the reasonable mean-
ing of various Internal Revenue Code provisions in light
of the Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view [42].
The Chief Counsel for the Internal Revenue Service
provides advice to the IRS Commissioner on all matters
pertaining to the interpretation, administration and en-
forcement of the Internal Revenue laws [43]. It prepares
legislative proposals, regulations, revenue rulings and
procedures, actions on decisions, and other items of pub-
lic guidance and legal advice [43]. The branch that takes
care of corporate taxes is the Associate Chief Counsel
(Corporate) which is responsible for tax matters involv-
ing corporate organizations, reorganizations, liquidations,
spin offs, transfers to controlled corporations, distribu-
tions to shareholders, debt vs. equity determinations,
bankruptcies, consolidated return issues affecting affili-
ated groups of corporations [43]. It furnishes information,
advice, and assistance in the development and drafting of
internal revenue legislation [43]. It prepares revenue rul-
ings, revenue procedures, announcements, notices, and
news releases to be published for the guidance of tax-
payers and Service personnel [43].
The Department of Treasury is entitled to enact tax
regulations as well as policies while the IRS plays the
main role in making tax policies and rules. Since IRS
takes charge of tax administrative in practice, one of its
core works is to interpret the Internal Revenue Code by
issuing rules and policies. Rules involving substantive
tax law is made in the Internal Revenue Bulletin in the
form of Revenue Rulings while those procedural rules
affecting taxpayers’ rights or duties that relate to matters
under the jurisdiction of the IRS is also published in the
Bulletin in the form of Revenue Procedures [44].
The purpose of publishing Revenue Rulings and Rev-
enue Procedures in the Internal Revenue Bulletin is to
promote correct and uniform application of the tax laws
by Internal Revenue Service employees and to assist
taxpayers in attaining maximum voluntary compliance
by informing Service personnel and the public of Na-
tional Office interpretations of the internal revenue laws,
related statutes, treaties, and regulations, and statements
of Service procedures affecting the rights and duties of
taxpayers [44]. However, there are exceptions when is-
sues that answered by statute, treaty, or regulations; that
answered by rulings, opinions, or court decisions previ-
ously published in the Bulletin; that are of insufficient
importance or interest to warrant publication; determina-
tions of fact rather than interpretations of law; that con-
cerns informers and informers’ rewards; or that disclo-
sure of secret formulas, processes, business practices,
and similar information [44].
The Internal Revenue Bulletin is the authoritative in-
strument to announce official rulings and procedures,
acquiescences and nonacquiescences in adverse reported
decisions of the United States Tax Court, and other Ser-
vice pronouncements of general interest [44]. Also pub-
lished in the Bulletin are other important tax matters such
as Public Laws and related Committee Reports, Execu-
tive Orders, tax treaties, new or amended regulations
(Treasury Decisio ns) and cour t decisions [44]. Taxpayers
generally may rely upon Revenue Rulings published in
the Bulletin in determining the applicability of the tax
law to their own transactions and need not obtain ruling
letters provided (a) the facts and circumstances in their
cases are substantially the same, and (b) the positions
stated in the Revenue Rulings are still determinative
when considered in the light of subsequent legislation,
regulations, cour t decisions, and Revenue Rulings [44].
Furthermore, rulings may be issued under certain cir-
cumstances in absence of regulations. For example, if the
answer to the question raised is clearly covered in the
Code; or, if the answer in the statute is not entirely free
from doubt, but is reasonably certain. If doubt as to in-
terpretation of the law governing the question cannot be
reasonably resolved before the issuance of regulations,
no ruling is issued.
All Internal Revenue Bulletins could be found on IRS
website. When searching the publications by “Internal
Revenue Bulletin”, there are 12,554 results listed. A huge
number of rulings have been issued by IRS. When enter
the search term “revenue ruling, corporate tax”, 5420
results come out, almost one fourth of the revenue rul-
ings.
In the United King dom, the HM Treasury and the HM
Revenue & Customs (“HMRC”) are two government
organizations dealing with taxes. The Treasury’s main
tax related job is to make bills [45] while HM Revenu e &
Customs’ is to issue publications and rules in daily prac-
tice [46]. HMRC, similar to IRS in the US, was formed

Research on the Structure of China’s Enterprise Income Tax Law System
70
on April 18, 2005, following the merger of Inland Reve-
nue and HM Customs and Excise Departments, and the
work is still continuing on their office-restructuring pro-
gram [47]. They ensure the correct tax is paid at the right
time, collect and administer direct taxes such as capital
gains tax, corporation tax, income tax, inheritance tax,
and national insurance contributions as well as indirect
taxes, and so on [47].
In Germany, the Tax Department, also known as the
Revenue Administration, is the public-sector body re-
sponsible for assessing and collecting taxes [48]. The
Federal Ministry of Finance is the supreme authority of
the Federal Revenue Administration, subordinate to
which are various senior authorities which perform spe-
cific functions for which central government is responsi-
ble, such as the Federal Central Tax Office. Strictly
speaking, the Federal Revenue Administration includes
the Federal Ministry of Finance as the supreme federal
authority, the senior fed eral au thor ities, th e medium-level
authorities, local author ities and other departments.
The tax authorities have the right to issue tax rulings.
There are four kinds of rulings, the Binding Consent, the
Information Request, the Actual Understanding, and the
Good Faith [49]. These four types can be divided into
two categories. One is binding ruling that includes the
first two types, and the other is non-binding ruling that
covers the latter two types.
Binding Consent is the form of binding ruling that is
recognized by the German General Tax Act in connec-
tion with an audit [49]. As a result, it is limited to the
evaluation of past facts, which have been reviewed in
detail by the tax authorities. The Information Request is
the type of ruling, upon which a taxpayer may base a
legal claim, only pertains to any payroll tax which is to
be withheld from wages and salaries as an advance pay-
ment by employers.
Actual Understanding is a type of arrangement be-
tween the taxpayer and the fiscal authorities, which does
not permit any binding agreement regarding legal issues
to be reached but to the concrete facts of the case and
encompasses subjective intentions and conclusions [49].
The most significant implication of such an understand-
ing or agreement in practice is in the prosecution or set-
tlement of fiscal offe nses [49]. The Good Faith only rec-
ognizes vague assumptions that by applying the principle
of good faith, a commitment from the fiscal authorities as
to previous actions may be achieved if such a situation
was handled a certain way between the parties over many
years [49].
France has two kinds of tax rulings, formal rulings and
informal rulings. Formal rulings provide directions on
tax benefits that are recognized by the law while informal
rulings offer predicted results though no law confirms it
[3]. Most rulings are made by the General Tax Admini-
stration Directorate while the Tax Legislation Directorate,
another ruling maker, usually regulates general explana-
tions of tax law [3]. Generally, there are no procedural
rules about how to obtain or publish tax regulations or
rules, but taxpayers may request rulings according to
substantive law articles or administrative documents be-
cause the development of France’s rulings focuses on
certain and reasonable expectations of taxpayers instead
of administrative discretion.
In China, State Administration of Taxation (SAT)
mainly takes charge of publishing tax policies and rules
in form of “Notice” or “Reply”. Since tax laws are in
lack and rules that are supposed to be regulated by tax
laws are now included in regulations, tax rulings are tak-
ing the position of both regulations as well as rulings.
That makes rulings more than it should have.
As for enterprise income taxes, inconsistency and in-
stability are results of issuing a huge number of tax rul-
ings. The inconsistency is due to the two-tier system be-
fore January 1, 2008. That is, domestic enterprises are
regulated by the PRC Interim Regulation on Enterprise
Income Tax, enacted in the beginning of 1994, while
foreign enterprises are ruled by the PRC Income Tax
Law of Enterprise with Foreign Investment and Foreign
Enterprise, published in April 1991. Many notices were
issued for both laws, and even more to fill the gap be-
tween the two.
Moreover, tax policies changed a lot for foreign in-
vestment. For example, the tax incentive of tax refund to
foreign enterprises when purchasing domestic equipment.
The incentive was first published by SAT on September
20, 1999 to refund value added tax [50]. The next year,
the incentive was extended to tax credit for enterprise
income tax if purchase was for further investment [51].
Later, the administrative measure concerning tax credit
for enterprise income tax was published by SAT on May
18, 2000 [52]. In 2004, the preferable measure was fur-
ther awarded to enterprises that were not qualified in the
previous rulings in order to include more foreign enter-
prises as an attractive measure [53]. After five years im-
plementing the measure, many individual cases were
reported to the SAT for specific rulings. For those have
commons in certain industries, SAT issued two rulings in
2005 describing the application of the incentive under
certain circumstances [54,55]. One year later, a notice
redefining the scope of foreign enterprises and domestic
products was distributed nationwide by the SAT to limit
and clarify the application of the incentive [56]. Seven
rulings were issued on one tax issue during seven years.
The instability of tax rules is obv ious. It was not stopped
then. After the enactment of new EIT Law, both the
measure of tax refund of value added tax and that of tax

Research on the Structure of China’s Enterprise Income Tax Law System71
credit of enterprise income tax were abandoned in the
year 2008 [57,58]. Meanwhile, a new tax incentive was
made concerning value added tax refund for foreign
funded projects when purchasing domestic made equip-
ment on December 16, 2008 [59].
The legislative planning or other substitutive ways
may help with the situation. When enterprise income tax
system is improved with laws filled their positions, tax
policies reduced, rules being consistent and stable, pub-
lishing new rulings will not be arbitrary but within the
principles of tax laws and purposes. Take it pleasant, the
promulgation of new EIT Law improves the situation a
lot. The previous case is a good example. Many notices
and replies were abandoned under the new law system.
However, another problem appeared. The screening of
old rulings requires a long period of time and effort. Take
the previous case as an example again. Though the in-
centive policy was discarded, seven notices were not all
repealed but three of them were clearly announced to be
not effective anymore in later rulings. It brings confu-
sions whether the rest four are effective or not. Therefore,
clearing old rulings shall launch as soon as possible to
shorten the blurring period from transferring old system
to the new one. Moreover, the process shall be set up
routinely to make sure previous rulings are not conflicted
or overlapped. It is a complex and time-consuming job
for the reason that making many new rules is inevitable.
Therefore, how to make it efficient and effective is the
subject the government has to figure out.
5. Suggestions of Restructuring the System
Legal system is formed by rules from different legal
sources. Legal sources are distinguished by powers that
are authorized. China’s constitutional law ranks at the top
in the hierarchy followed by “basic laws” made by Na-
tional People’s Congress and other “laws” made by its
standing committee. Article 62 of China’s Constitutional
Law authorizes the Nationa l People’s Congress the pow-
er to enact and amend basic laws governing criminal of-
fenses, civil affairs, the state organs, etc. Article 67 of
China’s Constitutional Law authorizes NPC Standing
Committee the power to enact and amend laws except
those enacted by the National People’s Congress. The
level below “the law” is “the regulation” made by State
Council. Article 89 of China’s Constitutional Law au-
thorizes State Council the power to adopt administrative
measures, to enact administrative rules and regulations
and to issue decisions and orders in accordance with the
Constitution and the law.
Apply the mechanism structured by the constitutional
law, China’s ideal enterprise income tax law system
should be as followed. The first level is constitutional
law addressing the power to tax. The next level includes
the basic tax law or both the basic tax law and the tax
collection law, which are under the responsibility of Na-
tional People’s Congress. If China adopts the model to
make the basic tax law as basic substantive law parallel
to the tax collection law as basic procedural law, both
basic tax law and tax collection law sh all be in this level.
If China chooses to make basic tax law into a general
rule covering both sub stantive and procedural areas, only
the basic tax law stands in this level. The third level in-
cludes the enterprise income tax law. The fourth level
contains implementing measures that supplement to laws,
known as Regulation on the Implementation of the En-
terprise Income Tax Law of the People’s Republic of
China. The last level collects tax policies and rules issu ed
by National Taxation Administration, Ministry of Fin-
ance, Ministry of Science and Technology and so forth.
Theoretically, China confronts difficulties to complete
the system designed by the constitutional law in the sec-
ond and third level. The tax collection law was made by
NPC Standing Committee, which sits it in the category of
the law rather than the basic law. How can it parallel
with the basic tax law? On the other hand, the enterprise
income tax law was made by National People’s Congress,
which categorized it into the second level instead of the
third. Does this mean it is categorized in the same level
with the basic tax law? Then how could it lead by the
basic law? Individual income tax law is appeared in the
appropriate position but most other specific tax rules are
under the lower level.
Alternatively, redefine the system to make it feasible
and not fall in the trap. That is to merge the second and
the third level, at least th ey are all “laws” and no need to
further divide them into basic or not basic, although there
should be difference between the law made by the Na-
tional People’s Congress and that made by its standing
committee, I think. This is an easy way but not the best
choice. In my opinion, stick to the designed structure and
consider it as a final goal. The country shall make the
basic tax law as well as tax collection law while amend
the enterprise income tax law. The project of improving
China’s enterprise income tax law system has been
launched. We are happy to see the good beginning.
However, it requires further contribution of work, time
and costs. We look forward to further big leaps China’s
legislature will make in the future to solve the problem.
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