RULES FOR THE IMPLEMENTATION OF THE INCOME TAX LAW FOR ENTERPRISES WITH FOREIGN INVESTMENT AND FOREIGN ENTERPRISES

    Article 1  These Rules are formulated in accordance with the provisions
of Article 29 of the Income Tax Law of the People’s Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises (hereinafter
referred to as the “Tax Law”).

    Article 2  “Income from production and business operations” mentioned in
Article 1, paragraph 1 and paragraph 2 of the Tax Law means income from
production and business operations in manufacturing, mining, communications
and transportation, construction and installation, agriculture, forestry,
animal husbandry, fishery, water conservation, commerce, finance, service
industries, exploration and exploitation, and in other trades.

    “Income from other sources” mentioned in Article 1, paragraph 1 and
paragraph 2 of the Tax Law means profits (dividends), interest, rents, income
from the transfer of property, income from the provision or transfer of
patents, proprietary technology, income from trademark rights and copyrights
as well as other nonbusiness income.

    Article 3  “Enterprises with foreign investment” mentioned in Article 2,
paragraph 1 of the Tax Law and “foreign companies, enterprises and other
economic organizations which have establishments or places in China and
engage in production or business operations” mentioned in Article 2,
paragraph 2 of the Tax Law are, unless otherwise especially specified,
generally all referred to as “enterprises” in these Rules.

    “Establishments or places” mentioned in Article 2, paragraph 2 of the Tax
Law refers to management organizations, business organizations, administrative
organizations and places for factories and the exploitation of natural
resources, places for contracting of construction, installation, assembly,
and exploration work, places for the provision of labor services, and
business agents.

    Article 4  “Business agents” mentioned in Article 3, paragraph 2 of these
Rules means companies, enterprises and other economic organizations or
individuals entrusted by foreign enterprises to engage as agents in any of
the following:

    (1) representing principals on a regular basis in the arranging of
purchases and signing of purchase contracts and the purchasing of commodities
on commission;

    (2) entering into agency agreements or contracts with principals, storing
on a regular basis products or commodities owned by principals, and delivering
on behalf of principals such products or commodities to other parties; and

    (3) having authority to represent principals on a regular basis in
signing of sales contracts or in accepting of purchase orders.

    Article 5  “Head office” mentioned in Article 3 of the Tax Law refers to
the central organization which is established in China by an enterprise with
foreign investment as a legal person pursuant to the laws of China and which
is responsible for the management, operations and control over such
enterprise.

    Income from production and business operations and other income derived
by the branches within or outside China of an enterprise with foreign
investment shall be consolidated by the head office for purposes of the
payment of income tax.

    Article 6  “Income derived from sources inside China” mentioned in
Article 3 of the Tax Law refers to:

    (1) income from production and business operations derived by enterprises
with foreign investment and foreign enterprises which have establishments or
places in China, as well as profits (dividends), interest, rents, royalties
and other income arising within or outside China actually connected with
establishments or sites established in China by enterprises with foreign
investment or foreign enterprises;

    (2) the following income received by foreign enterprises which have no
establishments or sites in China:

    (a) profits (dividends) earned by enterprises in China;

    (b) interest derived within China such as on deposits or loans, interest
on bonds, interest on payments made provisionally for others, and deferred
payments;

    (c) rentals on property leased to and used by lessees in China;

    (d) royalties such as those received from the provision of patents,
proprietary technology, trademarks and copyrights for use in China;

    (e) gains from the transfer of property, such as houses, buildings,
structures and attached facilities located in China and from the assignment
of landuse rights within China;

    (f) other income derived from China and stipulated by the Ministry of
Finance to be subject to tax.

    Article 7  In respect of Chineseforeign contractual joint ventures that
do not constitute legal persons, each partner thereto may separately compute
and pay income tax in accordance with the relevant tax laws and regulations
of the State; income tax may, upon approval by the local tax authorities of
an application submitted by such enterprises, be computed and paid on a
consolidated basis in accordance with the provisions of the Tax Law.

    Article 8  “Tax year” mentioned in Article 4 of the Tax Law begins on
January 1 and ends on December 31 under the Gregorian Calendar.

    Foreign enterprises that have difficulty computing taxable income in
accordance with the tax year stipulated in the Tax Law may, upon approval by
the local tax authorities of an application submitted by such enterprises,
use their own 12month fiscal year as the tax year.

    Enterprises commencing business operations in the middle of a tax year or
actually operating for a period of less than 12 months in any tax year due to
such factors as merger or shutdown shall use the actual period of operations
as the tax year.

    Enterprises that undergo liquidation shall use the period of liquidation
as the tax year.

    Article 10  “The formula for the computation of taxable income” mentioned
in Article 4 of the Tax Law is as follows:

    (1) Manufacturing:

    (a) taxable income = (profit on sales) + (profit from other operations) +
(non-business income) – (non-business expenses);

    (b) profit on sales = (net sales) – (cost of products sold) – (taxes on
sales) – [ (selling expenses) + (administrative expenses) +
(finance expenses) ];

    (c) net sales = (gross sales) – [ (sales returns) + (sales discounts and
allowances) ];

    (d) cost of products sold = (cost of products manufactured for the period)
+ (inventory of finished products at the beginning of the period) –
(inventory of finished products at the end of the period);

    (e) cost of products manufactured for the period = (manufacturing costs
for the period) + (inventory of semifinished products and products in process
at the beginning of the period) – (inventory of semi-finished products and
products in process at the end of the period);

    (f) manufacturing costs for the period = (direct materials consumed in
production for the period) + (direct labour) + (manufacturing expenses).

    (2) Commerce:

    (a) taxable income = (profit on sales) + (profit from other operations) +
(non-business income) – (non-business expenses);

    (b) profit on sales = (net sales) – (cost of sales) – (taxes on sales) –
[ (selling expenses) + (administrative expenses) + (finance expenses) ];

    (c) net sales = (gross sales) – [ (sales returns) + (sales discounts and
allowances) ];

    (d) cost of sales = (inventory of merchandise at the beginning of the
period) + { (purchase of merchandise during the period) –
[ (purchase returns) + (purchase discounts and allowances) ] +
(purchasing expenses) } – (inventory of merchandise at the end of the period).

    (3) Service trades:

    (a) taxable income = (net business income) + (non-operating income) –
(non-operating expenses);

    (b) net business income = (gross business income) – [ (taxes on business
income) + (operating expenses) + (administrative expenses) +
(finance expenses) ].

    (4) Other lines of business:

    Computations shall be made with reference to the above formulas.

    Article 11  The computation of taxable income of an enterprise shall, in
principle, be on an accrual basis.

    The following income from business operations of an enterprise may be
determined by stages and used as the basis for the computation of taxable
income:

    (1) Where products or commodities are sold by instalment payment methods,
income from sales may be recognized according to the invoice date of the
products or commodities to be delivered; income from sales may also be
recognized according to the date of payment to be made by the buyer as agreed
upon in the contract;

    (2) Where construction, installation and assembly projects, and provision
of labour services extend beyond one year, income may be recognized according
to the progress of the project or the amount of work completed;

    (3) Where the processing or manufacturing of heavy machinery, equipments
and ships for other enterprises extends beyond one year, income may be
recognized according to the progress of the project or amount of work
completed.

    Article 12  Where Chinese-foreign contractual joint ventures operate on
the basis of productsharing, the partners thereto shall be deemed to receive
income at the time of the division of the products; the amount of income
shall be computed according to the price sold to third party or with
reference to prevailing market prices.

    Where foreign enterprises are engaged in the cooperative exploration of
petroleum resources, the partners thereto shall be deemed to receive income
at the time of the division of the crude oil; the amount of income shall be
computed according to a price which is adjusted periodically with reference
to the international market prices of crude oil of similar quality.

    Article 13  In respect of income obtained by enterprises in the form of
non-monetary assets or rights and interests, such income shall be computed or
appraised with reference to prevailing market prices.

    Article 14  “Exchange rate quoted by the State exchange control
authorities” mentioned in Article 21 of the Tax Law refers to the buying rate
quoted by the State Administration of Exchange Control.

    Article 15  In respect of income obtained by enterprises in foreign
currency, upon payment of income tax in quarterly instalments in accordance
with the provisions of Article 15 of the Tax Law, taxable income shall be
computed by converting the income into Renminbi according to the exchange
rate quotation on the last day of the quarter. At the time of final
settlement following the end of the year, no recomputation and reconversion
need be made in respect of income in a foreign currency for which tax has
already been paid on a quarterly basis; only that portion of the foreign
currency income of the entire year for which tax has not been paid shall, in
respect of the computation of taxable income, be converted into Renminbi
according to the exchange rate quotation on the last day of the tax year.

    Article 16  Where an enterprise is unable to provide complete and
accurate certificates of costs and expenses and is unable to correctly
compute taxable income, the local tax authorities shall determine the rate of
profit and compute taxable income with reference to the profit level of other
enterprises in the same or similar trade. Where an enterprise is unable to
provide complete and accurate certificates of revenues and is unable to
report income correctly, the local tax authorities shall appraise and
determine taxable income by the use of such methods as cost (expense) plus
reasonable profits.

    When the tax authorities appraise and determine profit rates or revenues
in accordance with the provisions of the preceding paragraph, and where other
treatment is provided by the laws, regulations and rules, such other
treatment shall be applicable.

    Article 17  Foreign air transportation and ocean shipping enterprises
engaged in international transport business shall use 5% of the gross
revenues from passenger and cargo transport and shipping services arising
within China as taxable income.

    Article 18  Where an enterprise with foreign investment invests in
another enterprise within China, the profits (dividends) so obtained from the
enterprise receiving such investment may be excluded from taxable income of
the enterprise; however, expenses and losses incurred in such abovementioned
investments shall not be deducted from taxable income of the enterprise.

    Article 19  Unless otherwise stipulated by the State, the following items
shall not be itemized as costs, expenses or losses in the computation of
taxable income:

    (1) expenses in connection with the acquisition or construction of fixed
assets;

    (2) expenses in connection with the transfer or development of intangible
assets;

    (3) interest on capital;

    (4) various income tax payments;

    (5) fines for illegal business operations and losses due to the
confiscation of property;

    (6) surcharges and fines for overdue payment of taxes;

    (7) the portion of losses due to natural disasters or accidents for which
there has been compensation;

    (8) donations and contributions other than those used in China for public
welfare or relief purposes;

    (9) royalties paid to the head office;

    (10) other expenses not related to production or business operations.

    Article 20  Reasonable administrative expenses paid by a foreign
enterprise with an establishment or site in China to the head office in
connection with production or business operations of the establishment or
site shall be permitted to be itemized as expenses following agreement by the
local tax authorities after an examination and verification of documents of
proof issued by the head office in respect of the scope of the administrative
expenses, total amounts, the basis and methods of allocation, which shall be
provided together with an accompanying verification report of a certified
public accountant.

    Administrative expenses in connection with production and business
operations shall be allocated reasonably between enterprises with foreign
investment and their branches.

    Article 21  Reasonable interest payments incurred on loans in
connection with production and business operations shall be permitted to be
itemized as expenses following agreement by the local tax authorities after
an examination and verification of documents of proof, which shall be
provided by the enterprises in respect of the loans and interest payments.

    Interest paid on loans used by enterprises for the purchase or
construction of fixed assets or the transfer or development of intangible
assets prior to  the assets being put into use shall be included in the
original value of the assets.

    “Reasonable interest” mentioned in the first paragraph of this Article
refers to interest computed at a rate not higher than normal commercial
lending rates.

    Article 22  Entertainment expenses incurred by enterprises in connection
with production and business operations shall, when supported by authentic
records or invoices and vouchers, be permitted to be itemized as expenses
subject to the following limits:

    (1) Where annual net sales are 15 million yuan (RMB) or less, not to
exceed 0.5% of net sales; for that portion of annual net sales that exceeds
15 million yuan (RMB), not to exceed 0.3% of that portion of net sales.

    (2) Where annual gross business income is 5 million yuan (RMB) or less,
not to exceed 1% of annual gross business income; for that portion of annual
gross business income that exceeds 5 million yuan (RMB), not to exceed 0.5%
of that portion of annual gross business income.

    Article 23  Exchange gains or losses incurred by enterprises during
preconstruction or during production and business operations shall, except as
otherwise provided by the State, be appropriately itemized as gains or losses
for that respective period.

    Article 24  Salaries and wages, and benefits and allowances paid by
enterprises to employees shall be permitted to be itemized as expenses
following agreement by the local tax authorities after an examination and
verification of the submission of wage scales and supporting documents and
relevant materials.

    Foreign social security premiums paid by enterprises to employees working
in China shall not be itemized as expenses.

    Article 25  Enterprises engaged in such businesses as credit and leasing
operations may, on the basis of actual requirements and following approval by
the local tax authorities of a report thereon, provide year-by-year bad debt
provisions, the amount of which shall not exceed 3% of the amount of the
year-end loan balances (not including inter-bank loans) or the amount of
accounts receivable, bills receivable and other such receivables, to be
deducted from taxable income of that year.

    The portion of the actual bad debt losses incurred by an enterprise which
exceeds the bad debt provisions of the preceding year may be itemized as a
loss in the current year; the portion less than the bad debt provisions of
the previous year shall be included in taxable income of the current year.

    Bad debt losses mentioned in the preceding paragraph shall be subject to
approval after examination and verification by the local tax authorities.

    Article 26  “Bad debt losses” mentioned in Article 25, paragraph 2 of
these Rules refers to the following accounts receivable:

    (1) due to the bankruptcy of the debtor, collection is still not possible
after the use of the bankruptcy assets for settlement;

    (2) due to the death of the debtor, collection is still not possible
after the use of the estate for repayment;

    (3) due to the failure of the debtor to fulfil repayment obligations for
over two years, collection is still not possible.

    Article 27  Accounts receivable already itemized as bad debt losses which
are recovered in full or in part by an enterprise in a subsequent year shall
be included in taxable income of the year of recovery.

    Article 28  Foreign enterprises with establishments or places in China
may, except as otherwise provided by the State, deduct as expenses foreign
income tax, which has been paid on profits (dividends), interest, rents,
royalties and other income received from outside China and actually connected
with such establishments or places.

    Article 30  “Fixed assets of enterprises” means houses, buildings and
structures, machinery, machanical apparatus, means of transport and other
such equipment, appliances and tools related to production and business
operations with a useful life of one year or more. Items not in the nature of
major equipment which are used for production or business operations and
which have a unit value of 2000 yuan (RMB) or less, or with a useful life of
two years or less may be itemized as expenses on the basis of actual
consumption.

    Article 31  The valuation of fixed assets shall be based on original cost.

    The original cost of purchased fixed assets shall be the purchase price
plus transportation expenses, installation expenses and other related
expenses incurred prior to the use of the assets.

    The original cost of fixed assets manufactured or constructed by an
enterprise itself shall be the actual expenses incurred in their manufacture
or construction.

    The original cost of fixed assets treated as investments shall, giving
consideration to the degree of wear and tear of the fixed assets, be such
reasonable price as is specified in the contract, or a price appraised with
reference to the relevant market price plus the relevant expenses incurred
prior to the use thereof.

    Article 32  Depreciation of fixed assets of an enterprise shall be
computed commencing with the month following the month in which they are
first put into use. The computation of depreciation shall cease in the month
following the month in which the fixed assets cease to be used.

    All investments made during the development stage by enterprises engaged
in the exploitation of oil resources shall, taking the oil (gas) field as a
unit, be aggregated and treated as capital expenditures; the computation of
depreciation shall begin in the month following the month in which the
oil (gas) field commences commercial production.

    Article 33  In respect of the computation of depreciation of fixed
assets, the salvage value shall first be estimated and deducted from the
original cost of the assets. The salvage value shall not be less than 10% of
the original value; any request for retaining a lower salvage value or not
salvage value must be approved by the local tax authorities.

    Article 34  Depreciation of fixed assets shall be computed using the
straight-line method. Where it is necessary to use any other method of
depreciation, an application may be filed by an enterprise which, following
examination and verification by the local tax authorities, shall be reported
level-by-level to the State Tax Bureau for approval.

    Article 35  The computation of the minimum useful life in respect of the
depreciation of fixed assets is as follows:

    (1) for houses and buildings: 20 years;

    (2) for railway rolling stock, ships, machinery, mechanical apparatus,
and other production equipment: 10 years;

    (3) for electronic equipment and means of transport other than railway
rolling stock and ships, as well as as such fixtures, tools and furnishings
related to production and business operations: 5 years.

    Article 36  Depreciation of fixed assets in the nature of investments
during the development stage and subsequent stages of an enterprise engaged
in the exploitation of oil resources may be computed on a consolidated basis
without retaining salvage value; the period of depreciation shall not be less
than six years.

    Article 37  “Houses and buildings” mentioned in Article 35, Item (1) of
these Rules means houses, buildings and attached structures used for
production and business operations, and living quarters and welfare
facilities for employees, the scope of which is as follows:

    — houses, including factory buildings, business premises, office
buildings, warehouses, residential buildings, canteens, and other such
buildings;

    — buildings, including towers, ponds, troughs, wells, racks, sheds (not
including temporary, simply constructed structures such as work sheds and
vehicle sheds), fields, roads, bridges, platforms, piers, docks, culverts,
gas stations as well as pipes, smokestacks, and enclosing walls that are
detached from buildings, machinery and equipment;

    Facilities attached to buildings and structures mean auxiliary facilities
that are inseparable from buildings and structures and for which no separate
value is computed, including, for example, building and structure ventilation
and drainage systems, oil pipelines, communication and power lines, elevators
and sanitation equipment.

    Article 38  The scope of railway rolling stock, ships, machinery,
mechanical apparatus and other production equipment mentioned in Article 35,
Item (2) of these Rules is as follows:

    — “railway rolling stock” includes various types of locomotives,
passenger coaches, freight cars, as well as auxiliary facilities on rolling
stock for which no separate value is computed;

    — “ships” includes various types of motor ships as well as auxiliary
facilities on ships for which no separate value is computed;

    — “machinery, mechanical apparatus and other production equipment”
includes various types of machinery, mechanical apparatus, machinery units,
production lines, as well as auxiliary equipment such as various types of
power, transport and conduction equipment.

    Article 39  The scope of electronic equipment, means of transport other
than railway rolling stock and ships mentioned in Article 35, Item (3) of
these Rules is as follows:

    — “electronic equipment” means equipment comprising mainly integrated
circuits, transistors, electron tubes and other electronic components whose
primary functions are to bring into use the application of electronic
technology (including software), including computers as well as
computercontrolled robots, and digitalcontrol or programcontrol systems.

    — “means of transport other than railway rolling stock and ships”
includes airplanes, automobiles, trams, tractors, motor bikes (boats),
motorized sailboats, sailboats, and other means of transport.

    Article 40  Where, for special reasons, it is necessary to shorten the
useful life of fixed assets, an application may be submitted by an enterprise
to the local tax authorities which following examination and verification
shall be reported level-by-level to the State Tax Bureau for approval.

    Fixed assets which for special reasons as mentioned in the preceding
paragraph require the useful life to be shortened include:

    (1) machinery and equipment su