5. TREATMENT OF CAPITAL EXPENDITURE
The capital expenditure is the purchase of assets that can be used for more than one year or improvement that increasing the capacity or new function of the existing assets. The revenue expenditure is the cost of restoration of an asset so that the asset can maintain its original capacity and function. The revenue expenditure should be charged into the income statements in the year it incurs; while the capital expenditure (including equipment or tools with unit value over RMB2,000 and the useful lives more than 2 years) should be capitalized and depreciated or amortized over a period for an enterprise as follows:
5.1 Tangible assets
The depreciation should be provided in the next month following the month of usage of fixed assets and stop depreciation in the next month of cessation of the usage. There is a presumed 5% of scrap value in the calculation of the deprecation for tax
Items Allowable shortest
depreciation period
20 years
10 years
5 years
Construction and buildings
Trains, ships, machinery, equipment
Electronic equipment, other transportation vehicles and other tools or furniture
Machinery for integrated circuit industry (after tax bureau’s approve)
3 years purpose. The taxpayer can apply to the tax bureau ftr the shorter life or tower scam value with reasonable ground.
The allowable annual depreciation = (Original cost scrap value) / depreciation
period
5.2 Low vaIue article
They can he written off upon purchase or amortized over periods.
5.3 Intangible asset
Intangible asset should be amortized over the shorter of the beneficial period specified in the contract and the period under the relevant laws e.g. patent law. If no specification under the contract or the laws, the minimum amortization period is 10 years (software that purchased independently from the computer, it is 2 -5 years after approval).
5.4 Deferred assets
(a) Pre-operating expenses
The pre-operating expenses include the wages, salaries, training, traveling, registration, and exchange less, interest expenses incurred during the pre-operating period. it is the period from the date of approval of establishment of (he enterprise to the sort of production (including the trail run). therefore it does not include the feasibility study cost as it incurred before the approval of establishment of the enterprise.
It starts to be amortized from the next month following the start of production (including the trail run) over not shorter than 5 years. The amortization would be made on straight line basis without any scrap value.
(h) Leasehold improvement
it is the improvement made to the asset that is not belonging to the taxpayer. E.g. the taxpayer makes decoration to it office that is leased from the land load. The improvement can be amortized evenly without scrap value over not shorter than 5 years.
(c) Assets improvement
if the expenditure satisfies one of the following conditions, it can be treated as capita) expenditure:
the expenditure is more than 20% of the original cost of the assets;
the assets can be used for more than 2 years after the improvement;
the assets can have new function.
Once satisfied, the expenditure can be added to the cost of original assets. lithe assets are already fully depreciated, the expenditure can be depreciated evenly over 5 years

6. TREATMENT OF LOSSES
The taxable losses can be carried forward to set off against the taxable income of the next 5 consecutive tax years. It is irrelevant if profits are earned or losses are suffered in any one or more of those 5 consecutive years.
A domestic enterprise is subject to the worldwide tax and if an enterprise suffers overseas losses, the loss can be combined with other profits from source abroad but not the profit earned within China.