26th Session Watch Pt. 2: A Closer Look at the Three Bills Under Review (UPDATED)

Update (Feb. 24, 2017): By a vote of 156-0, with one abstention, the NPCSC approved the revised Red Cross Society Law, which will take effect on May 8, 2017, the World Red Cross and Red Crescent Day.

By a vote of 156–1, the NPCSC also passed an amendment to the Enterprise Income Tax Law (Amendment), effective today. The change made by the Amendment is discussed below. Zhang Tianli, an official with the Ministry of Finance, stated at a press conference today that the Amendment would retroactively apply to charitable donations made before today but after September 1, 2016, when the Charity Law came into force. Zhang also said that the State Council would soon amend relevant regulations to implement the Amendment.

The NPCSC today also approved three cabinet appointments. He Lifeng was promoted from Deputy Director to Director of the National Development and Reform Commission. Zhong Nan was appointed Minister of Commerce; he was a vice commerce minister and the Ministry’s International Trade Representative. Bloomberg profiles the two in this article. Lastly, Zhang Jun was appointed Minister of Justice. Before heading the Justice Ministry—which, among other duties, oversees China’s lawyers, prisons, and legal aid—Zhang was a Deputy Secretary of the Communist Party’s Central Commission for Disciplinary Inspection. He also twice served as a Vice President of the Supreme People’s Court. He has a Doctorate in Criminal Law.

We expect the NPCSC to solicit public comments on the draft revision to the Anti-Unfair Competition Law next week. The NPC’s annual plenary session will open on March 5, and we’ll soon post a preview of our coverage of the session.

Yesterday the 12th NPC Standing Committee (NPCSC) opened its 26th session, where the following three bills were submitted for deliberation. The following is a summary of the content of these legislations based on multiple media reports.

Revision to the Red Cross Society Law

Prior to this Session, the draft revision had already been considered twice by the NPCSC.  Based on media reports, the newest draft revision (3rd Draft) submitted yesterday is not drastically different from the 2nd Draft, to which the following minor changes were made:

  1. A Red Cross’s board of supervisors—a body created by the proposed revision to strengthen internal supervision—shall “democratically” choose its chief supervisor and deputy chief supervisors. The 2nd Draft didn’t specify a method for their selection.
  2. The 3rd Draft added penalties for a Red Cross’s failure to give feedback to its donors on the use of donations. The penalties include corrections ordered by governmental auditing offices and departments of civil affairs, and disciplinary actions against responsible persons “when the circumstances are serious.”
  3. The 3rd Draft no longer requires the Red Cross to “carry out” (开展) body and organ donations. Instead, the Red Cross now only needs to “participate in and promote” (参与、推动) such efforts, after various NPCSC members questioned the Red Cross’s (medical) expertise in those fields.

The NPCSC is expected to pass the draft revision Friday afternoon. Further changes may be made to the 3rd Draft prior to the vote. The full text of the revised Red Cross Society Law is expected to be released soon thereafter.

Amendment to the Enterprise Income Tax Law

According to the media, the scope of this draft amendment is very limited, and purely for the purpose of conforming to Article 80 of the new Charity Law, which took effect last September. Article 80 provides in part that:

The amount of charitable donations made by an enterprise beyond the amount that is legally permitted to be deducted from income tax for that year is allowed to be carried over into the calculation of taxable income over the next three years.

This provision, however, is at odds with Article 9 of the current Enterprise Income Tax Law, which provides that

Expenditure for charitable donations may be deducted when computing taxable income if it is within 12% of the total annual revenue.

without allowing the portion exceeding 12% of the total annual revenue to be carried over to the next three years. The draft amendment eliminated this inconsistency by explicitly permitting the latter situation.

It’s not immediately clear whether the NPCSC will vote on (and therefore approve) the draft amendment this Friday. Judging from the amendment’s scope, however, we think it will.

Revision to the Anti-Unfair Competition Law

The draft revision (Draft) made substantial changes to the current Law, which was enacted in 1993 and has never been amended. Many of the following changes were seen in a previous version of the revision released for public comments (Comments Draft) in February 2016. Most of the translations below are derived from China Law Translate’s translation of the Comments Draft.

We expect the NPCSC to solicit public comments on the Draft soon after this Session concludes.

Definition of Unfair Competition

 The Draft defines “unfair competition” as “a business operator’s conduct that harms other operators’ lawful rights and interests and disturbs competition order by using improper means to engage in market transactions, in violation of” the requirements that “[b]usiness operators [] follow the principles of voluntariness, equality, fairness, honesty, and credibility in economic activities, and observe the generally recognized business ethics.”

Notably, the Draft includes a new “catch-all” provision that authorizes the State Council to designate as unfair competition any “market transaction practice” that “seriously undermines competition order” and therefore must be prohibited, but which is otherwise not explicitly banned by the Law.

Unfair Competition on the Internet

Perhaps mindful of the high-profile anti-monopoly suit between two Chinese Internet giants, Tencent and Qihoo, the State Council includes in the Draft a series of provisions targeting Internet companies. The Draft bans Internet business operators from using technological means to carry out acts that “influence user choices and interfere with other operators’ normal operations,” including (according to Beijing News):

  1. without consent, inserting links in network products or services lawfully provided by other operators, causing forced target jumping [so-called “traffic hijacking”];
  2. misleading, deceiving, or compelling users to modify, close, or uninstall network products or services lawfully provided by other operators;
  3. interfering with or disrupting the normal operation of network products or services lawfully provided by other operators; and
  4. maliciously causing incompatibility with network products or services lawfully provided by other operators.

Commercial Bribery

The Draft expands the current Law’s commercial-bribery provisions by further prohibiting trade counterparts from bribing “third parties who might influence the transaction” and vice versa. The current Law’s ban is limited to bribery between parties to a transaction.

Intermediary agencies connecting hospitals and pharmaceutical companies are a type of third parties targeted by this new provision, said experts interviewed by Xinhua. Some hospitals are said to require pharmaceutical companies to use designated intermediary agencies as distributors, otherwise the hospitals won’t buy drugs from them. Such agencies neither sell nor buy drugs, nor do they provide material services to drug sales. Their only role is to facilitate the transmission of “improper interests,” or bribery, between the actual trade counterparts, from which they also reap benefits.

The Draft also stipulates that an employee’s act to seek trade opportunities or competitive advantage through bribery on the business operator’s behalf will be viewed as the operator’s own act, except when there is evidence proving otherwise.

Trade Secrets Protection

The Draft increases protection for “trade secrets,” defined in the Comments Draft as “technological information and business information that are not publicly known, have commercial value, and are subject to corresponding secrecy measures taken by the rights holder.” According to Beijing Youth Daily, a rights holder’s current or former employee who obtains the rights holder’s trade secrets “by theft, bribery, intimidation, or other improper tactics” is viewed as infringing on the rights holder’s trade secrets.

Moreover, a third party who “clearly knows or should know” that trade secrets have been obtained via the unlawful acts mentioned, “but obtains, discloses, uses, or allows others to use” such trade secrets, is viewed as infringing on the rights holder’s trade secrets as well.

Credit Discipline as Punishment

Reflecting China’s ongoing efforts to build a social credit system, the Draft (unlike the Comments Draft) provides that business operators who engage in unfair competition and receive administrative punishment as a result will have such violations recorded in their credit files. Those with “bad credit” will face restrictions on a wide range of activities, from applying for bank loans to air travel.

In addition, under the Draft, civil damages take precedence over administrative fines when a business operator is liable for both but cannot afford to pay both.

Lastly, the Draft increases (usually by several times) the fines that may be imposed on violations of the Law.

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