Two Sessions and Tax Policy
The CPC Central Committee's proposals for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development were approved at the fifth plenary session of the 19th CPC Central Committee. The implementing of which is due for consideration and approval in the present "Two Sessions" of the Chinese People's Political Consultative Conference and the National People's Congress this March 2021.
The goals of the Five-Year Plan correspond fiscal and tax plans which the Chinese state has implemented. Below we have grouped these incentive policies into their macro-economic groups.
Innovation and Technology
Companies which have qualified as high-tech enterprises or small and medium-sized technology enterprises in the current year, may carry their unrecovered losses from the 5 years before their qualification year forward. The longest carry-over period has been extended from 5 years to 10 years.
When small and medium high-tech enterprises use undistributed profits, surplus reserves, and capital reserves to increase their share capital to individual shareholders, if it is indeed difficult for individual shareholders to pay individual income tax at one time, they can formulate an instalment tax payment plan and pay in installments within 5 calendar years and submit relevant information to the competent tax authority for record.
Income from the transfer of technology obtained from transferring non-exclusive licenses for more than 5 years are in included in the scope of technology transfer income which enjoys a preferential corporate income tax. The part of the annual technology transfer income which does not exceed 5 million yuan is exempted from corporate income tax; the part that exceeds 5 million yuan is levied at a half rate.
Semiconductor Industry
To promote the development of the Semiconductor industry, primarily the integrated circuit sector and the software industry the State Council issued a number of circulars with incentive policies, the most notable of which is Guo Fa [2020] No.8; which has implemented the following tax incentives for manufacturers;
· An integrated circuit manufactures, which manufactures integrated circuits with a line width of less than 28 nanometers (inclusive), with the operation period of more than 15 years, may be eligible for 10-year CIT exemption.
· An integrated circuit manufacture, which manufactures integrated circuits with a line width of less than 65 nanometers (inclusive), with the operation period of more than 15 years, may be eligible for 5-year CIT exemption + 5 years CIT 50% reduction (5+5 CIT holiday).
· An integrated circuit manufacturer, which manufactures integrated circuits with a line width of less than 130 nanometers (inclusive), with the operation period of more than 10 years, may be eligible for 2-year CIT exemption + 3 years CIT 50% reduction (2+3 CIT holiday).
· An integrated circuit design, equipment, materials, packaging, or testing enterprise or a software enterprise, may be eligible for 2-year CIT exemption + 3 years CIT 50% reduction (2+3 CIT holiday).
· State-encouraged key integrated circuit design and software enterprise may be eligible for 5-year CIT exemption (commencing from the first profit-making year) + preferential tax rate of 10% for subsequent years.
Small Scale Market Economy
The preferential Corporate Income Tax Policies introduced in Caishui no. 13 [2019] "Implementing the Policy on Inclusive Tax Reliefs for Small and Micro Businesses" continue in 2021, which introduced a preferential Company Income Tax rate for small and micro companies with a taxable income up to 3 million CNY. In particular:
• small scale and low-profit enterprises with taxable income lower than 1 million CNY can enjoy a CIT rate of 20%, that would be applied on 25% of their income, leaving the residual 75% tax-free and leading to an effective rate of 5%;
• small scale and low-profit enterprises with taxable income between 1 million CNY to 3 million CNY can enjoy a preferential CIT rate of 20%, that would be applied on 50% of their income, leaving the residual 50% tax-free and leading to an effective rate of 10%.
The above-mentioned small scale and low-profit enterprises refer to companies engaged in non-restricted and non-prohibited industries and meeting all the following conditions:
• annual taxable income less or equal to 3 million CNY;
• number of employees not exceeding 300; and
• total assets not exceeding 50 million CNY.
From October 1, 2019 to December 31, 2021, taxpayers of the life service sector are allowed to add an extra 15% based on the deductible input VAT for the current period for deduction of the tax payable (referred to as the "15% super-deduction policy"). Life services refer to various service activities provided to meet the daily needs of urban and rural residents. Including cultural and sports services, education and medical services, tourism and entertainment services, catering and accommodation services, residents' daily services and other life services.
According to the Law of the People's Republic of China on Enterprise Income Tax and its Implementing Regulations, matters relating the pre-tax deduction of advertising expenses and business promotion expenses are announced as follows:
· For advertising expenses and business promotion expenses incurred by an enterprise manufacturing or selling cosmetics, manufacturing medicine, or manufacturing beverage (excluding liquor), the part less than 30% of the sales (business) revenue in the current year is permitted to be deducted; and the part in excess of the aforesaid quota is permitted to be carried forward to the subsequent tax years for deduction.
Rural revitalization and healthcare
As far as rural revitalization is concerned, Chinese western regions are the most targeted ones. In regions designated for rural redevelopment, taxpayers which lease state-owned agricultural land to agricultural producers for agricultural production, are exempted from value-added tax.
In addition there is a preferential tax rate of 15% in corporate income tax for encouraged industrial enterprises located in the western and north western regions of China.
The pre-tax deduction of advertising expenses and business promotion expenses incurred by an enterprise manufacturing or selling cosmetics, manufacturing medicine, or manufacturing beverage (excluding liquor), the part less than 30% of the sales (business) revenue in the current year is permitted to be deducted; and the part in excess of the aforesaid quota is permitted to be carried forward to the subsequent tax years for deduction.
In terms of healthcare to incentivise the development of the rare disease pharmaceutical industry there are special VAT incentive policies: General value-added taxpayers who produce, sell, wholesale and retail rare disease drugs may choose to calculate and pay VAT at a 3% collection rate in accordance with the simplified method.