Tax Deductions for Charitable Contributions
The ongoing COVID-19 epidemic has seen many international firms fulfilling their corporate social responsibility by providing material support to the localities where they are based through various means such as the donation of masks and health care supplies to the charitable donations of funds to registered charities in China.
To encourage such selflessness China has a number of regulations which govern charitable donations.
The Law of the People's Republic of China on Donations for Public Welfare (1999), the Charity Law (2016), the Enterprise Income Tax law and the Individual Income Tax Law all contain provisions for legal and natural persons to enjoy tax benefits when they make contributions for public welfare.
Pre-tax deduction of public welfare donations
The pre-tax deduction of public welfare donations refers to legal or natural persons support of public welfare organisations (charities) such sectors as education, poverty alleviation, disaster relief and public health events (pandemics). Donation expenditures which are processed through public welfare social organisations in China, or to the people's government at or above the county level, and departments and state organs can be deducted in the calculation of the taxable income of legal or natural persons.
The Enterprise Income Tax Law and the Notice of the Ministry of Finance and the General Administration of Taxation on the Relevant Policies of The Pre-Tax Carrying and Deduction of Public Interest Donation Expenditures stipulate that the expenditure of public welfare donations incurred by enterprises shall be no more than 12% of the total annual profits. Any portion exceeding 12% of the total annual profit shall be carried over and allowed to be deducted in the calculation of taxable income within the following three years.
The Personal Income Tax Law stipulate that individuals who make donations to public welfare charities such as education, poverty alleviation and disaster relief can be deduct the contributions from their taxable income provided that their donations do not exceed 30% of their income.
Pre-tax deductions for public welfare donations are typically made through public welfare social organizations in China, the people's governments above the county level and/or other state organs. The people's government and state organs shall provide pre-tax deductions for public welfare donations and as long as the donor satisfies the other conditions prescribed by law, they may, in accordance with the law, deduct the amount of income tax due in proportion to the charitable contribution.
If donations are made through public welfare social organizations, the charitable party should ascertain whether the public welfare social organizations are eligible for pre-tax deduction for public welfare donations.
In accordance with the provisions of the Supplementary Notice on Pre-tax Deduction of Public Welfare Donations, the Ministry of Finance, the State Administration of Taxation and the Ministry of Civil Affairs, as well as local departments of the state organs, jointly announce each year the public welfare social organizations which have qualified for pre-tax deductions of public welfare donations. If a person makes a donation to a charity which is not on the current list of permitted public social welfare organizations the charitable donation will not be a deductible.
In an exemption specific to the COVID-19 epidemic, hospitals are now entitled to issue a donation letter to the charitable person which can be submitted as supporting evidence in the application for a deduction.
Deductible donations are not just limited to capital donations, the Charity Law states which type of donations can be considered as deductibles, such as tangible assets like masks and ventilators to in tangible assets such as intellectual property, equity and marketable securities.
When calculating the value of goods in—kind the value shall be determined as the sales income according to the fair value of the assets being disposed of in accordance with the provisions of the Provisional Regulations on Value-added Tax, that is, the value-added tax shall be levied as if the donation of the goods is the act of selling the goods.
The price of the same sale will be determined based on the average sales price of similar medical materials sold by the enterprise or other similar enterprises in the recent period. When accepting donations of non-monetary assets, public welfare social organizations and people's government organs shall calculate the value of the donated assets at a fair value and issue public welfare donation bills.
While the VAT is calculated for the purpose of ascertaining the value of the donation, the authorities have made it clear that if the donation is used to deal with the pneumonia outbreak, the donation shall be exempted from value-added tax.