Higher Benefits but Strengthening Supervision on High and new Technology Enterprise
PRC R&D Tax incentives have been attractive, but taxpayers should evaluate their Overall Tax Position
The PRC Government has been encouraging the enterprise to carry out R&D activities in the PRC to enhance the technology level of the country. Meanwhile, it also would like to offer tax reliefs to relieve the burden of the enterprise during COVID-19.
In short, in addition to a lower Corporate Tax Rate of 15%, the following tax benefits are also offered to R&D Enterprises: -
1. Manufacturing Enterprise: Enhanced Tax Deduction from 175% to 200% for Quality R&D Expenditure starting from
1 January 2021;
2. Non-Manufacturing Enterprise: Enhanced Tax Deduction of 175% for Quality R&D Expenditure until
31 December 2023; and
3. Small Hi-Tech Enterprise: Enhanced Tax Deduction from 175% to 200% for Quality R&D Expenditure.
Having said the above, disqualification of High and New Technology Enterprise Status has been common in Year 2022. In the First Half of Year 2022, a total of 396 Enterprises were disqualified while only 148 Enterprises were disqualified throughout the Year 2021. In this regard, we are aware that around 2/3 of the disqualified enterprises have not developed any patents, which is an important indicator that the Enterprises may not have carried out the R&D activities as previously declared.
Nevertheless, we expect that the Mainland China authorities will continue to enforce close monitoring and investigation on the High and New Technology Enterprise Status. Taxpayers should not undermine the importance of maintaining the status continuously after being granted the benefits.
Points to note:
R&D Tax incentives have been attractive in recent years. Meanwhile, it is our general experience that it is not difficult for the taxpayers to pursue High and New Technology Enterprise Status and pursue enhanced Tax Deduction Claim in Mainland China, while in Hong Kong, it is relatively more difficult for the Hong Kong Inland Revenue Department to accept an expense to be considered as qualifying R&D activities and thus eligible to 200% / 300% Enhanced Tax Deduction.
Having said that, from Transfer Pricing Perspective, an enterprise carrying out R&D activities should generally deserve higher profits margins. As Mainland China is generally a high-tax jurisdiction, it may not be beneficial to explicitly disclose that the China entity of a Multi-National Corporations have been carrying out R&D activities in China and provided the relevant details in order to pursue Enhanced Tax Deduction. In such case, more profits have to be allocated to the China entity.
Corporations should therefore evaluate the pros and cons of each tax incentive to determine their overall PRC and global tax position.
