At an executive meeting of China's State Council on April 25
2018, Premier Li Keqiang outlined seven further tax reduction
measures, this time relating to the corporate income tax (CIT)
treatment of innovation activities.
- Under China's research and development
(R&D) super deduction incentive, a 150% deduction (i.e. a
50% bonus deduction) is available for eligible R&D
expenses. This rises to 175% for science and technology small
and medium enterprises (SMEs). However, under rules issued in
2015, Chinese enterprises outsourcing research work to
domestic service providers have faced an 80% deduction cap,
which applies to both the expense itself and the super
deduction bonus (i.e. a payment of RMB 100 ($16), which would
otherwise bring with it an RMB 50 bonus deduction, delivers a
tax deduction of just RMB 120 following the application of
the 80% cap). For payments to overseas service providers,
while no 80% cap was applied, the super deduction bonus was
denied. Under a new rule change, the disallowance of the
super deduction bonus for payments to overseas service
providers is abolished. As the 80% cap for payments to
domestic service providers is still in place, this could mean
that payments to overseas service providers will deliver a
greater tax deduction. However, it remains to be seen if this
cap might, in practice, be extended to payments to overseas
service providers, as well. The new treatment is
retroactively effective from January 1 2018, with detailed
rules to follow.
- China applies a general restriction of a
five-year carry-forward period to tax losses. This will now
be extended to 10 years for high and new technology
enterprises (HNTEs) and science and technology SMEs. This
recognises the fact that such enterprises may encounter
several years of losses before a new innovation becomes
profitable. The new treatment is retroactively effective from
January 1 2018, with detailed rules to follow.
- China applies a limitation to tax
deductions for staff education expenses. The limit is set at
2.5% of the enterprise's salary bill, though a special 8%
ceiling has applied for some time to advanced technology
services enterprises (ATSEs) and HNTEs. The 8% limitation is
now being expanded to all enterprises nationwide. The new
treatment is retroactively effective from January 1 2018,
with detailed rules to follow.
In addition to these new tax preferences for enterprise
innovation, the government is also looking to foster the
greater use of private pensions through individual income tax
(IIT) regime changes. Private pensions are treated as the third
of three pillars in China's pension insurance system. The
mandatory first pillar is government schemes funded with social
security contributions, and the second pillar is a voluntary or
supplementary pension benefit called the enterprise annuity. In
light of China's ageing population, the government has
concluded that the third pillar needs to be bolstered
further.
To this end, China is putting in place an
exemption-exemption-taxation (EET) system of the sort in use in
many other countries, such as the US's 401K regime. This is
being piloted in Shanghai, Fujian and Suzhou Industrial Park
from May 1 2018, and applies to so-called voluntary commercial
endowment plans, a form of private retirement plan, as
follows:
- Contributions to an eligible commercial
endowment insurance plan, deposited in an individual
retirement account (IRA), are allowed to be deducted for IIT
purposes;
- Investment gains generated by the funds in
the IRA are treated as tax exempt; and
- IIT applies when the amounts in the IRA
are withdrawn at retirement.
While the pilot programme is initially just in place for one
year, where the government is satisfied with how the reform has
proceeded, it may subsequently look to roll this programme out
to the whole country.
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Khoonming
Ho |
Lewis Lu |
Khoonming Ho (khoonming.ho@kpmg.com)
and Lewis Lu (lewis.lu@kpmg.com)
KPMG China
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421
Website: www.kpmg.com/cn