A new coronavirus, COVID-19, has spread rapidly across China since the beginning of 2020. More impactful than even the SARS epidemic back in 2003, a greater number of cities and industries have been affected. This is especially true of the service sectors, such as hotel catering, tourism, education and training.
In view of the severe situation, much of the Chinese workforce are currently working from home, where the nature of the work allows. Businesses requiring the physical presence of staff are only slowly getting back into operation.
Tax authorities announce extensions
National authorities, including the Ministry of Finance (MOF), the State Taxation Administration (STA) and the General Administration of Customs (GAC), together with provincial and local governments, have reacted quickly to COVID-19. They have set out a string of tax reliefs and preferential measures to support enterprises and citizens.
On the tax administration front, the STA extended February’s statutory tax filing deadline to February 28. This can be further extended by local tax authorities where the outbreak is particularly serious (such as in Hubei province). Particularly affected taxpayers and withholding agents can apply for a further extension of tax payment deadlines where needed. The STA also encourages local tax authorities and taxpayers to deal with tax matters remotely, such as via e-tax bureaus, mobile applications, etc.
Assisting the service sector
Given the importance of consumption and the services sector to the China economy, and the significant impact of COVID-19 on consumer activity and service providers, the government has exempted a wide range of consumer services from VAT on a nationwide basis. So-called ‘lifestyle services’, which include medical services, catering and accommodation services, and sundry personal services (e.g. hairdressing, laundry) are normally subject to VAT at 6%. The VAT exemption also applies to public transportation and express delivery services provided to residents. The exemption is not time limited; it is understood to be in place until COVID-19 is brought under control.
At a more targeted level, specific corporate income tax (CIT) and VAT incentives have been introduced for enterprises engaged in producing key supplies related to COVID-19 protection and containment (e.g. masks, protective clothing). On the CIT end, this includes a 100% expensing deduction for investment in equipment to expand production capacity. Under existing rules, expensing is only allowed for purchased equipment with a unit value less than RMB5 million ($700K). The new CIT incentive means that larger scale capital investments will now also benefit.
Furthermore, for seriously affected enterprises, CIT losses incurred in 2020 will be provided with a longer tax loss carry-forward period (i.e., 8 years, vs the standard 5 years). The latter treatment solely covers enterprises in the transportation, catering, accommodation and tourism sectors. These incentives are paralleled by individual income tax (IIT) exemptions for bonuses and subsidies paid to medical staff working at the frontline in combatting COVID-19.
On the VAT side, a full refund of carried forward excess input VAT balances may be granted to enterprises engaged in production of supplies for COVID-19 protection and containment. The refundable input VAT amount is the accumulated carried forward input VAT balance, to the extent it exceeds the carried forward input VAT balance as at the end of December 2019. Refund applications may be made monthly. Refunds for excess VAT input credit balances had only been recently introduced in China, in 2019, on a limited pilot basis. As such, the rapid expansion of this treatment to COVID-19 affected enterprises is a bold measure, by the authorities, to help enterprises with cashflow difficulties. In parallel, a VAT exemption will also apply for enterprises engaged in transporting protective supplies. Going further, China’s State Council has also decided to exempt VAT for small-scaled taxpayers in Hubei province and reduced the VAT collection rate to 1% (currently 3%) for small-scaled taxpayers in other areas, from March 1 to May 31 2020.
As many companies and individuals are actively making donations of money and goods to help combat COVID-19, related VAT, consumption tax (CT), IIT, CIT and import tax exemptions have been introduced. These exemptions cover goods donated through charity organisations, through government authorities, or donated directly to the hospitals leading coronavirus containment. These are exempted from VAT, CT, and surcharges. In addition, the donations made by enterprises or individuals through qualified organisations or government authorities can be fully deducted for CIT and IIT purposes.
By contrast, under prior tax rules, donation deductions were limited to 12%/30% of gross annual profits/taxable income for CIT and IIT, respectively. Exemptions also extend to imported supplies, donated by domestic and foreign donors, and used for COVID-19 prevention and control. These are exempt from import duties, import VAT and import CT. The latter treatments are valid from January 1 to March 31 2020. In fact, apart from the import tax exemptions, all of the above-listed tax incentives will be maintained in place for an open period, until the epidemic is under control.
Alongside these tax incentives introduced by the central government authorities, many provincial and local governments have also set out additional relief measures. This includes deferring the payment of social security contributions (and in some cases refunding contributions already made), cutting real estate tax and urban land use tax for enterprises with funding difficulties/small and middle-sized enterprises, among other measures. We expect more tax relief measures to follow at the central and local level.
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