Existing tax and fee cut policies were extended by the 14th National People’s Congress in March, on approving the National Economic and Social Development Plan of 2023.
According to the government’s estimation, the extension or renewal of a range of supportive tax and fee cut policies are expected to reduce the annual tax and fee burden on eligible companies by more than RMB480 billion (USD66.5 billion).
Relevant governmental departments have now released official policies for implementing the tax-related proposals.
Highlights of the pertinent tax policies are:
Up-scaled super-deduction ratio for R&D expenses. To further encourage enterprise investment in R&D and better support sci-tech innovation, the existing pre-tax additional deduction ratio of R&D expenses for eligible companies has risen from 75% to 100%. Additionally, the newly introduced policy will be implemented as a long-term incentive scheme, with no expiration date specified.
Extension and adjustment on income tax cuts for small and low-profit enterprises and sole proprietorships. Preferential income tax policies for small and low-profit enterprises (SLPEs) are extended and adjusted for the period from 1 January 2023 to 31 December 2024.
Qualifying SLPEs and sole proprietorships are entitled to the following income tax preferences:
Qualifying SLPEs are eligible to be taxed on just 25% of their taxable income at a reduced rate of 20%, meaning the effective tax rate is 5% for taxable income not exceeding RMB1 million. The portion of annual taxable income of more than RMB1 million but not exceeding RMB3 million is also subject to the same effective tax rate (5%) for the period from 1 January 2022 to 31 December 2024.
Note that qualifying SLPEs are those engaged in non-restricted and non-prohibited industries meeting three criteria:
- Annual taxable income does not exceed RMB3 million;
- The number of employees does not exceed 300 people; and
- Assets do not exceed RMB50 million.
- Sole proprietorships are eligible for 50% reduction of their individual income tax payable for taxable income not exceeding RMB1 million, while other prevailing preferential policies granted to sole-proprietorships remain valid and applicable.
Extended zero-tariff for coal imports. The Customs Tariff Commission of the State Council has further extended the provisional zero-tariff policy for coal imports. The policy was due to expire on 31 March 2023 and had been extended to 31 December 2023. The zero-tariff policy for coal imports was introduced in April 2022 to strengthen the security of energy supply in response to overseas inflation of prices.
Extended incentive of urban land use tax for logistics. For logistics enterprises, the policy of halving the urban land use tax on land used for qualifying bulk commodity storage facilities – introduced to promote development of the logistics industry and initially set to expire at the end of 2022 – will be extended to the end of 2027.
Compared with the tax and fee cut policies implemented in 2022, the scale and amount of the renewed or extended preferential tax policies implemented so far are considerably smaller.
This is partially because the pandemic has ended and China’s economic development is back on track. The government no longer appears quite so eager to revive the macro-economy by providing full-fledged impetus to the market, as it was when urgently required in 2022.
The government, especially at local level, is also under strained budgets, after injecting tremendous resources for epidemic controls while fiscal revenue growth slumped because of the slowing economy in the preceding years. It is not financially workable for the government to continue large-scale tax and fee cuts in the long term.
It is anticipated that the government will still provide impetus and support for key industries and certain types of business entities where necessary and possible for economic recovery. However, it is not likely that another round of large-scale tax reductions, as witnessed in the past year, will be reproduced.
At the same time, to ease fiscal pressure on local governments, tax authorities will likely strengthen daily supervision of taxpayers’ compliance in key industries with a relatively high risk of exposure.
Taxpayers, including multinational companies, should be mindful of their business arrangements that may incur potential tax risks and prepare in advance for any inquiries from the tax authority – or even tax investigations on critical issues of concern, such as transfer pricing policies, permanent establishment implications, tax treaty benefits and pre-tax deduction matters.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at email@example.com