A tax boost for corporate R&D policies

ON September 29 2013, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released the Circular on Policy Issues Relevant to the Pre-tax Super-deduction of Research and Development Expenses (关于研究开发费用税前加计扣除有关政策问题的通知) (Caishui [2013] No 70) to supplement the scope of R&D expenses which are able to enjoy a super deduction for CIT purposes. The Notice takes retroactive effect from January 1 2013.

Circular 70

Circular 70 expanded the scope of super deduction with the following five aspects:

(1) Basic pension fund, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing funding contributed by a company for its employees directly engaging in R&D activities in accordance with regulations set by the relevant department of the State Council or relevant provincial-level government authorities (the Insurance and Housing Fund);

(2) Costs of operational maintenance, adjustment, testing, and repair of tools and equipment incurred exclusively for R&D activities;

(3) Costs of samples, prototypes that do not constitute fixed assets and expenses for general testing solutions;

(4) Clinical test costs for R&D activities for new drugs;

(5) Certification costs for R&D results.

In addition, Circular 70 states that companies may engage a qualified accounting firm or tax agent firm to issue special purpose audit reports or verification reports to claim a super deduction. If the tax authority has any doubt regarding the validity of the R&D projects claimed, it can request opinion letters issued by the science and technology authorities at the municipal level or above.

The background

On December 10 2008, the SAT released the State Administration of Taxation, Measures for the Administration of the Pre-tax Deduction of the Research and Development Expenses of Enterprises (Trial Implementation) (企业研究开发费用税前扣除管理办法(试行)) (Guoshuifa [2008] No 116), which provides detailed stipulations regarding what qualifies as R&D activities, the scope of qualified R&D expenses, financial accounting treatment for the super deduction, application materials, and provisional and annual filing procedures. As background information, the original scope of qualified R&D expenses provided under Circular 116 for super deduction purposes contains the following eight categories:

(1) Design fees for new products, expenses for formulating procedures relating to new skills, and expenditures for technical books and information and translation fees directly related to R&D activities;

(2) Costs of materials, fuel and power consumed directly for R&D activities;

(3) Salaries, wages, bonuses and allowances of employees directly engaging in R&D activities;

(4) Depreciation expenses or rentals for tools and equipment exclusively used for R&D activities;

(5) Amortisation expenses of intangible assets such as software, patents and non-patented technologies exclusively used for R&D activities;

(6) Development and manufacturing costs of moulds and process equipment exclusively used for intermediate testing and trial manufacture;

(7) Expenditures for on-site testing of technology for prospecting and exploitation;

(8) Expenditure for verification, assessment and inspection of R&D results.

Compared with the actual R&D expenses incurred for R&D activities in different industries, the scope of the expenses covered by the super deduction under Circular 116 is narrower.

On October 8 2010, the MOF and the SAT released the Notice on Pilot Policy of Super Deduction of R&D Costs Related to Zhong Guan Cun Science and Technology Park's Building of the National Demonstration Zone for Independent Innovation (对中关村科技园区建设国家自主创新示范区有关研究开发费用加计扣除试点政策的通知) (Caishui [2010] No 81), which provides that, from January 1 2010 to December 31 2011, high tech enterprises acknowledged by the High Tech Enterprise Acknowledgement Management Agency in Beijing, and registered in the Demonstration Zone of the Science and Technology Park of Beijing Zhong Guan Cun, which are taxed based on an actual profit basis, can enjoy pre-tax super deduction for five more items (the same as those listed in Circular 70) of R&D costs than those set forth in Circular 116.

On February 26 2013, the MOF and the SAT released the Notice on Pilot Policy of Super Deduction of R&D Costs related to Zhong Guan Cun, Dong Hu and Zhang Jiang National Demonstration Zone for Independent Innovation and He Wu Bang General Innovative Pilot Zone (关于中关村、东湖、张江国家自主创新示范区和合芜蚌自主创新综合试验区有关研究开发费用加计扣除试点政策的通知)(Caishui [2013] No 13), which provides that, from January 1 2012 to December 31 2014, high tech enterprises acknowledged by the provincial High Tech Enterprise Acknowledgement Management Agency, managing respective pilot zones and registered in the pilot zones which are taxed based on an actual profit basis, can enjoy pre-tax super deduction for five more items (the same as listed in Circular 70) of R&D costs than those set forth in Circular 116.

As a consequence of Circular 70, the five added items of super deductible R&D costs will spread to a nationwide level for those qualified enterprises. Therefore, they are no longer limited to high tech enterprises in certain regions.