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China reviews tax legislation and implements subsidies, expands e-fapiao nationwide

The Chinese government introduced during the first half of this year a series of tax incentives and legislation, which could significantly benefit foreign companies operating in the country. Some of these measures include the VAT Law, Tariff Law, GBA IIT subsidy, and a nationwide expansion of the fully digitalized e-fapiao.


Additionally, starting July 2023, eligible taxpayers will have more time to apply for the additional deduction on R&D (research and development) expenses.


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The Greater Bay Area resumed the application for preferential IIT (individual income tax) subsidies for eligible foreign talents under updated guidelines, while seven provinces launched e-tax digital accounts, and the fully digitalized e-fapiao (invoice) system was activated nationwide.


According to the State Council’s legislative plan, authorities will work on and review several documents including the draft Consumption Tax Law, draft Amendments to the Accounting Law, draft Amendments to the Certified Public Accountants Law, and draft Amendments to the Tax Collection and Administration Law.


Analysts anticipate that the Value-Added Tax (VAT) Law and the Tariff Law may be passed as early as this year. Additionally, the progress of the Consumption Tax Law, one of the key taxes in China, should also be monitored.


The legislative plan does not mention the Amendments to the Individual Income Tax (IIT) Law and the Real Estate Tax Law. This suggests that the pilot reforms for IIT and real estate tax are unlikely to move forward during this year.


Regarding R&D expenses, starting in 2023, eligible enterprises can benefit from the additional deduction policy for expenses incurred during the first half of the year by making the prepayment and declaration of corporate income tax (CIT) in July.


Previously, this policy could only be applied when making CIT prepayment and declaration in October or during the annual settlement and clearance process (also referred to as annual CIT filing or annual CIT reconciliation).


Thanks to this new incentive, companies can enjoy the additional deduction policy three months earlier. Firms can now choose between July, October, or the next year’s annual CIT settlement and clearance, depending on their specific situation.


Small and medium-sized technology companies and those with limited capital can benefit from this, which will allow them to access the policy dividends earlier.


In addition, the Chinese government confirmed the implementation of a long-term institutional arrangement to increase the pre-tax additional deduction ratio for eligible industry enterprises’ R&D expenses from 75 percent to 100 percent.


General industries, excluding tobacco manufacturing, hotels, food and beverage, wholesale and retail, real estate, leasing and business services, and the entertainment industry, are eligible to benefit from this policy.


Under the current policy, companies that have already enjoyed these benefits can deduct double the actual R&D expenses incurred from their taxable income, further reducing their CIT burden.

This incentive seeks to encourage more R&D activities and is expected to attract foreign investors, interested in moving their R&D operations to China. This, in return, will create R&D centers in the country, fostering industry development and technological advancement.


Effective June 2023, for foreign high-end talents and talents in short supply working in the Greater Bay Area (GBA), the portion of their IIT already paid in one of the nine mainland cities of the GBA that is more than the first 15 percent of their taxable income is subsidized by the respective municipal government.


This subsidy is also exempt from further IIT. The IIT subsidy is capped at RMB 5 million (approx. US$ 691,266) for each taxpayer in a given tax year. (China’s tax year runs from January 1 to December 31.) The notice, jointly released by four departments in Guangdong Province, defines and clarifies the “amount of tax already paid” and the conditions that applicants must meet.


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The Guangzhou Municipal Finance Bureau released a draft for public comment, in which retroactive applications of the GBA IIT subsidy for the 2020 tax year, as well as applications for tax years 2021 and 2022, will be processed together during the application window in 2023.



In addition to the Guangdong-wide requirements, Guangzhou also expects the applicant to meet additional requirements for the subsidy, depending on whether they are classified as “overseas high-end talent” or “overseas in-demand talent”.




Some of these conditions include:


  • Work or be employed by an enterprise or other institution registered in Guangzhou during the tax year, provide independent personal labor services in Guangzhou, or engage in production and business activities in Guangzhou;

  • Work in Guangzhou for more than 90 days in a given tax year;

  • Pay IIT in Guangzhou;

  • Not been included in the list of untrustworthy joint punishment targets in accordance with laws and regulations at the time of application; and

  • Meet the standards set out in the respective in-demand and high-end talent catalogs (see below)

The taxable income of overseas in-demand talent must also exceed RMB 300,000 (approx. US$41,370) in a given tax year.

Finally, after seven provinces launched e-tax digital accounts, the fully digitalized e-fapiao was extended nationwide.

Starting June 2023, Shandong, as well as Beijing, Anhui, Hunan, Qinghai, Tibet, Guizhou, and Ningxia, requires taxpayers to use the “Shandong Provincial Electronic Tax Bureau – I Want to Handle Taxes – Tax Digital Account” for various business operations, including checking invoice, querying statistics, and more.

The digital tax account consolidates tax-related data and offers functionalities for taxpayers to access information, manage invoices, and conduct other operations.


 

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