The Chinese authorities have decided to take additional measures to implement more tax and fee reduction policies to better stabilize the economy and promote high-quality development in the country. According to China’s State Taxation Administration, in the past five years the total number of new “Tax and fee reduction” was over 8.6 trillion yuan nationwide.
More recently, the Chinese government announced a new policy package containing 33 stimulus measures in another effort to boost the economy in the wake of COVID-19 lockdowns. These actions expand upon support for companies impacted by the pandemic and seek to shore up investment and ensure the supply of basic resources.
Experts estimate that the amount of newly added “Tax and fee reduction” will exceed 1 trillion yuan.
The policy package was announced days after the city of Shanghai issued a set of 50 policy measures to improve economic activity in the wake of the recent lockdown. It also coincides with the reopening of Shanghai on June 1 and the gradual resumption of normal life in Beijing since May 29.
Many of the mechanisms proposed in the policy package are expansions of previous support measures, such as tax relief, fee reductions, and subsidies, while also proposing actions for stimulating the economy through increased investment and infrastructure spending and guaranteeing the supply of basic resources.
Policies such as boosting the operation of the industrial economy, promoting the guarantee of energy and electricity, and effectively and efficiently implementing tax deferral, are expected to handle tax deferral (fees) of 200 billion yuan for small and medium size enterprises (SMEs) in the manufacturing industry, and 27 billion yuan of tax deduction, refund and deferral for coal power and heating.
Small businesses collectively make up most companies, account for over half of the GDP, and employ the vast majority of people in China. They are also some of the most vulnerable entities to disruption, and for this reason the government is doing everything in their power to help them survive the storm.
The policy package includes mechanisms and proposals for shoring up support for micro, small, and medium-sized enterprises (MSMEs) in 14 of the policy measures.
Chinese tax authorities continue to expand "contactless" tax payment services, realizing that nearly 90% of tax-related matters and 99% of tax returns can be processed online. In 2021, the number of new tax-related market entities is expected to be about 13 million, an increase of 13.6% year-on-year.
In 2021, the State Tax Administration (STA) and the Ministry of Finance (MOF) extended a package of expired or to-be-expired preferential tax and fee policies as well as rolled out new structural tax and fee cut measures.
Some of these actions include a lower corporate income tax (CIT) liability of small and low-profit enterprises and of individual businesses, as well as a higher ratio of the additional pre-tax deduction for research and development (R&D) expenses incurred by eligible manufacturing firms and the increase of taxable threshold for sales turnover of small-scale taxpayers.
Tax breaks in 25 documents were extended to December 31, 2023 or December 31, 2025, including the favorable measures on the one-time pre-tax deduction for newly purchased equipment and the additional pre-tax deduction for enterprises’ R&D expenses, important areas for most businesses.
In addition to the above, to offer targeted aid to seriously affected sectors, the MOF and National Development and Reform Commission (NDRC) recently waived the port construction fee for the import-export sector and enabled further cuts in the payment to the civil aviation development fund by aviation companies. Also, registration fees for anti-COVID drugs and medical instruments will be waived this year.
The preferential tax and fee policies extended or newly rolled out apply to foreign-invested enterprises (FIEs) as well.
Some of these policies include:
>> Newly purchased equipment and instruments with unit value (price) not exceeding RMB 5 million (approx. US$760,000) are allowed to be included in the costs and expenses of the current period, can be deducted when computing then enterprise’s taxable income amount, and are not required to be depreciated over the years. This policy was extended until December 31, 2023.
>> The expense incurred by an enterprise in research and development activities, which has not yet formed intangible assets but has been accrued in current profits and losses, based on deduction of the actual amount as stipulated, 75 percent of the actual amount of the expenses is allowed for additional pre-tax deduction.
>> If the R&D expense has formed intangible assets, such intangible assets can be amortized based on 175 percent of the cost incurred. This policy was extended until December 31, 2023.
>> For manufacturing enterprises, the additional pre-tax deduction went from 75 percent to 100 percent. R&D expenses incurred by manufacturing firms, if they have not formed intangible assets, nor have they not been included into the current profits and losses, can be deducted before tax at 100 percent of the actual deductions; if they have formed intangible assets, they can be amortized before tax at 200 percent of the actual cost of intangible assets.
>> In addition, the VAT incremental credit balance will be refunded to advanced manufacturing taxpayers on a monthly basis.
Another policy will halve the corporate income tax (CIT) liability of small and low-profit enterprises for the portion of taxable income not exceeding RMB 1 million (approx. US$150,000) based on the preferential policies already in force.
All small and low-profit enterprises can enjoy a 20 percent CIT rate on 12.5 percent of the taxable income amount for the proportion of taxable income not exceeding RMB 1 million (approx. US$ 152,800) (effective from January 1, 2021, to December 31, 2022).
MSMEs refer to enterprises in industries not restricted or prohibited by the state. For enterprises in the information transmission industry, construction industry, and leasing and commercial services industry – less than 2,000 employees, business revenue of no more than RMB 1 billion (US$150 million), or total assets of no more than RMB 1.2 billion (US$180 million).
For enterprises in real estate development – business revenue of no more than RMB 2 billion (US$300 million) or total assets of no more than RMB 100 million (US$15 million); and enterprises in other industries, with less than 1,000 employees or business revenue of no more than RMB 400 million (US$60 million).
The policy package seeks to further expand the scope of businesses eligible for VAT credit rebates. Currently, monthly refunds of incremental VAT and a one-time refund of remaining VAT credits are available to micro and small-sized enterprises (MSEs) in all industries, and companies of all sizes in six industries, including manufacturing, scientific R&D, technology services, electricity, heating, gas, and water production, supply, software and information technology services, among others.
All MSMEs and sole proprietorships in pandemic-hit sectors will be able to defer payments of the three basic social security premiums – pension insurance, unemployment insurance, and work-related injury insurance. The deferment will be implemented in stages through to the end of 2022.
This policy was previously implemented for companies in five sectors, namely catering, retail, tourism, civil aviation, and road, water, and railway transportation. It will be now expanded to an additional 17 industries.
Pension insurance premiums can be deferred until the end of 2022, while the unemployment and work-related injury insurance can be deferred for up to a year.
The policy package urges commercial banks and other financial institutions to defer payments of principals and interests on loans for MSMEs and sole proprietorships that have been impacted by the pandemic. The repayment can be deferred until the end of 2022.
The measures propose several steps to promote major foreign investment projects and attract more foreign investment. The most notable of these is a call to speed up the revision of the Catalogue of Industries Encouraged for Foreign Investment. The draft 2022 edition of the catalogue increased the number of encouraged industries by 16 percent, signaling new opportunities for foreign investors. The draft catalogue is out for public feedback until June 10.
The package seeks as well to attract more foreign investment to high-tech fields, such as advanced manufacturing, technological innovation, and tech R&D, while also encouraging investment in less developed regions of the country, such as central, western, and northeastern.
The policy also aims at lowering the unemployment rate, which has increased over the course of 2022.
The urban unemployment rate reached 6.1% in April 2022, and 18.2% for those aged 16 to 24. To mitigate this, the measures include incentives to companies that hire fresh graduates, which will be eligible for a one-time subsidy of RMB 1,500 (US$225) for each person they employ until the end of the year. To be eligible, companies must sign a labor contract and participate in unemployment insurance schemes.
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