Interpretation of Announcement of the State Administration of Taxation on Matters concerning the Collection Scope of Research and Development Expenses for the Purpose of Super Pre-tax Deduction


Date:  2017-12-31    Autor:   ZHAO, Ric

Key words: Research and Development Costs for the Purpose of Super Pre-tax Deduction, the external researchers and developers, Other Relevant Expenses, unsuccessful research and development activities can be subject to the policies on weighted deduction

On 8thNovember, 2017, the State Administration of Taxation(“SAT”) released the “Announcement of the State Administration of Taxation on Matters concerning the Collection Scope of Research and Development Expenses for the Purpose of Super Pre-tax Deduction (Announcement of the State Administration of Taxation [2017] No.40, hereinafter,“Announcement 40”)In order to further implement the preferential pre-tax deduction policies for research and development expenses and effectively solve the problems existing in the processof policy implementation, in accordance with “the Circular of the Ministry of Finance, the State Administration of Taxation and the Ministry of Science and Technology on Improving the Policy on Extra Pre-tax Deduction of Research and Development Expenses” (Circular No. 119, ) and “the Announcement of the State Administration of Taxation on Issues Concerning the Pre-tax Weighted Deduction Policy for Corporate Research and Development Costs” (Announcementof the State Administration of Taxation [2015] No. 97, hereinafter, “Announcement 97”), matters concerning the collection scope of research and development expenses for the purpose of super pre-tax deduction are hereby announced in this announcement.

The main contentset out by 40th announcement

l  Clear policy caliber.

l  Detailed policy content.

l  Extend the scopeof preferential.

Here we presss even aspects to compare similarities and difference between interpretation of the new announcement No. 40 and previous Circular No. 119 and announcement No.97.

(A)   Clear caliber of deductible labor costs

Announcement No. 97 defined the scope of personnel directly engaged in R & D activities and clarified the requirements for accurate collection of labor costs for personnel engaged in various activities.The following table is in accordance with the provisions of No. 97, directly engaged in R & D personnel categories:

Personnel
category

Main features

Professional restrictions

Research staff

mainly working on R&D projects

Professional experts

Technical staff

professionals participating in R&D  activities under the guidance of research staff

With technical knowledge and experience  in one or more of the following domains: engineering technology, natural  sciences or life sciences

Supporting staff

Involved in R&D activities.

Technicians

The external researchers and developers

The enterprise which is the employer of  the employees dispatched shall pay the labor costs to the labor dispatching  enterprise as required by an agreement (contract) for the payment of wages  and salaries to external researchers and developers.

All of above classification and cost collection requirements have been retained in announcement No. 40 , in addition, labor dispatch, equity incentives and research and development production and distribution costs are increased in announcement No. 40.

Ø  Appropriately expand the scope of external researchers and developers. The announcement clarify that external researchers and developers refer to the researchers,technicians and supporting staff who are employed as temporary employees underlabor and employment agreements (contracts) with enterprises or labor dispatching enterprises. The enterprise which is the employer of the employees dispatched shall pay the labor costs to the labor dispatching enterprise asrequired by an agreement (contract) for the payment of wages and salaries to external researchers and developers.

Ø  Clarify that the equity incentives for researchers and developers can be used for calculation of weighted deduction. Announcement clarity that wages and salaries shall include the expenditure of equity incentives for researchers and developers, which may be deducted before tax according to the announcement ofthe State Administration of Taxation on Handling Enterprise Income Tax Involvedin the Implementation of Equity Incentive Plan by Chinese Resident Enterprises(Announcementof the State Administration of Taxation [2012] No. 18).

Ø  Any direct researcher or developer or any external researcher or developer, who participates in any activity other than research and development, shall have his or her activity recorded by the relevant enterprise, if necessary, and the relevant expenses actually incurredfor him or her shall be allocated between the costs of research and development and the costs of production and operation, on the basis of the percentage of actual working hours or in another reasonable manner, without subjecting any unallocated costs to weighted deduction.

(B)    Clear costs of direct input caliber

Retain the method of collection of costs with multiple purposes equipment or rental expenses established in announcement No 97. Explicitly stipulated material cost regard to actual sales order cannot be deducted. (Original text: “The material costs of products which are the direct result of research and development activities, or the material costs of the components of any products sold outward, in the costs of research and development, shall not be subject to any weighted deduction.”), further clarify the method of handling materials costs in different tax years.

The announcement clarify that If the product sales and the incurrence of corresponding material costs are in different tax years and the material costs have been included incosts of research and development, the costs of research and development in the year of sales may be offset on the basis of the corresponding material costs,and may be offset in the next year after carry forward, in the case of insufficiency for offset.

(C)    Detailed depreciation, amortization costs caliber

Retain collection and allocation policy of depreciation of instrument and equipment and amortization of intangible assets. (Original text: “The instruments and equipment used for research and development activities and any other activity shall have their usage recorded by the relevant enterprise, if necessary, and their depreciation costs actually incurred shall be allocated between the costs of research and development and the costs of production and operation, on the basis of the percentage of actual working hours or in another reasonable manner, without subjecting any unallocated costs to weighted deduction.”), to further adjust the method of collection of accelerated depreciation costs.

The announcement clarify that the instruments and equipment, which are used for research and development activities, shall comply with the provisions of tax laws and be subject to the preferential policies on accelerated depreciation/be amortized in a shortened period, shall be subject to the pre-tax weighted deduction of costs of research and development and the pre-tax deduction of their depreciation/amortization.

(D)    Add regulations for Design Fees of New Products, Fees of Determination of New Technological Processes, Clinical Trial Fees of New Drug Development and Field Test Fees of Exploration and Development Technology

Announcement clarify that these costs refer to the costs of design of new products, determination of new technological processes, and field tests of exploration and development technology relating to the activities.

(E)   Clear other relevant expenses caliber

According to Cai shui [2015] No. 119,Other expenses directly related to research and development activities, such as expenses for technology books and materials, fees for translation of materials,expert advice fees, insurance premiums of the high-tech research and development, expenses for retrieval, analysis, discussion, argument,verification, review, assessment and acceptance of research and development achievements, fees for application, registration and agency of intellectual property, travel expenses, and conference expenses.

Other related expenses stated in the Announcement No.40, apart from inheriting the above categories, new employee benefits, supplementary pension insurance and supplementary medical insurance premiums can be included as other related expenses to further stimulate the enthusiasm of R& D personnel, Promote research and development activities.

In particular, the total amount of otherrelevant expenses shall not exceed 10% of the total costs of research and development that are deductible before tax on a weighted basis.

(F)   Clear other policy caliber

Announcement No. 40 also made clear some special cases of research and development costs deductions to confirm thebasis.

Ø  The government subsidies received by an enterprise shall directly offset the costs of research and development inaccounting treatment, and the balance of those government subsidies not recognized as taxable income in accounting treatment after offsetting shall beused for calculation of weighted deduction.

Ø  The leftovers, defective products,intermediate trial products and other special income shall be deducted from the collected costs of research and development, in the calculation of the weighted deduction of costs of research and development in the year in which the income is recognized, and the weighted deduction of costs of research and development shall be zero if it is insufficient to deduct such income.

Ø  The intangible assets resulting from thecosts of research and development incurred in the research and developmentactivities shall be capitalized at atime point of the accounting treatment.

Ø  The costs of research and development incurred in unsuccessful research and development activities may be subject to the policies on weighted deduction.This article is of great benefit to industries with long research and development cycles and large uncertainties. The new regulation clearly failed the R & D activities can also be added deductions, eliminating the concernsof enterprises, but also conducive to encouraging enterprises to carry out R& D activities. However, there is still a need to remind enterprises that they should have a good plan for R & D activities. For the same project,continuous deductions for many years have yet to yield results (except forspecial trades), which can easily cause the IRD to question the authenticity of R & D activities .

Ø  The expression "actually incurred R&D costs" in Article 3 of the Announcement[2015] No.97 refers to the actual fees paid by the principal to the agent. No matter whether the principal is governed by the policies on pre-tax weighted deduction of costs of research and development, the agent shall not subject the costs of research and development to weighted deduction.

(G)   Implementation Time and ApplicableObjects

The Announcement of the StateAdministration of Taxation on Matters concerning the Collection Scope ofResearch and Development Expenses for the Purpose of Super Pre-tax Deductionapplies to the annual final settlement in 2017 and the years subsequent thereto. If any tax adjustment is made in the past year, no adjustment shall bemade. Any cost that may be subject to preferential policies as a result ofretrospection shall be governed by the provisions hereof. The small and mediumscientific and technological enterprises shall subject the pre-tax weighted deduction of their costs of research and development to the provisions hereof.(If you would like to learn more about the deduction related to R&D costsfor S&T, please refer to our August Newsletter - “Circular on increasing the proportion of extra pre-tax deductions research and development costs for Medium and Small-sized tech firms)

Ecovis Ruide China - Our service regard to aforesaid preferential policy

As mentioned before, in recent years the government claims bigger additional deduction of R&D expenses, if you have any questions about our read on the 40th announcement or an interest on application of additional deduction of R&D expense, you may at any time get in touch with our professional service personnel.

Ø  Our professional tax consulting team can field visit your company and fully analyze the applicability of the company under the preferential policy analysis, and provide suggestions for practice as well.

  Ø We render the service of declaration of R&D expense additional deduction as andother services.


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