R&D expenditures can enjoy more additional tax deductions

Date:  2015-11-22    Autor:  ECOIVS Ruide Marketing Team

   The “Law of Enterprise Income Tax” and its “ImplementingRegulations” provide that the R&D expenditures incurred for the purpose todevelop new technologies, new products and new crafts, can be subject to 50%more additional deduction after being deducted in full amount in light ofactual situation. According to the decision of the State Council, the StateAdministration of Taxation, the Ministry of Finance, and the Ministry ofScience and Technology in Cai Shui [2015] No.119 (hereinafter “Document No. 119”)it was announced to extend the scope of R&D activities and expenditureswhich are subject to additional deduction policy, and raise some new managementrequirements. The new document will be effective since January 1, 2016.


   (1)     To relax the limit ofindustries enjoying additional deduction policy:

   In 2008, Guo Shui Fa [2008] No.116 (hereinafter



    “Document No.116”) provided that in order to enjoy  additional tax deduction policies a firmshould be engaged in key industries as listed in “Hi-tech Sectors with PrimaryState Support” and the “Guideline of the Latest Key Priority Developmental Areasin the High Technology Industry”.

   Document No. 119 is applying the principle of a “negativelist”: Except seven industries, all enterprises’ R&D activities may enjoy additionaldeduction policy. These include:






                      Tobacco manufacturing;                


                      Accommodation and catering industry;                


                      Wholesales and Retail industries                


                      Real Estate Industry;                


                      Leasing and Business service industry;                


                      Entertainment industry                


                      Other industries specified by the Ministry of    Finance and the State Administration of Taxation.                





   (2)     Creative designundertakings:

   The development of multimedia, animation and gamesoftware; digital animation, design and production of digital anime and gamedesign; building construction engineering design (green building evaluationcriteria for Samsung); landscape architecture projects; industrial design,multimedia design, anime and its derivatives design, and model design.


   (3)     What can be declared as R&Dexpenses:

   Comparing directly to Document No. 116, the newpolicy Document No. 119 includes an increase of labor costs for external R&Dpersonnel, as well as in inspection fees for trial products. Other expensesdirectly related to R&D as long as they do not exceed 10% of total R&Dexpenses include technical books and data translation, expert advice fees,high-tech R&D insurance premiums, expenses for retrieval, analysis, evaluation,appraisal, assessment, acceptance, registration fees for patents, travelexpenses, conference fees, etc..

   At the same time the four categories: cost ofdepreciation; amortization of intangible assets; mold development and

   manufacturing costs are able to enjoy accelerateddepreciation as long as they are still connected with R&D relevant activitieseven if it is also used towards marketing, sales, or backoffice functions.


   (4)     Somelimits to R&D activities conducted by external agencies lifted:

   According to Document No. 119, R&D activitiesentrusted to non-affiliated companies, do not require providing details of expendituresof the project the same as this was stipulated under Document 116 in 2008. Insteadof that, expenditures can be included in the R&D expenses of the enterpriseat 80% of the actual amount incurred and be calculated for extra deduction

    (However, ifaffiliated companies are entrusted with such projects, details are stillrequired.)


   (5)     Deadlines for applicableextra deductions:

   Document No. 119 allows the filing procedures witha retroactive effect (at most three years), for all those enterprises whoconform to the extra deduction conditions.


   (6)     Changes in accounting requirements:

   Document No. 116 requires that enterprises mustcarry out administration of special accounts for R&D expenditures.


   The new Document No. 119 provides that enterprisesshall treat R&D expenses in accordance with the requirements of nationalfinancial and accounting systems. Meanwhile they shall set up assistantaccounts for those R&D expenses. According to our understanding, applyingthe new document, enterprises do not need to set up a separate specialaccounting book outside of their accounting system for R&D expenses, butthey shall set up detailed sub-accounts under the R&D ledger. Therefore, tosome extent, the burden of enterprises will be eased.


   (7)     To strengthen the follow-upmanagement:

   The tax authorities will carry out regularinspection, with the annual inspection rate being not less than 20%.


   Our observations and suggestions

   The No. 119 document expands the scope of R&Dadditional deduction policy. We anticipate that the filing procedure will alsobe further simplified. More enterprises will benefit from the policy.


   But we want to draw the attention of our honoredreaders to the point that the tax compliance risk will also be increased due tothe post administration of tax authorities. While actively striving for taxpreference, enterprises shall collect expenditures and prepare documents,according to the relevant regulations, in order to meet the requirements ofexamination in the future.


   As always, if you need: our professional consulting team and personnel can offer you consultingservice for both of the above mentioned policies and practices.



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