Qianhai: Opportunities for Innovation and Development in Financial Sector

Posted by on April 25, 2013 under Corporate Tax Planning, Tax Incentives | Be the First to Comment

In early March, the National Development and Reform Commission issued the Permitted Industry Catalogue for Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Fa Gai Chan Ye [2013] No. 468), which further clarifies the scope of encouraged industries enjoying the preferential enterprise income tax rate of 15%. Since Qianhai was positioned as Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in 2010, a series of preferential policies have been formulated from both central and local government level, which create perfect environment for innovation and development in modern service industries. It is reported that the total number of registered enterprises has increased to 236 and the total amount of registered capital has reached 248 million in Qianhai by the end of February. In view of Qianhai’s strategic position in the new round of China’s economic transformation and development, Hwuason Lawyers summarized the relevant documents and offered brief analysis on preferential fiscal policies for the reference of enterprises seeking opportunities in Qianhai.
Generally speaking, the preferential tax policies mainly concern enterprise income tax, individual income tax, business tax and so on, which are further explained as follows:
1. Enterprise Income Tax
According to Guo Han [2012] No.58, qualified enterprises shall be eligible for a preferential enterprise income tax rate of 15% in Qiuanhai. And according to Fa Gai Chan Ye [2013] No. 468, the permitted industry catalogue covers six industry sectors including financial services, modern logistics, information services, technology services, professional services and public services. The detailed industrial segments listed below the six industries could amount to 112. Observing the current tax system, the 15% enterprise income tax rate is largely applied in western region. Therefore, Qianhai is among the few areas in eastern region which could enjoy such tax incentives.
2. Individual Income Tax
According to Shen Fu [2012] No. 143, overseas talents and professionals in short supply working in Qianhai will receive financial subsidies concerning the part exceeding 15% from the Shenzhen municipal government and such rebates shall be exempt from individual income tax. It may actually reduce their tax burden to a flat tax rate of 15% and avoid the highest tax bracket of 45% under the progressive tax rates. Therefore, Hwuason Lawyers suggest the company pay special attentions on the qualifications and application process in relation to overseas talents and professionals in short supply and try to obtain such financial subsidies. However, it is worth noting that such financial subsidies are merely subject to income from wages and salaries. Other categories of individual income are excluded from the scope of financial subsidies, such as income from remuneration for personal services, income from the transfer of property, incidental income, etc.
3. Business Tax
According to Guo Han [2012] No. 58, qualified logistics companies that registered in Qianhai are allowed to apply a net basis for business tax. Furthermore, according to the Ordinance of Shenzhen Special Economic Zone on Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, incomes derived from international transportation insurance services provided to enterprises registered in Qianhai Cooperation Zone by insurance enterprises registered in Shenzhen are exempted from business tax. And incomes derived from offshore outsourcing services by enterprises registered in Qianhai are exempted from business tax. The exemption policies of business tax will definitely reduce the tax burden of the relevant industries like modern logistics and promote the development of these industries.
In addition, enterprise may apply for special funds to Qianhai Administration Bureau pursuant to Shen Cai Jian [2013] No. 28 and Shen Qian Hai [2013] No.55 if they have some projects requiring government support. The special fund will give priorities to projects applying core technology or innovative business models, equipped with significant social and economic benefits, available to integrate resources, etc.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Tax Incentive: Practical Guides on Application of Additional Deduction of R&D Expenses

Posted by on April 3, 2013 under Tax Incentives | Be the First to Comment

Ⅰ.Brief Introduction on Additional Deduction Policies
According to Law of the People’s Republic of China on Enterprise Income Tax, R&D expenses incurred for developing new technologies, products or techniques are subject to additional deduction when the amount of taxable income of an enterprise is calculated. Specifically, additional 50% deduction of the R&D expenses incurred from the research and development of new technologies, new products and new techniques could be deducted on the basis of the actual deductions if no intangible asset has been formed and included in the current profits and losses; where intangible asset has been formed, such expenses shall be amortized at 150% of the cost of the intangible asset.
Ⅱ.Application Process
Enterprises shall submit relevant additional deduction documents to tax authorities when filling annual enterprise income tax returns (within five months from the end of a taxable year) and shall fill in the amount of additional deduction in Statement of Tax Breaks (Annual Tax Return Form for Enterprise Income Tax Annexes 5) as required. The detailed application process as follows:
i. Obtain Enterprise R&D Project Appraisal Opinion issued by science and technology department before 30th April;
ii. Submit the application materials to tax authority before 15th May;
iii. Tax authority will finish the review within 7 working days. As for enterprises passed the review, tax authority will grant recordation notices; otherwise, tax authority will issue disapproval recordation notices;
iv. Enterprises receiving recordation notices shall be recorded in accordance with the relevant legal procedures and enjoy tax incentives of additional deduction of R&D expenses.
Ⅲ.Remind of Main Focuses
i. Scope of Additional Deduction of R&D Expenses
According to laws and regulations, the scope of additional deduction of R&D expenses merely includes eight items, such as the design expenses for new products, the expenses for formulating new technique procedures, expenses for technical books and materials and material translation expenses in direction connection with the research and development activities; expenses of materials, fuel and power directly consumed in the research and development activities; the wages, salaries, bonuses, subsidies and allowances for the personnel who are engaged entirely in the research and development activities; etc. Other expenses beyond the listed scope shall not be calculated. Therefore, companies shall be aware of the scope of additional deduction of R&D expenses and strictly comply with relevant regulations to impute R&D expenses accurately.
ii. Establishment of Auxiliary R&D Accounts
According to laws and regulations, enterprises shall set out special accounts for R&D expenditures, and meanwhile shall, based on the listed items, classify and complete accurately each item of actual R&D expenditures incurred in the year eligible for additional deduction. To impute the R&D expenses precisely is the essential condition to enjoy the tax incentive of additional deduction. Otherwise, suppose that the R&D expenses are mixed with production and operation expenditures, companies shall not subject to such tax incentive. Therefore, companies shall establish auxiliary R&D accounts to impute the expenditures of each R&D projects. In addition, companies’ R&D expenses are more likely to be recognized by tax authorities provided with auxiliary R&D accounts.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Energy Service Company: Taking VAT Exemptions or Making a Waiver

Posted by on December 19, 2012 under China Tax, Tax Incentives | Be the First to Comment

 Started at Shanghai in January 2012, further spread to other eight provinces in August, China is now experiencing a significant VAT tax reform. And it is alleged that the scope of the reform will be expanded to include other industries like construction industry next year. Therefore, companies shall take a close eye on the latest update to the tax reform and best prepared for the potential changes.
According to the tax law, income gained by qualified energy service companies performing energy performance contracting is exempted from VAT within the pilot areas.
(1) Eligibility for VAT exemptions
Not all energy service companies are eligible for VAT exemptions. The tax law sets certain standards, namely two requirements. On one hand, the related technologies for the implementation of the energy performance contracting shall meet the standard of GB/T24915-2010. On the other hand, the format and content of the signed contract shall also meet the standard of GB/T24915-2010.
(2) VAT exemptions may not reduce the tax burden
Compared with paying VAT, a company with VAT exemption may not definitely reduce its tax burden. Since a company claims for VAT exemption, it may be not allowed to deduct the tax at the same time.
As an energy service company, its service scope may vary. Some may focus on the energy saving of buildings, for instance, to improve the energy efficiencies of the air-conditioning systems or the heating systems. Others may focus on energy saving of illumination by using the energy effective bulbs. However, generally speaking, their business models are similar which are to provide free energy saving equipment for industries and gain profits from industries’ reduced energy consumption.
From the operation of an energy service company, one can easily figure out that some equipment may be involved during a certain project. So sometimes whether the equipment can be deducted or not may dramatically influence the tax burden of both the energy service company and its client. If the energy service company is willing to abandon the exemption, it can deduct the tax and issue VAT invoices which may actually reduce the total tax burden.
Therefore, Hwuason Lawyers suggest companies aware that VAT exemption may not necessarily lead to a lower tax burden. And we advise companies to estimate the tax burden under these two circumstances before applying for the VAT exemptions.
(3) Abandon of VAT exemptions
A company can choose to pay VAT or apply for exemption at its own will. However, such exemption, once abandoned, cannot be reapplied within the next 36 months. So companies shall be very cautious when dealing with such tax issues. Accordingly, we suggest companies review their business operation for a comparatively long period of time and also take their future plans into consideration in order to make the best decisions. And it is always preferable for a company to seek tax professionals’ advisories when making such important choices.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). Or you can visit our website at www.hwuason.com.

About us

Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.



Posted by on November 29, 2012 under China Tax, Tax Incentives | Be the First to Comment

State Council decided at an executive meeting on 25 July to extend the VAT pilot scheme for transportation and some modern services sectors from Shanghai to 10 provinces (municipalities and cities with independent planning status), including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen,. Meanwhile the types of industries, which are dominant in the services sector in these 10 locations, are culture creativity enterprise. The question is that what changes the VAT reform would bring to culture creativity enterprises.

 The beneficiaries are small and medium sized enterprises
According to Cong Ming, the VAT pilot scheme has produced obvious results in reducing tax burdens in Shanghai since its implementation in 2011. Tax burdens were reduced for 80% of the pilot enterprises. In the case of small-scale taxpayers (companies with annual sales of less than Rmb5 million), in particular, the tax rate was reduced by about 40% from 5% to 3%. Small and medium-sized enterprises have become the biggest beneficiaries of this reform.

 Problems with the application of the credit invoice method
On one hand, value-added tax invoice management to distinguish between for general VAT taxpayer and small-scale VAT taxpayer. Especially for general taxpayers, distinguish the special invoice and commercial invoice two, on the range, tax part have special defined. On the other hand, bill of value added tax limitation and business tax is different, the common limitation of invoice is low. And the large amount of the invoice for longer time will cause inconvenience to conduct business. In our tickets to the rail system control tax, the invoice is not standard will directly bring tax inspections and the verification collection of risks.

 Financial subsidies offered by the government
The tax reform required enterprises to report their monthly tax changes to the office of the State Administration of Taxation. The office will closely monitor and analyze changes and identify which of the enterprises are qualified for the subsidy. At present, financial subsidies have been granted to enterprises suffering tax burdens since the implementation of the tax reform. Cultural creative enterprise should close attention to Shanghai pilot, especially in balance collection processing, financial help, preferential tax for cleaning, financial management and tax law risk prevention four and enterprise of immediate interest, do all aspects of work, so as to achieve the maximum profit, caught in the challenge of opportunity.

The impact of the VAT reform on China’s Creative cultural services

Posted by on September 6, 2012 under China Tax, Tax Incentives | Be the First to Comment


The Ministry of Finance and the State Administration of Taxation accounted that,from 1 August 2012 until the end of the year, the VAT pilot scheme will be implemented in Beijing and seven other provinces and municipalities: Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. According to theannouncement, Beijing is to be expected to complete the conversion by September 1, 2012. Experts suggest that this reform will not lower tax rates that have been previously paid by large enterprises.

(1) Benefits for small and medium-sized businesses

 Mr Wu, a deputy general manager of Ruosen, said that “Our Company’s taxrevenues have dropped by nearly a third under a VAT reform”.

Ruosen, which is a digital technology limited company in Beijing, is engaged in the IT service business which is subject to 5% BT and 6% VAT under the VAT Pilot Program. At first sight,Ruosen seems to pay more in taxes that it would have in the first place. But it was found that it in fact paid less tax under a VAT reform.

A AVT taxpayer is able to reclaim the VAT he or she paid on purchases, and doing so could reduce payable taxes. According to the state regulation, businesses with turnover of RMB 5 million or more must register as a general VAT tax payer, who will enjoy the right to deduct. A registered person may deduct the VAT charged on work equipment or office supplies which are used for the purposes of his or her taxable business. For example, if Ruosen’s turnover is RMB 12 million last year, the company will pay business taxes of RMB 600,000 at a rate of 5%. Although Ruosen would pay RMB 680,000 in taxes at VAT rate of 6 % under the Pilot Program, the company is entitled to the tax deduction by providing a valid VAT invoice. As a result,Ruosengot about RMB 240,000 of VAT deductions. Accordingly,the amount of VAT the company actually paid was only RMB 440,000.

(2) Not all smooth sailing

After a VAT Pilot Program started in Shanghai this year, Beijing has taken several step to speed up its tax regime. According to Cai Shui [2011]No.111, the VAT reform will be specifically applied in the transport industry and certain “modern service industries” including technology services, information technology services, culture and creativity services as well as logistics auxiliary services. By reference to culture and creativity services, it coves several specific types such as design, transfer of trademark, copyright, intellectual property related, IP agent, advertisement, and conference and exhibition.

“In order to help develop the Chinese animation industry, a lower 3% business rates had already been applied to animation products involving picture, word, music, technical production,ect. We initially worried that such an existing preferential tax policies would no longer be available after a VAT pilot reform was to be implemented .But there is no need to worry too much about this issue right now as the adjustment on tax policy will continue to support the animation industry. In other words, less tax and taxation of both VAT and business tax will be made hereby.” Ms Sun said

Some doubts that tax preferential policy mentioned above can not relieve the stress on animation enterprises. Even if ananimation company could be able to save as much as RMB 200,000 per year by paying for reduced tax rates, it has been questioned that how helpful it wouldbe for animation enterprises to enjoy lower tax rates

Responding to above criticism, Wu Zhen pointed out that “the tax reductions effected by means of the VAT should help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit.” Meanwhile, Wu Zhen suggests that the government should give more details about the new tax policy and put it into practice as soon as possible.

(3) Reality check

Shifting from business tax to VAT has lessened most tax payers’ burden in cultural enterprises. However, Liu Tianyong said that the VAT tax reform does not exactly mean that this will be full tax cuts for cultural enterprises. In fact, large sized enterprises will possibly even pay more than it had previously, while the average tax burden of small scale taxpayers was slashed .

In addition,the pilot program might enable a customer of a Pilot Industry taxpayer to credit input VAT incurred on the purchase of services or goods. But the service company such as creative and cultural businesses cannot deduct the tax cost of the purchase of materials. This puts the service company in a disadvantageous tax position, as part of its expenses are double-taxed.

Moreover,as the pilot currently limited to one city, for larger companies and businesses, they may have a difficult management issue because they are paying one sort of taxes in one city and another set of taxes in other cities. Unfortunately, this may eventually result in a higher tax bill. For example, if a customer is a BT taxpayer outside the Pilot Program who cannot deduct input VAT, its tax burden may increase if it receives services provided by taxpayers in the Pilot Program.

Although all experiments come with problems, Liu Tianyong believes that such a move will boost China’s taxation system reform.