Beingmate, a leading domestic infant milk powder manufacturer, was cancelled of its High and New Technology Enterprises Status in September 2011, which led to a significant amount of tax bill equivalent to 58,927,096.40 RMB due in 15 days. The company decided to pay for the tax the second day of its announcement which was sure to have negative effect on the company’s net profits of fiscal year 2008 and 2009.
In fact, the enforcement of tax benefit keeps strengthening every year. And many high-tech companies lost their statues in spot-checks including some listed companies like East Lake High Technology, CPT Technology, etc. Most recently another 36 high-tech companies in Ningbo were revoked by Ministry of Finance in November 2012. On January 11th 2013, Ministry of Science and Technology, Ministry of Finance and SAT jointly issued a notice regarding checks on High and New Technology Enterprises (hereinafter referred to as “the check”).
As for high-tech companies, the check will emphasis on the following 4 aspects mainly proprietary intellectual rights, R&D expenditures, revenues gained from high-tech products or services and personnel.
1. Proprietary intellectual rights
According to the law, a high-tech company shall own proprietary intellectual rights either by independent R&D, transfer, gift, M&A or exclusive license. And the check will focus on the obtaining time of intellectual property, the compliance of exclusive license agreement, the scope of intellectual property and its certificate, the relatedness of intellectual property, etc. In fact, some high-tech companies fail to obtain the certificate for some reasons or the relatedness of the acquired intellectual property is not that obvious during their application process. Since proprietary intellectual right is a key element both on the application process and the check, Hwuason Lawyers suggest companies shall pay more attention on the obtaining and management of their proprietary intellectual rights.
2. R&D expenditures
According to the law, R&D expenditure of a high-tech company shall take at least 3% of annual sales revenue. And the check shall not only emphasis on the proportion of the R&D expenditure, but also the imputation of R&D costs and the compliance of external R&D. As for the imputation of R&D costs, companies need to set R&D auxiliary accounts required by law which is also designated as an important item in the check. Therefore, companies without R&D auxiliary accounts shall be strictly in line with such requirements in order to avoid potential tax risks.
3. Revenues gained from high-tech products or services
According to the law, the proportion of revenues gained from high-tech products or services of annual gross income shall exceed 60%. The check will stress on the imputation of the revenue and its proportion, the relatedness of the revenue, etc. In practice, some companies’ gross revenues for high-tech products and non high-tech products are mixed, especially for some small companies. Hwuason Lawyers suggest company split unrelated businesses through M&A in order to optimize the structure and be better qualified for the requirements.
According to the law, the proportion of scientific and technical personnel of total employees shall exceed 30% and the proportion of R&D personnel of total employees shall exceed 10%. In fact, some companies misunderstand the scope of R&D personnel. They think an employee could be classified into R&D personnel as long as his work is related with technology. However, the authority does impose certain rules when making such judgments. Since the scope of certain personal is not that clear, companies shall keep in touch with the authorities to avoid such risks.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (firstname.lastname@example.org) or Lingyan Hu (email@example.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
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.