Tax Insight: STA issued new guidance, enhancing tax preferential policies on super-deduction of R&D expenses

To implement the measures of the State Council to encourage enterprises to increase R&D investment and to optimize the implementation of the super-deduction of R&D expenses policies ("RDSD policies"), on 13 September 2021, China’s State Tax Administration (STA) issued Bulletin on Further Implementing the Super-deduction R&D Expenses Policies (Bulletin [2021] No. 28, or Bulletin 28), aiming to facilitate enterprises pre-enjoying RDSD policies and ease their financial pressure, and also to improve and simplify the format of auxiliary books for R&D expenses and adjust the calculation method of the deduction cap for "other R&D-related expenses".

In this article, RSM China Tax Team will share with you the key points of the newly issued Bulletin 28, combining the contents of Bulletin on Further Improving the Super-deduction R&D Expenses Policies (Bulletin [2021] No. 13, or Bulletin 13) issued earlier this year, so as to help you better utilize the preferential policies and understand the potential tax risks.

Key Policy Changes

1. More benefits upon pre-filing

Under Bulletin 13, when enterprises pre-file enterprise income tax (EIT) for the third quarter (in the case of pre-filing by quarter) or September (in the case of pre-filing by month), they can choose to pre-enjoy RDSD policies based on R&D expenses incurred in the first six months of the year.

Before that, enterprises can only enjoy RDSD policies when filing annual EIT instead of pre-filing. As a result, many enterprises with massive R&D investment will have to apply for tax refund during annual filing for the tax pre-paid, which leads to cash flow problems.

Now, for 2021, the newly-issued Bulletin 28 further allows enterprises to pre-enjoy RDSD policies based on R&D expenses incurred in the first three quarters of 2021. However, it is important to bring some attention to the 3 below points:

  • If an enterprise chooses not to enjoy RDSD policies when pre-filing EIT in October 2021, it cannot choose to enjoy it when pre-filing EIT in January 2022.  However, it can still enjoy the RDSD policies upon filing annual EIT by the end of May 2022;
  • According to Bulletin 28, R&D expenses incurred in the fourth quarter of 2021 cannot be super-deducted when pre-filing EIT for the fourth quarter of 2021.
  • This benefit only applies to 2021. For subsequent years, the enterprises can only pre-enjoy RDSD policies based on expensed incurred in the first six months, under Bulletin 13.

2. Formalities to pre-enjoy

To pre-enjoy RDSD policies, enterprises shall calculate the super-deduction amounts based on the R&D expenses actually incurred by themselves and fill in the "PRC Enterprise Income Tax Monthly (Quarterly) Pre-filing Tax Return (Type A)". It is assumed that the online filing system will unlock the RDSD related columns in Form A201010 for purpose of filling in.

Compared with the previous pre-filing tax return, the "Detailed Statement of Super-deduction of R&D Expenses" (Form A107012) has been added, which is also one of the required forms for EIT annual filing.

However, we would like to remind that the EIT pre-filing is generally based on the accounting profit amount, while it is the eligible R&D expenses that the super-deduction amounts shall be calculated from. The eligible R&D expenses shall be identified and collected following rules under relevant RDSD regulations.

3. Calculation method for “other R&D-related expenses”

If an enterprise conducts multiple R&D projects in one tax year, "other R&D-related expenses" of multiple R&D projects can now be combined for the calculation of the cap amount for super-deduction purpose. Previously, the cap amount had to be calculated separately for each project.

"Other R&D-related expenses" include expenses incurred for technical books and materials, data translation, expert consultation, high-tech R&D insurance, retrieval, analysis, evaluation, demonstration, appraisal, review, assessment and inspection & acceptance of R&D achievements, application, registration and agency of intellectual property, business trips, conference, employee welfare, supplementary pension insurance premiums, supplementary medical insurance premiums, etc.

The cap amount of the above expenses that can be super-deducted is 10% of the total amount of the other five kinds of eligible expenses, which are defined under relevant RDSD regulations.

Before, Bulletin on Relevant Matters of Super-deduction R&D Expenses Policies (Bulletin [2015] No. 97, or Bulletin 97) issued by STA regulates that the cap amount had to be calculated separately for each project. Now Bulletin 28 not only simplifies the calculation method, but also avoid the practical hurdles of allocating "other R&D-related expenses" to each project and mitigate the consequent tax risks, while guaranteeing this RDSD policy can be further enjoyed.

 

  • Rules to allocate "other R&D-related expenses" to R&D projects are not always clear. For example, travelling expenses of R&D personnel may benefit multiple R&D projects. The new calculation method avoids difficulties of allocation and reduces the tax risks for both taxpayers and tax authorities;
  • The new calculation method achieves to balance the cap amount between projects, which increases the absolute amount of tax benefits that enterprises can enjoy;
  • It is also stipulated that in the year of capitalizing intangible assets, the R&D expenses incurred for these capitalized projects are also included in the calculation along with the expensed items to calculate the cap amount for "other R&D-related expenses". However, in practice, it requires specific guideline, such as, how to decide which part to claim or exclude for super-deduction purpose when the total “other R&D-related expenses exceed the cap?

4. Diverse R&D expenses auxiliary books

Considering that the accounting software and systems used by enterprises vary, Bulletin 97 requires that while "accounting for R&D expenses in accordance with the requirements of the national financial and accounting rules", and the enterprises shall "set up R&D expenses auxiliary books since a R&D project is approved and retain it for follow-up administration. At the end of the year, the summary sheet of the R&D expenses auxiliary books shall be prepared."

Bulletin 28 provides a simplified version of R&D expenses auxiliary books ("the 2021 version"), while the 2015 version issued under Bulletin 97 stays alternative.

The 2015 version is more complicated, consisting of 4 auxiliary sheets and 1 summary sheet, while the simplified 2021 version only consists of 1 auxiliary sheet and 1 summary sheet, which would reduce the workload and difficulty of filling in.

When enterprises set up R&D expenses auxiliary books, they can choose to use either the 2015 version or the 2021 version, or even design the books themselves, which shall cover all items required in the 2021 version, meeting requirements for logical relation and high accuracy.

5. Reminder of potential tax risks   

For most of the tax preferential policies, it is cleared that the enterprises can "decide the applicability themselves, enjoy it when filing tax, and retain the documents for follow-up administration". In view of this, RSM China Tax Team would like to remind you of the following potential tax risks regarding the newly issued Bulletin 13 and Bulletin 28:

  • Bulletin 28 specifically adds the description of "actually incurred". One is to emphasize the authenticity of R&D projects; the other is to emphasize the authenticity of expenses incurred. The estimated and accrued R&D expenses shall not be entitled to be super-deducted during pre-filing.
  • The reason why Bulletin 28 provides more flexibility with auxiliary books for R&D expenses is due to the fact that the 2015 version was quite complicated that it did not carry out well. Simplifying the formats and allowing enterprises to design their own auxiliary books is aimed at encouraging the enterprises to implement the set-up and maintenance of auxiliary books, promoting the management of R&D projects and the accounting of R&D expenses. 
  • We recommend that enterprises choose or design the auxiliary books that meet their own R&D management requirements and take this as an opportunity to improve the coordination between managements for both R&D projects and R&D expenses accounting, so as to mitigate tax risks therefrom. In the spirit of Bulletin 28, tax authorities have the right to inspect relevant documents, including auxiliary books, that the enterprises retain for pre-enjoying RDSD policies. If the enterprises choose to supplement the documents later, it may lead to higher tax risks.

RSM would be glad to share with you the most updated tax policies and practice. If you have any question or need in relation to the above, please feel free to contact us.

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