Red tape hobbles China’s tax-relief scheme for hi-tech firms

Incentives meant to boost investment in innovation are so hard to actually get that many companies don’t bother trying, observers say

PUBLISHED : Monday, 10 October, 2016, 7:03am
UPDATED : Monday, 10 October, 2016, 7:03am

China has some of the friendliest taxation rules in the world for corporate research activities on paper, but businesses are still finding it a tedious and confusing process to actually gain the benefits, according to corporate executives and tax advisers.

Tax incentives are key pieces in the country’s mass innovation campaign, trumpeted by Premier Li Keqiang, to climb the value chain and bid farewell to low-end manufacturing. But the tax regime remains complicated and rigid, often involving a lot of paperwork and red tape, even after Beijing’s tweak of such policies in the last year.

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“Theoretically, the measures are intended to ignite innovation,” said a financial manager at a Shanghai firm who declined to be named. “But in reality, enterprises may feel reluctant to bother with such policies, as it could also trigger piles of documentation. Sometimes, the money saved from tax may not even be enough to pay off the input.”

To begin with, it’s a tricky process to be officially recognised as “hi-tech” to qualify for tax breaks. According to a state regulation enacted this year, a firm can only apply for this status one year after its registration by proving to a special government office that it has research capabilities and spent at least 3 per cent of all sales revenues on research.

According to accounting giant PwC, fewer than half of Chinese high and new-technology companies, or 31,000 out of a pool of 79,000 such firms, actually enjoyed tax relief last year.

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Roger Di, a PwC partner, said many businesses did not have the capacity to navigate the complicated tax incentive system.

“The lack of qualified internal R&D management systems and the difficulty for corporates to accurately identify R&D activities … are among reasons that companies haven’t fully benefited from the policies,” he said.

Hi-tech firms get a preferential income tax rate of 15 per cent instead of the standard 25 per cent. Software firms can enjoy two-year tax holidays and another three-year period in which their taxes are cut in half.

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The State Administration of Taxation claimed that the nation exempted a total of more than 140 billion yuan (HK$162 billion) in taxes to support R&D and innovation last year, or 5 per cent of the total corporate-income-tax haul of 2.71 trillion yuan for the year.

A few tweaks since the end of last year have sweetened the pot a bit.

Travel and conference expenses that were directly related to research activities, for instance, were now deductible, said Max Qiu, the tax director for Asia Pacific at Eaton, a US power management company.

“Such policies can help many businesses, including ours, to cut R&D costs,” he said.

But Qiu said there were still high bars to obtaining tax cuts.

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For instance, a company has to prove that it has strong growth in both sales and net assets for three consecutive years – such as reporting 15 per cent growth in both categories – to access deeper tax relief.

“It’s quite a high threshold for businesses amid ... the lacklustre conditions in China and around the globe now,” he said.