<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=2213921&amp;fmt=gif">

Preferential Tax Policies to Assist Businesses Under the Current Lockdown in Shanghai

News Fidinam Shanghai

To support business impacted by the current lockdown in Shanghai, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) issued a series of preferential tax policies and extended the implementation period for some tax-preferential policies.

Overview

  1. VAT Credit Refunds
  2. Further Extending the Scope of Tax and Fee Cutting Policies
    1. VAT Exemption for Small-Scale Taxpayers
    2. VAT Exemption for Small Low-Profit Enterprises
    3. Tax Deduction of R&D Expenses for Small and Medium-Sized Technological Enterprises
    4. Increased Tax Deduction Proportion for Newly Purchased Equipment and Instruments for Micro-, Small and Medium-Sized Enterprises
    5. Applicable Scope of "Six Taxes and Two Fees" Reduction and Exemption Policy Extended to Small Low-Profit Enterprises and Self-Employed Individuals
    6. Continuing the Deferred Payment of some Taxes and Fees by Micro-, Small and Medium-Sized Enterprises in the Manufacturing Industry in the Fourth Quarter of 2021
    7. Continuing the Additional VAT Credit Policy for the Life Service Industry
  3. Extension of Deferring the Payment of a Batch of Taxes and Fees
  4. Reduction and Exemption of Real Estate Tax and Urban Land Use Tax for Enterprises in Difficulties


1. VAT Credit Refunds

Value-added tax (“VAT”) is a typical indirect tax in the China tax system, with different rates of 6%, 9%, 13%. VAT credit is the tax surplus when the input VAT excess the output VAT. It is usually transferred to the Revenue Department, waiting to be credited by output VAT from future business activities. To support the operation of enterprises, the authorities decided that the VAT credit refunding policy will have a broader scale of application based on the Announcement [2022] no. 14 of the Ministry of Finance and the State Taxation Administration.

Small- and micro enterprises (individual business included) across all industries will enjoy a one-off existing tax credit refund in April or May 2022, and a fully incremental tax credit refund on a monthly basis starting from April 2022.

Enterprises from the following industries, will receive the same one-off existing VAT tax credit refund in July or October and monthly incremental VAT tax credit refund from April 2022:

  • manufacturing
  • research and technical services
  • electricity, heating, gas and water production and supply
  • software and information technology services
  • ecological protection and environmental governance
  • transportation, warehousing and postal services


The refunding process will start on April and be completed by the end of the year. Newly added credits will also be fully refunded on a monthly basis starting from April 1.

According to the Xinhua Press, the VAT credit refund this year is worth around 1.5 trillion RMB (US$235.56 billion). This is a relief measure that can help to release the cash flow of enterprises, therefore benefiting businesses directly.

2. Further Extending the Scope of Tax and Fee Cutting Policies

This round of tax and fee cutting includes VAT tax credit, tax deduction for R&D expenses, PPE purchasing (conditional items), “six taxes and two fees” and the extension of deferred payments. Medium-, small-, and micro-sized taxpayers are the main beneficiaries.

A. VAT Exemption for Small-Scale Taxpayers

Based on the Announcement [2022] no. 15, small-scale VAT taxpayers with 3% VAT tax rate, are exempted from VAT payment from April 1 to December 31, 2022. The pre-payment of VAT items with 3% pre-collection rate shall be suspended.

As per the previous Announcement [2021] no.07 and [2020] no.13, small-scale VAT taxpayers with 3% VAT tax rate and VAT items with 3% pre-collection rate are taxed on a reduced rate of 1% from January to March 2022. Starting from April 1, 2022, the tax exemption is promoted by exempting or pausing the tax payment to further reduce the tax burden for small-scale VAT taxpayers.

B. VAT Exemption for Small Low-Profit Enterprises

Small low-profit enterprise refers to enterprises engaged in industries that are not prohibited or restricted by the government, and at the same time meet all the following conditions:

  • The annual taxable income does not exceed RMB 3 million
  • The number of total employees does not exceed 300 persons
  • The total assets do not exceed RMB 50 million (approx. US$7.7 million)

According to the Announcement [2022] no. 13, for small low-profit enterprises, 25% of the taxable income that is more than RMB 1 million but not exceeding RMB 3 million yuan (approx. US$462,000) shall be included in the taxable income, with the applicable corporate income tax rate of 20%. This policy is valid from January 1, 2022 to December 31, 2024. Thus, it is a 3-year long-term preferential tax policy for eligible entities.

Also, the previous Announcement [2021] no. 08 regulated that a 20% corporate income tax rate should be imposed on 12.5% of their taxable income that is not exceeding RMB 1 million. This policy is valid from January 1, 2021 to December 31, 2022.

Therefore, for small low-profit enterprises, 2022-2024 will be a good opportunity to partially reduce the tax burden.

C. Tax Deduction of R&D Expenses for Small and Medium-Sized Technological Enterprises

Starting from January 1, 2022, based on the Announcement [2022] no.16 by the Ministry of Finance, the State Taxation Administration and Minister of Science and Technology, the following are available for small and medium-sized technological enterprises:

  • For R&D expenses which have not generated intangible asset, after being recorded into current profits and losses, an additional 100% of those R&D expenses could be deducted from taxable income
  • R&D expenses which have formed an intangible asset, could be amortized as 200% of the actual cost the intangible asset

In short, 200% of R&D expenses could be used as tax deduction for small and medium-sized technological enterprises. Those are strong tax incentives to encourage technology innovation, corresponding with China’s recent policies to encourage targeted investments in research and development (R&D) and technological development.

D. Increased Tax Deduction Proportion for Newly Purchased Equipment and Instruments for Micro-, Small and Medium-Sized Enterprises

Based on the announcement [2022] no.12, micro-, small or medium-sized enterprises may voluntarily choose to deduct the amount of newly purchased equipment and instruments (purchased within the period from January 1, 2022 to December 31, 2022) with a unit price greater than or equal to RMB 5 million, from the taxable income at a certain percentage.

The different depreciation percentage is based on the minimum depreciation period under the “Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China”, as following:

  • Equipment and instruments with 3 years minimum depreciation period: 100% of the amount could be deducted in a lump sum from taxable income in the current year.
  • Equipment and instruments whose minimum depreciation period are 4 years, 5 years or 10 years: 50% of the value could be deducted from taxable income in the current year; and the other 50% should be depreciated across the remaining useful life.

Any current year loss derived from the application of this policy, could be carried forward and deducted against taxable income after 5 years. Eligible entities who enjoy other policies regarding extending the loss carryover period may choose to apply this policy.

The validation period of this policy is from January 1, 2022 to December 31, 2022.

E. Applicable Scope of "Six Taxes and Two Fees" Reduction and Exemption Policy Extended to Small Low-Profit Enterprises and Self-Employed Individuals

From January 1, 2022 to December 31, 2024, small-scale value-added tax taxpayers, small low-profit enterprises and self-employed individuals are included in the scope of applicable subjects of the “six taxes and two fees” reduction and exemption policies. Eligible entities will only need to pay 50% of “six taxes and two fees”, including resource tax, urban maintenance and construction tax, real estate tax, urban land use tax, stamp tax (excluding securities transaction stamp tax), cultivated land occupation tax, education surcharge, and local education surcharge. (Announcement [2022] no.10)

F. Continuing the Deferred Payment of some Taxes and Fees by Micro-, Small and Medium-Sized Enterprises in the Manufacturing Industry in the Fourth Quarter of 2021

According to the former Announcement [2021] no.30, eligible micro-, small and medium-sized enterprises in the manufacturing industry, could choose to defer the payment of taxes and fees in October, November, December 2021 (monthly payment) or in the fourth quarter of 2021 (quarterly payment) as follow:

  • Medium-sized enterprises could defer 50% of taxes and fees payments
  • Micro- and small-sized enterprises could defer 100% of taxes and fees payments

All those payments could be deferred for 3 months since the end of 2021. Those taxes and fees including enterprise income tax, individual income tax, domestic value-added tax, domestic consumption tax and some surtax.

When the new Announcement [2022] no.2 issues, the validation period for deferring the payment of those taxes and fees in the 2021 Q4 shall be extended for another 6 months. In the case where exemptible taxes and fees of 2021 Q4 have already been paid after January 1, 2022 (before the Announcement [2022] no.2 comes into force), eligible entities could choose to apply for tax (fee) refund and enjoy the policy of deferring the payment. After the deferral, the final time limit is before the end of September 2022 (monthly payment) or October 2022 (quarterly payment). This would facilitate enterprises in manufacturing industry to better deploy cash and resources.

G. Continuing the Additional VAT Credit Policy for the Life Service Industry

From January 1, 2022 to December 31, 2022, taxpayers in the life service industry are allowed to credit an additional 15% of the input VAT against the output VAT (Announcement [2022] no. 11). The “taxpayer in the life service industry” means a taxpayer whose sales amount from providing life services is more than 50% of total sales. The specific scope of life services includes culture and sports service, education and medical service, tourism and entertainment service, catering and accommodation service, resident daily services and so on, governed by the Notes on the Sale of Services, Intangible Assets and Immovable Properties (Announcement [2016] no. 36).

3. Extension of Deferring the Payment of a Batch of Taxes and Fees

Considering the strict lockdown policy of the entire city in Shanghai, it is unfeasible for taxpayers to process tax payment during this period. Therefore, under the Rules for the Implementation of the Law of the People's Republic of China on the Administration of Tax Collection, deferring certain taxes and fees payment is practicable.

For taxpayers who file monthly returns, the deadline for filing tax returns in March 2022 will be extended from March 15 to March 31. Those greatly affected by the pandemic and thus still have difficulties in filing tax returns within the tax filing period in March 2022 may apply for the extension of the declaration.
For those who have difficulty in paying taxes on time due to the impact of the pandemic, and meet the conditions for deferring tax payments, the deferral of tax payment is granted, with a maximum period of no more than 3 months. Tax administrative penalties are exempted for taxpayers who fail to file on time due to the pandemic.

As the restriction in Shanghai is extended, therefore the corresponding deferring is effective until the end of lockdown policies in Shanghai.

4. Reduction and Exemption of Real Estate Tax and Urban Land Use Tax for Enterprises in Difficulties

For enterprises whose houses and land are urgently requisitioned by the government or who voluntarily reduce or exempt the rent for tenants, if it is indeed difficult to pay real estate tax and urban land use tax, the corresponding taxes can be reduced or exempted (No. 3 [2022] and No. 5 [2022] of the Shanghai Municipal People's Government).

This policy is effective for 3 months after the end of the lockdown in Shanghai.

Fidinam can help

In conclusion, although the lockdown in Shanghai brings a massive challenge for essentially any enterprise and individual, it is still possible to seize some opportunities to contain the economic damages. Making an efficient use of some of the available preferential policies is a good way to make the best out of a very challenging situation.

Should you want to know more about the available policies and those which could be more beneficial for your company and business, feel free to write to us at info@fidinam.com.cn or via the form below. Our professionals will assist you. 

Get in touch