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.
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  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:
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.
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.
Based on the Announcement  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  no.07 and  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.
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:
According to the Announcement  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  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.
Starting from January 1, 2022, based on the Announcement  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:
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.
Based on the announcement  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:
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.
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  no.10)
According to the former Announcement  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:
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  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  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.
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  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  no. 36).
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.
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  and No. 5  of the Shanghai Municipal People's Government).
This policy is effective for 3 months after the end of the lockdown in Shanghai.
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 email@example.com or via the form below. Our professionals will assist you.