New temporary incentives to support scientific and technological innovation
China’s Ministry of Finance, the Ministry of Science and Technology and the State Taxation Administration jointly issued guidance on 28 September 2022 (Announcement  No. 28) that temporarily enhances benefits for high-tech enterprises with a view to encouraging innovative development, equipment renewal and the technological upgrading of enterprises. The announcement applies as from 1 October 2022.
The benefits provided in the announcement are as follows:
- Preferential treatment for high-tech enterprises for new equipment and equipment: High-tech enterprises may deduct from taxable income the full amount of the cost of newly purchased equipment and equipment during the period 1 October 2022 through 31 December 2022. This bonus deduction may be taken only for the current year and is available to all enterprises that become qualified as high-tech enterprises in the fourth quarter of 2022. Any qualifying amount that is not deducted may be carried forward for deduction in subsequent years based on the normal rules.
- Preferential treatment for enterprises entitled to the additional pre-tax deduction for research and development (R&D) expenses: Enterprises that are entitled to the bonus pre-tax deduction of 75% for R&D expenses may take a 100% deduction for the period 1 October 2022 through 31 December 2022. To enjoy the additional deduction at the time the corporate income tax for 2022 is settled, an enterprise may calculate those expenses: (a) based on the expenses actually incurred in the fourth quarter of 2022; or (b) by multiplying the actual R&D expenses incurred in the year by the number of months the enterprise was carrying on operations during the period 1 October 2022 through 31 December 2022 and dividing the amount arrived at by the actual number of months of business operations in 2022.
It is possible that different tax authorities may have different opinions on the types of equipment and appliances that qualify for the additional tax deduction, so affected enterprises should consider engaging in advance communications with the in-charge authority to better understand its position. Additionally, with respect to the deduction for R&D expenses, the tax authority will have certain requirements, such as maintaining accounting vouchers and supporting documents, and possibly requiring a verification report from a qualified third party to demonstrate the authenticity of the expenses. Affected enterprises may wish to consider following up with the tax authority on the requirements and involving a professional agent to prepare the verification report.