Circular on Improving the Policy of Pre-tax Super Deduction for R&D Expenses

关于完善研究开发费用税前加计扣除政策的通知

Cai Shui [2015] No.119 — Issued jointly by the Ministry of Finance, the State Taxation Administration and the Ministry of Science and Technology on November 2, 2015. Effective from January 1, 2016.

Sources:

• Chinese text: 国家税务总局政策法规库 (STA)
• English translation: State Taxation Administration, Zhejiang Provincial Tax Service (Hangzhou)

All information in this document is authentic in Chinese. English is provided for reference only. In case of any discrepancy, the Chinese version shall prevail.

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I. Collection scope of R&D activities and expenses

R&D activities mentioned in this Circular refer to systematic activities with clear objectives carried out continuously by an enterprise for the purpose of acquiring new scientific and technological knowledge, creatively applying such knowledge, or substantively improving technologies, products (services), or processes.

(I) R&D expenses allowed for super deduction

Where the actual R&D expenses incurred in the R&D activities carried out by enterprises have not generated intangible assets and have not been recorded as current profits and losses, 50 percent of the actual amount incurred within the current year shall be deducted from the taxable income for the current year, after a deduction of the actual amount in accordance with the regulations. Where intangible assets have been formed, 150 percent of the cost of the intangible assets shall be amortized before tax.

The specific scope of R&D expenses includes:

1. Staff and labor costs

Salary and wages, basic pension insurance contributions, basic medical insurance contributions, unemployment insurance contributions, employment injury insurance contributions, maternity insurance contributions, housing provident fund of personnel directly engaged in R&D activities, and labor expenses for outsourcing R&D personnel.

2. Direct investment expenses

1. Materials, fuels, and power expenses directly consumed by R&D activities.
2. Development and manufacturing expenses for moulds and technological equipment used for intermediate tests and trial production of products, acquisition expenses of samples, prototypes and general testing methods that do not constitute fixed assets, and inspection fees for trial products.
3. Expenses related to operation and maintenance, adjustment, inspection, and repair of instruments and equipment used in R&D activities, as well as lease expenses for instruments and equipment rented in the form of operating lease and used in R&D activities.

3. Depreciation expenses

Depreciation expenses for instruments and equipment used in R&D activities.

4. Amortization of intangible assets

Amortization expenses for software, patents, non-patented technology (including licenses, proprietary technology, design, and calculation methods, etc.) used in R&D activities.

5. Design fees for new products

Fees for formulating new process regulation, clinical trial fees for new drugs, and on-site testing fees for prospecting and development technology.

6. Other relevant expenses

Other expenses directly related to R&D activities, such as fees for technical books and materials, fees for translating materials, expert consultation fees, insurance premiums for high-tech research and development, fees for retrieving, analysing, reviewing, demonstrating, appraising, evaluating, assessing and accepting R&D results, application fees for intellectual property rights, registration fees, agency fees, travel expenses, conference expenses, etc.

The total amount of such expenses shall not exceed 10 percent of the total amount of R&D expenses that are allowed for super deduction.

7. Other expenses

Other expenses as prescribed by the Ministry of Finance and the State Taxation Administration.

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(II) Activities to which the super deduction policy does NOT apply

1. Routine upgrades of enterprise products (or services).
2. Direct application of scientific research results, such as directly adopting new processes, materials, equipment, products, services, or knowledge that are publicly available.
3. Technical support activities provided to customers after commercialization.
4. Repetitive or simple changes made to existing products, services, technology, materials, or technological processes.
5. Market research, efficiency survey, or management research.
6. Quality control, testing and analysis, maintenance and repair as part of industrial (service) processes or routinely carried out.
7. Research in the fields of social sciences, arts, or humanities.

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II. Treatment of special matters

1. For expenses incurred in R&D activities carried out by an external organization or individual entrusted by the enterprise, 80 percent of the actual amount shall be included in the entrusting party's R&D expenses and allowed for super deduction, and the entrusted party shall not be allowed to make super deduction again. The actual amount of external R&D expenses shall be determined based on the arm's length principle.

   If there is an associated relationship between the entrusting party and the entrusted party, the entrusted party should provide detailed information about the R&D project expenses to the entrusting party.

   No super deduction shall be allowed for expenses incurred by enterprises entrusting R&D activities to foreign establishments or individuals.

2. For projects jointly developed by enterprises, each cooperating party shall separately calculate super deduction based on the actual R&D expenses they bear.

3. Enterprise groups, according to the actual situation of production, operation, and scientific-technological development, may determine reasonable methods for apportioning R&D expenses incurred in the projects with high technological requirements, large investment and the need for centralized research and development, based on the principles of consistency between rights and obligations and expenses matching revenue sharing. Such expenses shall be apportioned among the beneficiary member enterprises, and the relevant member enterprises shall calculate super deduction separately.

4. The expenses incurred by an enterprise for creative design activities to achieve innovative, creative, or breakthrough products may be allowed for pre-tax super deduction in accordance with the provisions of this Circular.

   Creative design activities refer to: development of multimedia software and animation game software; design and production of digital animation and games; design of construction engineering (with the green building evaluation standard reaching three stars), and specialized design of landscape architecture; industrial design, multimedia design, animation and derivative product design, model design, etc.

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III. Accounting and management

1. Enterprises shall, in accordance with the requirements of the national financial accounting system, conduct accounting treatment of R&D expenses; at the same time, for R&D expenses qualified for super deduction, a subsidiary accounting book shall be set up per research and development project to accurately collect and calculate the actual amounts of R&D expenses allowed for super deduction in the current year. Where an enterprise carries out multiple R&D activities within a tax year, it shall separately accumulate the R&D expenses that are allowed for super deduction according to different research and development projects.

2. Enterprises shall keep accounts for R&D expenses and production and operation expenses separately. All expenses shall be accurately and reasonably accumulated and super deduction shall not be applied to the expenses that are not clearly classified.

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IV. Industries to which the super deduction policy does NOT apply

1. Tobacco manufacturing industry.
2. Accommodation and catering industry.
3. Wholesale and retail industry.
4. Real estate industry.
5. Leasing and business services industry.
6. Entertainment industry.
7. Other industries specified by the Ministry of Finance and the State Taxation Administration.

The aforesaid industries shall be based on Industrial Classification and Code for National Economic Activities (GB/4754-2011) and updated accordingly.

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V. Tax administration matters and collection requirements

1. This Circular applies to resident enterprises with sound accounting practices that are subject to accounts-based tax collection and can accurately classify R&D expenses.

2. Where the actual amounts accumulated for each item of R&D expenses by an enterprise are inaccurate or the total amount calculated is incorrect, the tax authority shall have the right to make reasonable adjustments to its pre-tax deductions or super deduction amounts.

3. If the tax authority has objections to an enterprise enjoying super deduction benefits for research and development projects, it may refer to the administrative department of science and technology at the prefectural level (inclusive) or above for an appraisal, and the department of science and technology shall provide the appraisal in a timely manner. Enterprises undertaking R&D projects at the provincial or ministerial level (inclusive) and above, as well as cross-year R&D projects previously appraised, are no longer required to undergo an appraisal.

4. Enterprises, which meet the conditions of super deduction for R&D expenses as stipulated in this Circular and fail to enjoy this policy in time after January 1, 2016, may retroactively enjoy it and fulfill the filing procedures, with a maximum retroactive period of three years.

5. The tax authority shall strengthen the follow-up administration of the policy of super deduction for R&D expenses, regularly conduct examinations, and ensure that the annual examination coverage is not less than 20 percent.

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VI. Implementation date

This Circular shall enter into force from January 1, 2016.

The following documents are repealed simultaneously:

• Circular of the State Taxation Administration on Issuing Proposed Administrative Measures for Pre-tax Deduction for Enterprises' Research and Development Expenses (Guoshuifa [2008] No.116)
• Circular of the Ministry of Finance and the State Taxation Administration on Policy Issues Concerning Pre-tax Super Deduction for Research and Development Expenses (Caishui [2013] No.70)