The Missed Opportunities: CFO’s unawareness of several incentives given to R&D businesses in Chi

Today, many foreign owned R&D centres in China willcontrol their cash flows by setting their mark up rate at the lowest level aspossible, for instance below 10% or even below 5%.  This is certainly an effective way of controlling cashflows but the risks involved are unimaginably high.  The tax authorities might trace back the enterprise’s profits for the previous 10 years,reset the previous profit rate at a more reasonable level, for example, at13-15%(The China Tax Authorities will often consider the average rate used byneighboring countries, for example, the average rate set in India is at 15%)andask the enterprise to transfer back the eroded and shifted cash flows to China. If theheadquarters (HQ) does not transfer back the cash to the subsidiary bankaccount, a 10% withholding tax will be set on overseas profits distribution anda higher rate of 35% of Corporate Income Tax (CIT) willbe chargeable on local profits.

Besides the abovetax risks, the Chinese Government has been encouraging multinational companies,especially in the R&D and Technology field, to step in the Chinese market.  The government has been offering a plethoraof both tax and financial incentives tothese types of enterprises. Forinstance, an R&D multinational company established in China can benefitfrom the following incentives:

1.    Value AddedTax(VAT) exemption on R&D revenue
(Caishui(2013)No. 106 Attachment 3,State Tax Announcement (2014) No. 49 & China Tax Administration Section 51)

2.    VAT exemptiononoverseas revenue related to technology R&D, technology services ortechnology consulting or even zero-rated VAT on these revenues with a VATinputrefund

(Caishui (2013)No.106 Section 1& 7, State Tax Announcement (2014) No. 11, Caishui (2015)No.118 &State Tax Announcement (2015) No. 88)

 3.    Financialsubsidy, meaning for every 1 USD of overseas technology revenue, obtain 0.1RMBof subsidy

 4.    CIT ratereductionfrom 25% to 15%

 For betterillustration, let’s assumean R&D centre with an annual cost of 50million RMB and a mark up of 15%.

 

Incentives	Before Incentives	After Incentives
VAT Exemption	VAT= 3,864,000 (57.5  million*6.72%)	VAT= 0
Financial Subsidy	Subsidy Amount=  0	Subsidy Amount=  884,615 ((57.5  million/6.5USD)*0.1)
CIT Reduction	CIT= 1,875,000 (7.5million*25%)	CIT= 1,125,000 (7.5million*15%)

 

Up to now, RTF has helped over 100 foreign invested companies to controltheir tax risks but also helped them tosave around 5 billion RMB of taxes andto gain 10 million RMB of subsidy. Isreducing tax risks and minimising costsyour principal goal?  If it is a YES,then RTF will definitely be the best right-hand man to help your companytoachieve these corporate goals.  Should there beany questions, our consulting team is at your disposal.