How can pharmaceutical enterprises easily enjoy zero tax rate?
On basis of the 2015 No. 88 Announcement issued by the State
Administration of Taxation and with its official implementation on
December 1, 2015, the taxable service scope applicable to the zero tax
rate policy is set forth below:
Taxable services, including
production and distribution services of radio, film and television
programs (works), technology transfer services, software services,
circuit design and testing services, information system services,
business process management services, as well as overseas energy
management services contract, can be eligible for VAT zero tax rate
under the tax policy Cai Shui  No. 106- “Notes on taxable services
scope”. VAT zero tax incentives are also applicable for offshore
outsourcing business services as per the Offshore Outsourcing Business
Services Annex 1. The aforesaid taxable services applicable for VAT zero
tax rate are collectively referred to in this announcement as the new
zero tax rate taxable services.
Taxable services rendered by a
Chinese enterprise or individual to another enterprise or individual
within China are NOT within the VAT zero tax rate taxable services’
Note: The purpose of applying for zero tax rate is to
benefit from VAT tax exemption but also to claim a refund on previous
“Cases of zero tax rate in the pharmaceutical industry”
Pharmaceutical Enterprise A
Enterprise A’s businesses can be categorized under 2 types of taxable services:
Knowledge Process Outsourcing (KPO) under the Offshore Outsourcing
Services (Pharmaceutical and biotechnology research, development and
2. R&D Services (Research, testing and development
on new technologies, new products, new processes or new materials and
1. RTF Solution: Apply for zero tax rate under the offshoring outsourcing service contracts
With all contracts belonging to the offshoring outsourcing services
bracket under the latest policy, the process of applying for zero tax
rate is now relatively simple.
Risk: The VAT exemption tax policy
under the offshore outsourcing services is only valid from January 1,
2014 to December 31, 2018. Whether or not the policy will be extended
after 2018 still remains unknown.
However, once this preferential
incentive is cancelled, all pharmaceutical companies will have to change
from the former offshore outsourcing service (KPO) contract into the
research and development service contract in order to continue
qualifying for the zero VAT rate tax exemption.
2. RTF Solution: Apply for the zero tax rate under the research and development services contracts
There is currently no time limit on the zero tax rate when applied
under the research and development services contract .
the contract is changed to cover the scope of R&D services, RTF’s
tax team will have to liaise with the enterprise’s technical staff to
acquire detailed information about the enterprise’s research, so as to
meet the contract’s various requirements. In addition, experts in the
field will have to be invited for acknowledging the research projects.
So, this process is more complicated.
3. RTF Other Solution: Give up on the application of zero tax rate but apply for tax exemption
This is more suitable for enterprises with low VAT input. Even if the
application for zero tax rate is successful, enterprises with low VAT
input can only enjoy tax exemption because applying for the refund on
the VAT input will not be worthwhile. So, the VAT exemption process is
Risk: Once an enterprise waives the zero tax rate,
it is no longer entitled to qualify for the zero tax rate for the
subsequent 36 months.