Following the release of Circular Caishui  No. 119 (“Circular 119”), 2 on December 29, 2015, the State Administration of Taxation (“SAT”) issued Announcement  No. 97 (“the Announcement”) to clarify several matters concerning the super-deduction policy for R&D expenses applicable from tax year 2016.
The highlights of the Announcement
- R&D personnel includes researchers, technicians and support staff, whether full-time employees or external personnel engaged through labor service agreements (including through labor dispatching arrangements), or those temporarily employed by the company. Support staff, defined as mechanics engaged in R&D activities, does not include those providing logistic services.
- Accounting of R&D expenses
- When conducting R&D activities, companies can use tools and equipment that benefit from a tax policy granting accelerated depreciation of certain fixed assets. Under this circumstance, the Announcement clarifies that the super-deduction will be calculated based on the accounting depreciation expenses of these assets, provided it does not exceed the amount calculated based on tax depreciation expenses.
- For multi-purpose assets, the Announcement requires companies to record the R&D personnel’s activities and the use of equipment and intangible assets, and then allocate the expenses incurred between R&D expenses and operating expenses, taking a reasonable approach, e.g., one based on the proportion of the actual working hours for different activities. Without a proper record of reasonable allocation, R&D expenses cannot benefit from super-deduction.
- Companies engaging in multiple R&D projects in one tax year must calculate other R&D expenses eligible for super-deduction on a project-by-project basis. Other relevant expenses incurred in each project are eligible for super-deduction, up to a cap of 10% of the qualifying R&D expenses of a particular project, calculated according to the following formula:
Limit of other relevant expenses for each project = total amount of other qualifying R&D expenses3 for each project x 10% / (1 – 10%)
- Extraordinary income derived from scraps, defective products and prototypes produced in the course of R&D activities will be deducted from qualifying R&D expenses.
- R&D expenses do not qualify for super-deduction if they incur from activities financed by a fiscal fund the company has received from the government that is not subject to enterprise income tax (“EIT”).
- Outsourced R&D activities
- Outsourced R&D expenses paid domestically are fully deductible before EIT, and only the super-deduction is limited to 80% of the total amount. If outsourced to individuals, valid invoices are required.
- Overseas commissioned parties are defined as entities established under the laws of a foreign county or foreign individuals, including the special administrative regions of Hong Kong and Macau and Taiwan.
- A company will be considered to belong to the one of the seven industries4 that do not qualify for R&D super-deduction if the company’s main business income derives from them, accounting for more than 50% of its total income, excluding non-taxable income and investment profit.
- Subsidiary accounts for R&D expenses that qualify for super-deduction on a projectby-project basis must be available for the tax authorities’ future review. At the year end, enterprises must fill in a summary form of subsidiary accounts for R&D expenses and file it with the annual financial report and its notes.
To standardize the follow-up management, SAT provides a template of subsidiary account and year-end summary form.
- The Announcement also provides a list of essential documents that should be kept for this purpose.
Enterprises that benefit or will benefit from the R&D super-deduction policy should study the Announcement at length, especially the accounting and documentation requirements, and be familiar with the corresponding templates to prepare the documentation in compliance with the required format.
Date of issue: December 29, 2015. Effective date: January 1, 2016