In recent years, a series of regulations were issued by China, through which the incentive regime to encourage the research and development (R&D) of enterprises is refined, and the point that enterprises should be led to become the party of innovation is emphasized.
Examples of such regulations include the refined R&D expense super deduction policy issued at the end of 2015, the new "Administrative Measures for the Assessment of High and New Technology Enterprises" (HNTEs) and its corresponding working guidelines released in 2016, and the corporate income tax (CIT) incentive policy for Software Enterprises and Integrated Circuit Enterprises released in 2016.
"Innovation is one of the major drive for economic growth, and R&D incentive is an important method for governments around the world to encourage the innovation of enterprises,” says Peter Ng, PwC China and Hong Kong Tax Leader.
Ng explains that currently approximately 70% of the countries have adopted tax credit as the only type of R&D related tax incentive, and some European countries have implemented 'patent box' as a kind of R&D related tax incentive.
Compared with these countries, China has a more refined and more comprehensive R&D related incentives regime, which covers the whole R&D value chain and is world-leading.
Furthermore, in China, eligible enterprises can enjoy incentives and benefits of various forms, including cash grant, preferential tax rate, and tax reliefs.
Nevertheless, PwC found in practice that certain problems exist in enterprises' implementation and execution of R&D related policies, which led to insufficient enjoyment of these cost-reducing and innovation-boosting incentives.
Under such circumstance, how to enjoy R&D incentives to the largest extent while remaining compliant with relevant laws and regulations has become a concern of many enterprises.
"R&D incentives are not fully enjoyed because of enterprises' being unfamiliar with R&D incentives related regulations,” says Roger Di, Leader of PwC China Research & Development Incentive Services.
Di adds that the lack of qualified internal R&D management system and the difficulty for enterprises to accurately identify R&D activities with technology driven methodology are the main issues.
Citing the R&D expense super deduction as an example, Di explains that based on the industrial statistics of the recent two years, entities such as banks, financial institutions, and agriculture product & by-product process enterprises did not fully enjoy R&D related benefits and incentives.
In terms of HNTEs, in 2015, only 31,000 out of the 79,000 HNTEs in China enjoyed relevant CIT relief, according to Di.
Free online resource
In this connection, technology experts and specialists of finance/accounting and R&D management of PwC Research & Development Incentive Services Team successfully established the PwC China R&D Incentives Website (www.pwcrd.com).
The website is established based on the R&D incentives related policies that are currently available, and the practical issues encountered by enterprises.
The website aims at providing professional solutions regarding the whole R&D value chain and enhancing the certainty of enjoying relevant R&D incentives for enterprises.
Recommendations for future R&D incentives
Edwin Wong, PwC China Tax Leader in China North Region, suggests tentative regimes that should considered regarding the policy-making of future R&D incentives.
In terms of R&D expense super deduction, Wong says that different R&D incentive systems can be applied to big enterprises and small and medium enterprises respectively in order to better encourage the R&D and innovation of all types of enterprises.
“To further support and encourage the development of small and micro businesses, part of the R&D expenses of such businesses can be refunded as cash back. In this way the cash flow and competitiveness of small and micro businesses can be enhanced,” adds Wong.
In terms of HNTEs and government incentives, it is suggested that the 'Catalogue of High and New Technology Areas Specifically Supported by the State' be further expanded in the future years so that more innovative businesses can fully enjoy R&D incentives.
“In this way a solid foundation will be laid for the enhancement of China's technological power,” notes Wong.