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China: Corporate income tax returns for 2018, new rules and requirements

China: Corporate income tax returns for 2018, new rules

Multinational corporations with operations in China need to be aware about new filing rules and requirements for their corporate income tax returns for 2018.

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Overview of changes

Recently promulgated tax regulations include changes affecting corporate income tax. The following list provides an overview of certain amendments, with details provided in the next section of this report.

  • Changes concerning deductions
    • Increase to the unit value of fixed assets eligible for the “one-off deduction method” to RMB 5 million
    • Increase to the deduction limit for staff education expenses to 8% of total annual payroll
    • Relief from restrictions on applying the super-deduction on commissioned research and development (R&D) expenses for R&D activities undertaken by overseas entities
    • Increase to the super-deduction ratio for R&D expenses to 75%
    • Permit the carryforward of public welfare donations exceeding the deduction limit to the subsequent three years
  • Clarification of supporting documentation for deductions
    • Expand the types of documents that can be used in supporting deductions under certain circumstances
    • Clarify the time limit for obtaining supporting documentation for deductions
    • Provide remedial measures for invalid invoices
    • Provide remedial measures for “irremediable invoices” due to an “abnormality” of the transaction party
    • Retroactive deduction of expenses when the relevant supporting documents are only obtained after the filing deadline for the corporate income tax return
  • Simplified procedures for the “record filing” for tax incentives and asset losses
    • Record-filing procedure for enjoying tax incentives
    • Record-filing of asset losses for deduction purposes
  • Extended carryforward period of losses to 10 years for “high and new technology enterprises” (HNTEs) and “high-tech small and medium enterprises” (SMEs)

Details of changes

Changes to deductions

Changes to the income tax deductions are aimed at reducing the tax burden encountered by taxpayers, by reducing the tax depreciation period, increasing the deductible limit, removing the restrictions on specific deduction items, and permitting the excess amount to be carried forward for deduction purposes.
 

Increase of the unit value of fixed assets eligible for one-off deduction method

Circular Cai Shui [2018] No. 54 provides that expenditures incurred by enterprises in purchasing equipment and instruments during the period 1 January 2018 to 31 December 2020 and having a unit value not exceeding RMB 5 million are permitted to be fully expensed (100%) in the current period for corporate income tax purposes, rather than depreciated over the assets’ useful lives.
 

Increase of the deduction limit for staff education expenses

Circular Cai Shui [2018] No. 51 increases the deduction limit for staff education expenses from 2.5% to 8% of the annual total payroll amount. The amount of staff education expenses not exceeding the deduction limit is deductible for corporate income tax purposes. The amount of staff education expense exceeding the deduction limit can be carried forward and claimed as deduction in future tax years, without limitation.
 

Relief from restriction on applying super-deduction on commissioned R&D expenses for R&D activities conducted by overseas entities

Circular Cai Shui [2018] No. 64 provides relief from the restriction on the application of super-deduction on commissioned R&D expenses for R&D activities conducted by overseas entities—from being fully (100%) disallowed to an amount that is lower of two thresholds:

  • 80% of the R&D expenses incurred in commissioning overseas entities in conducting R&D activities
  • Two-thirds of the domestic R&D expenses that satisfy certain conditions


Increase the super-deduction ratio for R&D expenses to 75%

Circular Cai Shui [2018] No. 99 provides that from 1 January 2018 to 31 December 2020, the additional deduction on qualified R&D expenses for corporate income tax purposes is increased from 50% to 75% for R&D expenses that are actually incurred by an enterprise in R&D activities when such activities have not yet resulted in intangible assets and not accrued in the current year’s profit and loss statement.  Also, 175% of the amortization of intangible assets formed through the R&D activities is allowed to be claimed as deduction for corporate income tax purposes.
 

Carryforward of public welfare donations exceeding the deduction limit

Circular Cai Shui [2018] No. 15 allows the amount of public welfare donations exceeding 12% of an enterprise's annual total profit to be carried forward to the subsequent three tax years for corporate income tax purposes.

Documentation rules

Supporting documentation for deductions

The State Administration of Taxation (SAT) issued Announcement [2018] No. 28 to clarify the requirements for documentation in support of claims for deductions of costs and expenses for corporate income tax purposes, including:

  • Expand the types of documents, in addition to tax invoices, that can be used in supporting claims for deductions, including internal documentation such as original accounting vouchers prepared by an enterprise for their accounting of costs, expenses, losses, and other expenditures under certain circumstances
  • Extend the time limit for obtaining supporting documentation for deductions, to the date when the annual corporate income tax return is due (31 May of the following year)
  • Permit the deduction of costs and expenses without having in hand “valid invoices” as long as the valid invoices are obtained before the deadline for filing the corporate income tax return
  • Allow certain other specified documents to support a claim for deduction if the supplier is no longer in business
  • Retroactive deduction of expenses after receiving the relevant documents supporting the deductions within five years from the deadline for filing the corporate income tax return for the year at issue


Simplified procedures for record filing for tax incentives and asset losses

Effective 2018, taxpayers are only required to complete record filing on self-assessment basis instead of obtaining pre-approval from competent tax authorities for the following:

  • Application for tax incentives (SAT Announcement [2018] No. 23)
  • Reporting of asset losses for purposes of deduction (SAT Announcement [2018] No. 15)


Extended carry-forward period for losses of HNTEs and high-tech SMEs

Circular Cai Shui [2018] No. 76 further extends the carry-forward period of losses from five years to 10 years for HNTEs and high-tech SMEs as of 1 January 2018 for losses incurred within five years before obtaining the relevant qualification.

 

For more information, contact a tax professional with KPMG’s China Tax Center in the United States:

David Ling | +1 609 874 4381 | davidxling@kpmg.com

Shirley Shen| +1 408 367 6088 | yinghuashen1@kpmg.com

 

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