China to Cut Billions in Taxes

As China’s behemoth growth begins to slow, the government is taking steps to ensure decline is minimal. How can your company benefit?

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China has approved 380 billion RMB (US$55.2 billion) worth of tax cuts for businesses and individuals, in an effort to boost economic growth by reducing the tax burden on businesses and encouraging consumption.

The cuts simplify the value-added tax (VAT) system, reduce rates for small and medium sized enterprises (SMEs), offer incentives for certain industries and increase health insurance deductions. The measures follow Premier Li Keqiang’s pledge in the annual Work Report in March to cut corporate taxes by 350 billion RMB (US$50.7 billion) and business fees by 200 billion RMB (US$29 billion) in 2017.

The tax relief package is the first since China completed its VAT reform last year, and comes as the economy is forecast to slow in the latter half of 2017.

VAT system simplified
The number of VAT brackets will be reduced from four to three as of July 2017. As previously reported, the government will eliminate the 13 percent, leaving only the 17 percent, 11 percent and six percent brackets.

All products previously part of the 13 percent bracket will become part of the 11 percent bracket, namely: cereals and edible vegetable oils; tap water, heating, cooling, hot water, coal gas, liquefied petroleum gas, natural gas, methane gas, coal/charcoal products for household use; books, newspapers, magazines; feed, chemical fertilizers, agricultural chemicals, agricultural machinery and plastic covering film for farming; agriculture, forestry, products of animal husbandry, aquatic products; audio-visual products; electronic publications; dimethyl ether; and edible salt.

Tax cuts for small enterprises, tech firms
Tax cuts for low-profit enterprises have been extended to a wider range of companies. Enterprises with an annual income of 500,000 RMB (US$72,625) or less are eligible for a preferential corporate income tax (CIT) rate of 20 percent applied to only half of their taxable income, up from the previous cap of 300,000 RMB (US$43,575).

The standard CIT rate is 25 percent on all taxable income. The measure is valid from January 1, 2017 to December 31, 2019.

For instance, high-tech companies across China enjoy a preferential 15 percent CIT rate, while Guangdong, for example, has its own high-tech incubation fund to
attract investment.

The measures also increase pre-tax deductions for SME tech firms from 50 percent to 75 percent for R&D costs incurred from the development of new technologies, products, and techniques. The deductions are also valid from January 1, 2017 to December 31, 2019.

Furthermore, venture capital firms in certain regions can benefit from taxable income deductions on 70 percent of tech firm investment at the seed stage, the initial setup stage of a new business, as of January 1, 2017. Investments made up to two years prior to this date can also apply for this benefit. The eligible regions are Beijing, Tianjin, Hebei, Shanghai, Gu angdong, Anhui, Sichuan, Wuhan, Xi’an, Shenyang, and the Suzhou Industrial Park.

Other tax cuts
Individuals nationwide will enjoy expanded tax cuts for commercial health insurance, with an upper limit on deductions of 2,400 RMB (US$350) per person, leaving individuals extra money for consumption.

Implications for foreign investors
The slew of tax cuts, coming on the heels of a year of significant tax reform, is a positive sign for businesses and is expected the boost the economy. Although China’s GDP grew at a faster than projected 6.9 percent in the first quarter of 2017, analysts expect the pace to drop off later in the year as other stimulus measures run out of steam and officials try to rein in the booming property market.

Given the essentially complete transition from business tax to VAT, overhauls to the VAT system are of note for all businesses operating in China. In particular, the amalgamation of the 13 percent bracket into the 11 percent bracket is a boon for any business involved in the former. The move can be seen as a starting point for simplifying the newly ‘completed’ VAT system, as the 13 percent bracket applied to fewer products than the other brackets.

Meanwhile, many of the other tax breaks target small enterprises and tech startups. China’s comparatively high taxes and business fees can put a squeeze on small firms and startups, especially as the pace of growth slows. But supporting tech startups is part of China’s strategy to foster a more innovative economy and move up the value chain.

That being said, many of the cuts also target farmers, low-income businesses and other vulnerable elements of society. Appeasing these potentially restive groups is important for Chinese President Xi Jinping to ensure stability ahead of the fall’s 19th Party Congress.

However, Chinese citizens are eagerly awaiting an individual income tax system better suited to China’s new economy, and are calling for curbs to unaffordable property prices.

In addition to the new tax cuts, China has a number of pre-existing tax incentives at both the national and regional levels. For instance, high-tech companies across China enjoy a preferential 15 percent CIT rate, while Guangdong, for example, has its own high-tech incubation fund to attract investment.

Category Business