China has released a new corporate income tax (CIT) incentive for enterprises engaged in pollution prevention and control, in a bid to support firms that align with the government's environmental goals.
According to the incentive, qualified pollution prevention and control enterprises – such as those engaged in waste management or pollution monitoring – will benefit from a reduced CIT rate of 15 percent. It will be implemented retroactively from January 1, 2019 until December 31, 2021.
The policy was jointly announced by the Ministry of Finance, State Administration of Taxation, National Development and Reform Commission, and Ministry of Ecology and Environment on April 13 in The Announcement on the Third Party Enterprise Income Tax Policy Concerning Pollution Prevention and Control.
The preferential 15 percent CIT rate applies for qualified enterprises that are commissioned by polluting enterprises or the government to operate or maintain environmental pollution control facilities.
To qualify, such an enterprise must:
- Be legally registered in China;
- Have been operating facilities for over one year;
- Employ at least five technicians in the field with intermediate titles, or at least two with senior titles;
- Have annual operating income deriving from environmental protection services accounting for no less than 60 percent of total revenue;
- Have its own laboratory and resources to meet the testing requirements of pollutants within the scope of the enterprise's operations;
- Be able to ensure normal operation so that pollutants can be continuously monitored and treated to meet required standards; and
- Have a tax credit rating not assessed as C or D within the past three years.
Enterprises who qualify for the preferential CIT rate may self-declare to make use of the incentive. When verifying an enterprise's eligibility after the fact, the tax department may transfer the responsibility to the ecology and environment department to conduct the assessment.
Support for the environment
The CIT incentives for pollution prevention and control enterprises is part of the Chinese government's campaign to improve the country's notoriously polluted environment and encourage compliance with environmental regulations.
In recent years, China's top leadership has made environmental concerns a higher priority in the domestic policy agenda than any other time in recent memory. In his landmark speech at the 19th Party Congress in 2017, Chinese President Xi Jinping said that China would strive for an "ecological civilization".
In the same vein, the government has been undertaking a campaign to crack down on heavy polluters – especially in northern regions – since at least 2016 and has come up with a number of measures to encourage firms to reduce their emissions.
These include increased compliance inspections, forced relocation of heavy polluters, incentives for firms to slash emissions, support for green industries, and the introduction of the Environmental Protection Tax and Soil Pollution Law, among others.
China's leadership not only sees support for environment-related firms as necessary to battle pollution, but also as a means to nurture firms to grow in what they consider to be a strategic emerging industry. The 15 percent CIT rate – down from the standard rate of 25 percent – offered in this new incentive is the same offered to high-tech companies participating in the strategically important Made in China 2025 policy.
Although the Chinese government has showed some signs of easing on its pollution crackdown as the economy slows, it has also maintained that improving the environment continues to be a high priority. The trend of tighter regulations for polluters and support for environmentally-friendly enterprises should therefore be expected to continue even as the economy faces a slowdown.
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