In order to further encourage enterprises to increase investment in research and development (R&D) activities, and to better support technological innovation, the Ministry of Finance and the State Tax Administration jointly issued the latest announcement about the pre-tax additional deduction for R&D expenses in March 2023.
According to this announcement, qualified enterprises are allowed to deduct an additional 100% of R&D expenses on top of actual expenses incurred if the R&D has not formed intangible assets. If intangible assets are formed, the enterprises are allowed to use 200% of the cost of intangible assets as the amortizing basis. Compared to the previous policies, this announcement extends the scope of enterprises that could qualify. In the past, the highest additional deduction was only available for certain industries or certain types of enterprises.
Even though the scope has been extended, the industries that are excluded from additional R&D deductions have not been changed. These industries include the tobacco manufacturing industry, accommodation and catering industry, wholesale and retail industry, real estate industry, leasing and business services industry, and entertainment industry. In addition, this additional R&D deduction policy can only be applied to resident enterprises that have a sound accounting system, calculate and pay tax based on their accounting books, and are able to trace and compute R&D expenses correctly.
The most common types of R&D expenses are:
Qualified R&D personnel expenses are limited to personnel who are directly engaged in R&D activities. If the personnel also conduct non-R&D activities, the enterprise should make necessary records and adopt reasonable methods to allocate expenses between R&D activities and non-R&D activities.
These expenses mainly include materials, fuel, and power that are directly invested and consumed in R&D activities, and include rent, repair, and maintenance fees for the equipment and instruments participating in R&D activities. Like the above, if the equipment and instruments are used in both R&D and non-R&D activities, records and clear allocation methodology are also needed.
Depreciation expenses incurred by equipment used for R&D activities can also be treated as qualified R&D expenses. Still, records and allocation should also be done if the equipment is not purely used in R&D activities.
While conducting R&D activities, intangible assets such as software, patents, and non-patented technology always play an important role. The amortization expenses on these intangible assets (the portion contributed to R&D activities) can also be treated as qualified R&D expenses.
New product design fees, new procedure formulation fees, clinical trial fees for new drug development, and field test fees for exploration and development technology
Other R&D-related expenses
This category refers to miscellaneous expenses directly related to R&D activities, such as book and material fees, translation fees, export consulting fees, appraisal, and evaluation fees, etc.
The procedure to enjoy additional R&D deduction remains, which is still "based on actual R&D expenses and self-assessment, declaring the benefit, and retaining the relevant materials for future reference". When enterprises file their Corporate Income Tax (CIT) returns for the third quarter (quarterly filing enterprises) or September (monthly filing enterprises), the enterprises are allowed to choose if they will include additional deductions calculated based on R&D expenses incurred in the first three quarters in this filing and adjust it to the whole year amount while doing CIT annual filing, or just simply wait until the annual filing to declare the whole year additional deductions all at once.