Innovation is the first driving force for enterprise development and the fundamental driving force for social development. As one of the most important subjects of innovation, enterprises' R&D power and capability are particularly important to social development. In order to encourage enterprises to increase investment in R & D and effectively promote their R & D and innovation activities, the Chinese government has introduced many policies to promote enterprise innovation. Tax is one of the most effective means to directly affect the behavior of market subjects, and countries generally guide the behavior of market subjects through tax means. The policy of additional deduction of R&D expenses is one of the preferential tax policies of our government to guide enterprises to innovate. China's Enterprise Income Tax Law stipulates that the following expenditures of enterprises may be deducted in the calculation of taxable income amount: research and development expenses incurred in the development of new technologies, new products and new processes. Jiao Hanwei, lawyer of Shanghai Guolinghouse Law Firm, will discuss the issue of additional deduction of enterprise R&D expenses from the perspective of tax law in combination with practical experience, so as to provide reference for operators.

What is research and development expense plus deduction?

Additional deduction is a tax-base preferential method of enterprise income tax, which generally refers to the amount of actual expenditure in accordance with the tax law, and then add a certain percentage as the deduction amount when calculating the taxable income. The implementation of additional deductions for enterprises' research and development expenditures is called research and development expenses additional deductions. According to the current policies and regulations, if the R&D expenses of the enterprise for the development of new technologies, new products and new processes do not form intangible assets and are included in the profit and loss of the current period, on the basis of actual deduction in accordance with the provisions, the R&D expenses shall be deducted at 50% more; If intangible assets are formed, they shall be amortized at 150% of the cost of intangible assets. For smes based on science and technology, from January 1, 2017 to December 31, 2019, the deduction rate for R&D expenses increased from 50% to 75%. For example, small and medium-sized technology enterprises can deduct 17.5 million yuan (10 million ×175%) before tax if the actual expenditure on the development of new products in the year is 10 million yuan. Through the additional deduction of research and development expenses, the income tax base is reduced, the tax burden of enterprise income tax is reduced, and enterprises are encouraged to increase research and development investment. China's implementation of the enterprise research and development expenses additional deduction policy began in 1996. In that year, the Ministry of Finance and the State Administration of Taxation, in order to implement the "Decision of the Central Committee of the Communist Party of China and The State Council on Accelerating Scientific and Technological Progress", actively promote the transformation of the mode of economic growth, and improve the economic efficiency of enterprises, jointly issued the "Notice of the State Administration of Taxation of the Ministry of Finance on Promoting the technological Progress of Enterprises Related to financial and tax issues" (Finance Word (1996) No. 41). For the first time, the issue of pre-tax deduction of research and development expenses was clarified: the state-owned and collective industrial enterprises research and development of new products, new technologies, new processes of the various expenses, the growth rate of more than 10%, subject to the examination and approval of the competent tax authorities, can be deducted according to the actual amount of 50% of the taxable income. In 2003, in order to further promote the healthy development of the socialist market economy, encourage all kinds of enterprises to increase investment in science and technology, improve economic benefits, and promote fair competition among enterprises, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Expanding the Scope of Application of the Policy of Additional Deduction of Enterprise Technology Development Fees (Finance and Taxation (2003) No. 244). The subjects entitled to additional deduction of R&D expenses will be expanded from "state-owned and collective industrial enterprises" to "all industrial enterprises of various owner-types with sound financial accounting systems and the practice of auditing accounts and collecting enterprise income tax." In 2006, the Notice of the State Administration of Taxation of the Ministry of Finance on the Preferential Policy of Enterprise Income Tax related to Enterprise Technological Innovation (Finance and Taxation (2006) No. 88) further expanded the scope of the subject enjoying the additional deduction of research and development costs, on the basis of industrial enterprises, It is extended to "domestic and foreign-funded enterprises, scientific research institutions, colleges and universities with a sound financial accounting system and the practice of audit and taxation." In 2008, the implementation of the Enterprise Income Tax Law of the People's Republic of China and its implementing regulations confirmed the preferential policy of additional deduction of research and development expenses in legal form. In May 2017, in order to further encourage science and technology smes to increase investment in R&D expenses, according to the decision of the Executive meeting of The State Council, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Science and Technology jointly issued the Notice on Increasing the Proportion of Pre-Tax Deduction of research and development Expenses of Science and Technology smes (Finance and Taxation [2017] No. 34). We will increase the percentage of R&D expenses deducted by small and medium-sized enterprises in science and technology from 50% to 75%.

What R&D expenses are subject to additional deductions?

In the final settlement of income tax, for the R&D expenses incurred in the form of independent research and development, enterprises can add and deduct the expenses as follows:

1. Personnel and labor costs. Salaries, basic old-age insurance premium, basic medical insurance premium, unemployment insurance premium, work-related injury insurance premium, maternity insurance premium and housing provident fund of personnel directly engaged in R&D activities, as well as labor expenses of external R&D personnel.

2. Direct input costs. (1) Materials, fuel and power costs directly consumed by R&D activities. (2) Mold and process equipment development and manufacturing costs for intermediate tests and product trial production, do not constitute fixed assets of samples, prototypes and general testing means of purchase costs, trial production of products inspection fees. (3) Expenses for the operation, maintenance, adjustment, inspection and repair of instruments and equipment used for R&D activities, as well as the rental fees for instruments and equipment used for R&D activities rented through business leasing.

3. Depreciation expense. Depreciation of instruments and equipment used in research and development activities.

4. Amortization of intangible assets. Amortization of software, patents, non-patented technologies (including licenses, know-how, designs and calculation methods) used in research and development activities.

5. Fees for new product design, new process regulation formulation, clinical trial fees for new drug development, and field test fees for exploration and development technologies.

6. Other related expenses. Other expenses directly related to research and development activities, such as technical books and materials fees, data translation fees, expert consultation fees, high-tech research and development insurance premiums, research and development results of the search, analysis, evaluation, evaluation, acceptance fees, intellectual property application fees, registration fees, agency fees, travel, conference fees, etc. The total amount of such expenses shall not exceed 10% of the total amount of research and development expenses that can be deducted.

7. Other fees stipulated by the Ministry of Finance and the State Administration of Taxation.

As far as business operations are concerned, the extension of the above R & D expenses plus deductions is still relatively broad, and it also gives enterprises a lot of room for overall arrangements. It should be emphasized that China's R & D expenses additional deduction policy to implement a negative list system, according to the provisions of the fiscal [2015] 119 document: tobacco manufacturing, accommodation and catering, wholesale and retail, real estate, leasing and business services, entertainment industry six industries do not apply to R & D expenses additional deduction policy. This means that the research and development investment of the above six industries does not enjoy the additional deduction policy. It should be pointed out here that the R&D expense extension of the R&D expense deduction policy is not completely consistent with the R&D expense extension of high-tech enterprises, and it should be noted when collecting related expenses.

What is the difference between commissioned R&D and independent R&D?

Research and development activities refer to the systematic activities with clear objectives that enterprises continue to carry out in order to obtain new scientific and technological knowledge, make creative use of new scientific and technological knowledge, or substantively improve technology, products (services) and processes. In the process of business practice, enterprises usually have four forms of R & D activities: independent R & D, commissioned R & D, cooperative R & D and centralized R & D, among which independent R & D and commissioned R & D are the main forms of R & D. Enterprise independent research and development refers to the independent research and development of enterprises mainly relying on their own resources, bearing all research and development investment, and owning completely independent intellectual property rights for research and development results. Commissioned research and development refers to the research and development project commissioned by a third party. In the commissioned research and development, the enterprise as the entrusting party needs to pay the corresponding remuneration or research and development costs to the third-party research and development institution, and the third-party research and development institution delivers the research and development results to the enterprise according to the requirements of the enterprise. According to the relevant provisions of China's tax law, as far as commissioned research and development is concerned, only when the entrusting party partially or fully owns the intellectual property rights of the research and development results, it can enjoy the additional deduction policy in accordance with the commissioned research and development. Otherwise, the enterprise can not enjoy the additional deduction policy according to the commissioned research and development. When enjoying the additional deduction policy, the difference with the form of independent research and development is that 80% of the expenses incurred in research and development activities is taken as the additional deduction base. The term "R&D expenses" refers to the expenses actually paid by the Principal to the Agent. No matter whether the entruster enjoys the pre-tax deduction policy of R&D expenses, the agent shall not deduct any additional deduction.

Tax burden is a very important part in the operation of enterprises, and even affects the competitiveness of enterprises to a large extent. Every operator should pay close attention to the tax policy and pay full attention to the tax burden of enterprises. After the above analysis, enterprises should accurately collect research and development expenses in strict accordance with the corresponding policies in the process of operation, and accurately apply the policy of additional deduction of research and development expenses to avoid tax risks. At the same time, enterprises should maximize the use of the R & D expense deduction policy in the process of operation, and make overall arrangements in the aspects of enterprise division, post setting, personnel definition, expense collection, and R & D forms, in order to maximize the enjoyment of the R & D expense deduction policy, reduce the tax burden cost, and promote the development of enterprises.

Jiao Hanwei

Chief partner and lawyer of Shanghai Guohillhouse Law Firm

More than 10 years of legal service experience and more than five years of business experience, familiar with law, familiar with business, He is good at providing enterprises with legal counsel, brand management, business compliance, business negotiation, intellectual property management, tax planning, equity transfer, corporate structure design, equity incentive, investment and financing, restructuring and merger, dispute resolution and other solutions for the whole stage of enterprise development from the perspective of law and business operation.