China disqualified 58 companies for a significantly reduced corporate tax rate for high and new technology companies and asked them to repay taxes at a higher rate.
The nation is suffering tax losses from the aftermath of the Covid-19 pandemic and a campaign to reduce the tax burden on businesses over the past three years. Since the government is selling bonds to raise funds to fill the budget gap, it also needs to fill gaps in the tax system to generate as much revenue as possible.
Under Chinese tax law, high and new technology companies (HNTEs) are entitled to corporate income tax of 15%, compared to the usual 25%. To obtain HNTE status, several criteria must be met. A company’s core technology should belong to one of the categories listed in a catalog of high and new technologies specifically supported by the state, such as electronic information, biotechnology, aerospace, new materials, and new energy.
At least 10% of the company’s employees should be involved in research and development and related activities.
The Beijing Municipal Tax Administrative Bureau published a list of 58 companies that were disqualified as HNTEs without giving the reasons for their disqualification or how much tax they owe.
Under the rules for HNTE identification, companies disqualified as HNTEs cannot resubmit an application within five years.
In the past two years, China has tightened the qualification test of HNTEs. According to statistics from the government’s HNTE Qualification Management Network, Beijing disqualified a single-digit number of HNTEs every year from 2014 to 2018. The number rose to 23 in 2019 and 65 in 2020, beating the total number of disqualifications from 2013 to 2019. Guangdong, Jiangsu, and Zhejiang have also shown a similar trend.
According to statistics from the Ministry of Science and Technology, China had about 225,000 high and new technology companies in 2019.
China’s tax revenue declined 6.4% year over year in the third quarter after declining 11.3% in the first six months as corporate profits plummeted due to the Covid-19 pandemic. The country’s tax and fee reductions since 2016 also contributed to this.
From 2017 to 2019, the average ratio of total corporate tax payments to operating income was 4.78% and showed a clear downward trend. The average corporate tax to profit ratio was 11.15%, well below the normal corporate tax rate of 25%. This was found in a survey by the Chinese Academy of Finance, a think tank of the Treasury Department.
The think tank also suggested that China has limited scope to further cut taxes and fees, and now it’s more important to create security and hedge risk than to cut taxes on businesses.
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