Tax Incentives Available to Businesses Impacted by the Shanghai Lockdown
Over the past two years, China has issued a range of tax policies to help ease the tax burden of businesses hit by the COVID-19 pandemic. As Shanghai continues to battle the worst outbreak of COVID-19 the country has seen since early 2020, the city has begun rolling out additional measures to help struggling businesses. Here we summarize the applicable national and Shanghai tax incentives, rebates, exemptions, and extensions that businesses can access during the current COVID-19 outbreak.
Amid the most severe wave of COVID-19 in China since the virus first erupted in Wuhan in 2020, Shanghai is by far the hardest-hit city in the country.
To contain this latest flare-up, Shanghai has been under a city-wide lockdown since April 1, 2022, with some areas shut down for even longer. Worse still, as daily cases remain stubbornly high, no definite end date for the lockdown has been announced, creating a sense of uncertainty among households and businesses.
The prolonged lockdown measures have put great pressure on enterprises operating in Shanghai, especially on small businesses that are more vulnerable to disruptions.
To help impacted businesses get through this difficult period, on March 29, 2022, the Shanghai Municipal government released Several Policy Measures of Shanghai Municipality to Fight against COVID and Boost the Growth of Enterprises (the “Policy Measures”), which roll out 21 measures across six areas. These include tax and fee cuts, financial support, rent cuts for small businesses renting state-owned property, measures that specifically target restaurants, retail businesses, travel agencies and tourist sites, the transportation sector, and the exhibition industry, among others.
On March 30, 2022, the Shanghai Municipal Tax Service released a detailed guideline for the implementation of the tax measures proposed in the Policy Measures.
In this article, we will walk you through the tax incentives proposed in the Policy Measures.
What are the proposed tax incentives?
Large-scale tax rebates on VAT credit
After first being proposed in the Government Work Report released during the 2022 Two Sessions, on March 21, 2022, the Ministry of Finance (MOF) and the State Taxation Administration (STA) released detailed guidelines on the implementation of large-scale tax rebates on VAT credit, in a move to provide cash flow support to enterprises and promote consumption and investment.
VAT, or value-added tax, is one of the major indirect taxes levied in China. Rates range from six to 13 percent for general VAT taxpayers. VAT credit is the overpaid input VAT at the end of each taxable period when the input VAT exceeds the output VAT.
Previously, the period-end uncredited VAT was not refundable in the current taxable period but could be carried forward to and be deducted in the next taxable period. Since April 2019, when China began deepening VAT reform, qualified taxpayers in all industries were allowed to apply for uncredited VAT refunds in the current taxable period. Starting in June 2019, qualified taxpayers in the advanced manufacturing industry were able to enjoy a similar but more relaxed policy.
Now, the VAT credit refund policy will be applied even more broadly.
The full refund of incremental VAT credit on a monthly basis, which was previously only available to companies in the advanced manufacturing industry, is now available to micro and small firms in all industries and qualified enterprises in another six industries.
The six industries are:
- Scientific research
- Electricity, heat, gas, and water supply
- Software and information technology services
- Ecological protection and environmental governance
- Transportation, storage, and delivery services
All qualified enterprises will be able to apply for this full refund of incremental VAT credit on a monthly basis starting from April 1, 2022.
Moreover, qualified enterprises will enjoy a one-off refund of their existing VAT credit in turn following the below calendar:
- Micro firms in all industries can start to apply for one-off existing tax credit refunds in April 2022
- Small firms in all industries can start to apply for one-off existing tax credit refunds in May 2022
- Medium-sized enterprises in the six industries can start to apply for one-off existing tax credit refunds in July 2022
- Large enterprises in the six industries can start to apply for one-off existing tax credit refunds in October 2022
The refund process is expected to be completed by the end of the year. It is estimated that about RMB 1.5 trillion (approx. US$ 238 billion) will be spent on tax rebates, all of which will go directly to enterprises.
VAT exemption for small-scale taxpayers
On March 24, 2022, the MOF and the STA released a new announcement clarifying issues related to VAT exemption for small-scale VAT taxpayers.
Here, small-scale taxpayers normally refer to taxpayers whose annual VAT taxable sales do not exceed RMB 5 million (approx. US$784,560).
Accordingly, from April 1, 2022 to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment. Moreover, the taxable sales income that small-scale VAT taxpayers earned before March 31, 2022 will be taxed at a reduced rate of 1 percent instead of 3 percent.
CIT reduction for small and low profit enterprises
On March 18, 2022, the MOF and the STA released an Announcement on Further Implementing Preferential Income Tax Policies for Small and Low Profit Enterprises (the “Announcement”), which will be retrospectively implemented from January 1, 2022 to December 31, 2024. The incentive was first disclosed during the 2022 Two Sessions.
Accordingly, the corporate income tax (CIT) liability of small and low profit enterprises (SLPEs) will be halved for the portion of taxable income exceeding RMB 1 million (approx. US$152,800) but less than RMB 3 million (approx. US$ 458,500).
SLPEs refer to enterprises engaged in non-restricted and non-prohibited businesses that meet the following three conditions:
- Annual taxable income not exceeding RMB 3 million (approx. US$458,500);
- Number of employees not exceeding 300; and
- Total asset value not exceeding RMB 50 million (approx. US$7.7 million).
All types of SLPEs in China are able to enjoy a reduced CIT rate of 20 percent in combination with a reduction of their tax base. With the retrospective implementation of the Announcement, SLPEs are subject to:
- 20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million (approx. US$152,800) (effective from January 1, 2021 to December 31, 2022); and
- 20 percent CIT rate on 25 percent of their taxable income amount for the portion of taxable income in excess of RMB 1 million but not exceeding RMB 3 million (effective from January 1, 2022 to December 31, 2024).
As a result, for an SLPE’s taxable income amount of up to RMB 1 million, an effective 2.5 percent CIT rate will apply; for the portion of taxable income between RMB 1 million and RMB 3 million, an effective 5 percent CIT rate apply.
Because the SLPE evaluation is carried out at the entity level (instead of at the group level), small subsidiaries of foreign multinational enterprises (MNEs) in China can also benefit from these CIT cuts.
|CIT Reduction for Small and Low Profit Enterprises (SLPEs)|
|Annual taxable income（ATI）||Tax base||CIT rate||Effective CIT rate||Effective period|
|The portion below RMB 1 million||ATI*12.5%||20%||2.5%||2021.1.1 to 2022.12.31|
|The portion between RMB 1 million and RMB 3 million||ATI*25%||5%||2022.1.1 to 2024.12.31|
Super pre-tax deduction on R&D expenditure for TSMEs
According to the 2022 Government Work Report released on March 5 during the 2022 Two Sessions, the additional R&D expenses deduction ratio of technology-based small and medium-sized enterprises (TSMEs) will be raised from 75 percent to 100 percent. On April 1, 2022, the MOF, together with the STA and the Ministry of Science and Technology (MOST), released an announcement that provides more details on the implementation of this policy.
A TSME falls under the scope of SMEs that conduct technology-based activities, which consists of scientific and technological personnel who are involved in R&D activities and obtain IP for creating high-tech products or services.
For TSMEs, starting from January 1, 2022, if the R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount. If the R&D expenses have formed intangible assets, they can be amortized before CIT at 200 percent of the actual cost of intangible assets.
It’s important to note that R&D activities here refer to processes where an enterprise applies new science and technology knowledge creatively for the purpose of obtaining new science and technology knowledge or continuously carries out systematic activities with specific goals for substantive improvement of technologies, products (services), and processes. Non-creative activities, such as conventional upgrades of the enterprise’s products, are not regarded as eligible for the R&D super deduction policy. The STA also has detailed guidance on the scope of the R&D expenses.
Increased proportion of CIT deduction for new equipment and instrument purchases for MSMEs
On March 4, 2022, the MOF and STA released the Announcement of the Policy on Pre-tax Deduction of Taxable Corporate Income on Micro, Small and Medium-sized Enterprises for Purchase of Equipment and Instruments, which clarified specific deduction rules.
Accordingly, during the period from January 1, 2011 to December 31, 2022, micro, small, and medium-sized enterprises (MSMEs) can voluntarily choose a pre-tax deduction of a certain proportion of their costs for the purchase of new equipment and instruments with a unit value (price) not exceeding RMB 5 million (approx. US$760,000). Specifically:
- MSMEs purchasing equipment and instruments with a minimum depreciation period of three years would be entitled to a one-off deduction of the total purchase costs from taxable income; and
- MSMEs purchasing equipment and instruments with a minimum depreciation period of four, five, or ten years would be eligible for a 50 percent deduction of the total purchase costs from taxable income, while the remaining 50 percent shall be deducted in the remaining depreciation period.
If an enterprise chooses to apply the above policies to the current year and the deduction amount outnumbered the taxable income, the relevant loss can be carried forward in the following five tax years to deduct the taxable income.
MSMEs refer to enterprises engaging in industries not restricted or prohibited by the state and satisfy the following criteria:
- For enterprises in the information transmission industry, construction industry, and leasing and commercial services industry: less than 2,000 employees, business revenue of no more than RMB 1 billion (approx. US$156.9 million), or total assets of no more than RMB 1.2 billion (approx. US$188 million).
- For enterprises in real estate development: business revenue of no more than RMB 2 billion (approx. US$313.8 billion) or total assets of no more than RMB 100 million (approx. US$15.7 million); and
- For enterprises in other industries: less than 1,000 employees or business revenue of no more than RMB 400 million (approx. US$62.7 million).
Expanded scope of the “six taxes and two fees” policy to SLPEs and self-employed
First introduced in 2019 to help ease the tax burden of small-scale VAT taxpayers, this policy allows provincial governments to reduce the “six taxes and two fees” within 50 percent of the tax amount. As per an announcement released by the MOF and the SAT, this policy is now available to SLPEs and self-employed individuals, in addition to small-scale taxpayers.
The “six taxes” are:
- Resource tax
- Urban construction and maintenance taxes
- Property tax
- Urban and township land use tax
- Stamp duty (excluding securities transaction stamp duty)
- Farmland occupation tax
The “two fees” are:
- Education surcharges
- Local education surcharges
This tax benefit was originally applicable from January 1, 2019 to December 31, 2021. The policy has now been extended to December 31, 2024.
Extension of the tax deferment policy for manufacturing MSMEs
The STA and the MOF released an announcement on February 28, 2022 on extending the tax deferment policies for MSMEs in the manufacturing sector, with effect on the same day.
Accordingly, the policies allowing manufacturing MSMEs to defer payment of some taxes for the fourth quarter of 2021, as stipulated in the STA Announcement  No.30, would be extended for another six months in addition to the original three months.
If manufacturing MSMES have paid the deferred taxes in the fourth quarter of 2021 after January 1, 2022 and before the announcement is issued, they can voluntarily choose to apply for tax refunds (fees) and enjoy the extension of the tax deferment policy.
The taxes allowed for deferral include CIT, individual income tax, domestic VAT, and domestic consumption tax incurred by manufacturing MSMEs from January through June 2022 (payable on a monthly basis) or in the first and second quarters (payable on a quarterly basis) of 2022, as well as the surtaxes. However, it excludes withholding taxes and fees, taxes collected and remitted, and taxes and fees paid when a taxpayer applies for the tax authorities to issue invoices on its behalf.
Extension of the additional VAT deductions for the life services industry
First implemented in the period from October 1, 2019 to December 31, 2021, the policy of additional deduction of VAT in the life services industry has now been extended to December 31, 2022, according to an announcement released by the MOF and the STA.
The additional VAT deductions in the life services industries will continue to be deducted by 15 percent, on the basis of the current period of deductible input VAT.
To be eligible for the additional VAT deductions, taxpayers must be engaged in services falling within the following six broad categories:
- Cultural and sports services;
- Educational and medical services;
- Tourism and entertainment services;
- Catering and accommodation services;
- Daily necessities services; or
- Other services considered to be within the life services industry.
Extending the period for filing tax returns
According to guidelines released by the Shanghai Municipal Tax Services, for taxpayers who file tax returns on a monthly basis, the deadline for filing tax returns in March 2022 was extended from March 15, 2022 to March 31, 2022.
Those who still face difficulties filing tax returns before the deadline for March 2022 due to the impact of the epidemic may apply to the tax authorities for an extension.
Those who have difficulty paying taxes on time due to the impact of the epidemic and meet the conditions for tax deferment can be granted an extension of up to three months for tax payment.
Taxpayers affected by the epidemic who fail to file taxes on time will be exempted from related administrative penalties.
This policy will be effective until the lockdown measures in Shanghai are lifted.
Reduction and exemption of property tax and urban and township land use tax for struggling enterprises
For enterprises whose property and land is requisitioned by the government or who voluntarily cut or exempt rent for tenants, if they have difficulty paying property tax and urban and township land use tax, the corresponding taxes can be reduced or exempted.
The policy is effective until three months after the latest wave of COVID-19 in Shanghai is contained.
Suspension of the advance payment of VAT by aviation and railway transport enterprises
The advance payment of VAT by aviation and railway transport enterprises will be suspended during the period from January 1, 2022 to December 31, 2022
Extension of the annual CIT reconciliation deadline
According to a notice released by the Shanghai Municipal Tax Services on May 20, 2022, the deadline for filing annual CIT reconciliation for the year of 2021 will be extended from May 31, 2022 to June 30, 2022.
Taxpayers affected by the epidemic who still have difficulties in making annual CIT reconciliation before June 30, 2022 can apply to tax authorities for a further extension in accordance with the law. Taxpayers can handle the extension formalities through the online platform of the Shanghai Municipal Tax Services.
Branches of cross-regional business enterprises filing consolidated CIT, which cannot file annual CIT reconciliation in the locality due to the head offices located in Shanghai applying for extension, can apply to the local tax bureau for extension within the time limit for CIT reconciliation.
|Key Tax Incentives Implemented in Shanghai to Fight COVID-19|
|Tax incentives||Main content of the policy||Document no.||Effective period|
|Large-scale tax rebates on VAT credit||
|April 1, 2022 – No expiry date|
|VAT exemption for small-scale taxpayers||
|April 1, 2022 to December 31, 2022|
|CIT reduction for small and low profit enterprises (SLPEs)||
|January 1, 2021 to December 31, 2022
January 1, 2022 to December 31, 2024
|Super pre-tax deduction on R&D expenditure for technology-based small- and medium-sized enterprises (TSMEs)||
|January 1, 2022 – No expiry date|
|Increased CIT deduction proportion for newly purchased equipment and instruments for micro-, small-, and medium-sized enterprises (MSMEs)||
|January 1, 2022 to December 31, 2022|
|Expanding the scope of “six taxes and two fees” policy to small and low profit enterprises (SLPEs) and self-employed individuals||
||January 1, 2022 to December 31, 2024|
|Extension of the tax deferment policy for manufacturing MSMEs||
||The deferment period was extended for six months|
|Extension of the additional VAT deductions for the life services industry||
||January 1, 2022 to December 31, 2022|
|Extending the period for filing tax returns||
||Effective until the lockdown measures in Shanghai are lifted|
|Reduction and exemption of property tax and urban and township land use tax for struggling enterprises||
|Effective until three months after the current wave of COVID-19 is contained|
|Suspension of the advance payment of VAT by aviation and railway transport enterprises||
||January 1, 2022– December 31, 2022|
|Extension of annual CIT reconciliation deadline||
(The article was first published on April 15, 2022 and was last updated on May 23, 2022)
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