China has boosted to 100% the tax deduction on research and development (R&D) expenses incurred by manufacturing firms in a renewed effort to boost innovation and industrial productivity.
The State Council, the national cabinet and chief administrative authority, Wednesday announced the tax break in a meeting chaired by Premier Li Keqiang. It said the incentive will serve to better motivate the business sector and other private actors to boost R&D spending. This, in turn, will spur further economic growth.
Specifically, the State Council said the ratio of the extra tax deduction on R&D costs will be raised to 100% from from 75% retroactive to January 1. This means a company will see two million yuan ($306,000) deducted from its taxable income for every one million yuan ($153,000) spent on R&D.
The method used to calculate the new R&D tax deduction will be reformed. Business firms can choose to benefit from the tax incentive on a semi-annual basis rather than during its settlement in the next year. This change will allow R&D spending in the first half of the year to be deducted during the prepayment of corporate income tax in October.
R&D service providers, innovation firms and business startups will also receive preferential tax policies.
China has kept on increasing tax break for R&D expenses over the past years, which has effectively enhanced corporate innovation.
This policy, however, will cost the government dearly. It's expected to slash corporate taxes by another $12.2 billion this year on top of $55 billion in tax cuts in 2020. Despite the hit to revenues, China said there will be more and larger tax cuts in the future.
"There is still room for further scaling up of this policy," said Li about the tax cut. "Deeper tax cuts can be introduced as things develop. We should accumulate experience along the way and simply the procedures in a step-by-step manner."
To drive home the point about the importance of R&D, Xi Jinping, general secretary of the Communist Party of China Central Committee, Wednesday said China will fully support companies committed to innovation.
