Beijing Scraps 58 Excessive-Tech Firms’ Qualification for Decrease Taxes

China disqualified 58 companies’ eligibility for a significantly reduced corporate tax rate for high- and new-technology enterprises and asked them to pay back taxes at a higher rate.

The nation is suffering from fiscal revenue loss amid the fallout of the Covid-19 pandemic and a campaign to reduce tax burdens on enterprises over the past three years. As the government sells bonds to raise funds to fill the fiscal gap, it also needs to close loopholes in the tax system to collect as much revenue as possible.

Under China’s tax law, high- and new-technology enterprises (HNTEs) are eligible for a 15% corporate income tax, compared with the standard 25%. To obtain HNTE status, several criteria need to be satisfied. A company’s core technology should belong to one of the categories outlined in a catalogue of high and new technologies specifically supported by the state, such as electronic information, biotech, aviation and space, new materials and new energy.

At least 10% of the enterprise’s employees should be engaged in research and development and related activities.

The Beijing Municipal Tax Administrative Bureau released a list of 58 companies disqualified as HNTEs but didn’t specify the reasons for their disqualification or disclose how much in taxes they need to pay.

According to the rules for HNTE identification, companies disqualified as HNTEs can’t resubmit an application within five years.

In the past two years, China has tightened qualification review of HNTEs. According to statistics from the government’s HNTE qualification administrative network, Beijing disqualified single-digit numbers of HNTEs every year from 2014 to 2018. The number increased to 23 in 2019 and 65 in 2020, surpassing the total of disqualifications from 2013 to 2019. Guangdong, Jiangsu and Zhejiang have also shown a similar trend.

China had about 225,000 high- and new-technology enterprises in 2019, according to statistics from the Ministry of Science and Technology.

Meanwhile, China’s tax revenue shrank 6.4% year-on-year in the third quarter after an 11.3% drop in the first six months as companies’ profits shrank amid the Covid-19 pandemic. The country’s tax and fee reductions since 2016 also contributed.

From 2017 to 2019, the average ratio of total corporate tax payment to operating revenue was 4.78% and showed a clear trend of decline. The average ratio of total corporate tax to profit was 11.15%, significantly lower than the standard corporate tax rate of 25%, according to a survey conducted by Chinese Academy of Fiscal Sciences, a think tank under the Finance Ministry.

The think tank also suggested that China has limited room to further cut taxes and fees and now it’s more important to inject certainty and hedge risks than to reduce taxes on enterprises.

Contact reporter Denise Jia ([email protected]) and editor Bob Simison ([email protected]).

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