By Li Panpan

(JW Insights) Sep 21 -- Chinese authorities announced a tax cut on the research and development (R&D) expenses of eligible integrated-circuit and machine-tool firms between January 1, 2023, and December 31, 2027 to spur enterprise-led innovation.

During the period, such costs, if not covered in the income statement as intangible assets, will be deducted before tax based on 120 percent of the actual amount incurred, in addition to the existing rule that such costs will be deducted before tax, according to the announcement.

If the costs have been taken as intangible assets, they will be amortized at 220 percent as intangible asset costs before tax, said a Xinhua report on September 18.

The Ministry of Finance, the State Taxation Administration, the National Reform and Development Commission, and the Ministry of Industry and Information Technology jointly made the announcement on September 12.

For R&D costs run up in the first half of this year, companies can enjoy the new tax break in July, while for the third quarter, they can take advantage of it next month, according to regulations.

Chinese IC companies are relatively backward in technology and have limited profitability, so it is hard to catch up with developed countries and regions and significantly improve their profitability in the short term, reported Yicai Global on September 19, citing Tian Zhiwei, deputy dean of the Institute of Public Policy and Governance of Shanghai University of Finance and Economics.

“In this case, it is crucial to reduce the R&D costs of enterprises,” Tian added, noting that the new policy is vital to help companies make technological breakthroughs.

China has numerous tax breaks for high-tech firms. In 2020, the finance ministry issued one to reduce or waive corporate income tax for firms in the IC field, while earlier this month, it allowed advanced manufacturers to deduct an additional 5 percent from input value-added tax, which includes IC enterprises and industrial machinery makers, according to the Yicai Global report.

The country can also consider further increasing the input VAT deduction for IC firms and reducing the individual income tax rate of high-end talent in the field, Tian said.