Policy Content

On March 26, 2023, the State Administration of Taxation issued a notice jointly with the Ministry of Finance, entitled "Announcement on Further Improving the Policy of Pre-tax Additional Deduction for Research and Development Expenses" (Announcement No.7 of 2023 by the Ministry of Finance and the State Administration of Taxation), in order to further encourage enterprises to increase R&D investment and better support technological innovation.

According to the announcement, for R&D expenses actually incurred by enterprises in R&D activities, which have not formed intangible assets and are not included in the current profit and loss, on the basis of actual deductions according to regulations, starting from January 1, 2023, an additional deduction of 100% of the actual amount incurred before tax will be made. For expenses that have formed intangible assets, from January 1, 2023, they will be amortized before tax at 200% of the cost of intangible assets.

This new policy applies to enterprises in industries other than tobacco manufacturing, accommodation and catering, wholesale and retail, real estate, leasing and business services, and entertainment.

In addition, other policy criteria and management requirements for enterprises to enjoy the policy of additional deduction for R&D expenses shall be implemented in accordance with the relevant provisions of the "Notice of the Ministry of Finance, State Administration of Taxation and Ministry of Science and Technology on Improving the Policy of Pre-tax Additional Deduction for Research and Development Expenses" and the "Notice of the Ministry of Finance, State Administration of Taxation and Ministry of Science and Technology on Policy Issues Related to Pre-tax Additional Deduction of Overseas Research and Development Expenses Commissioned by Enterprises."

Application of Additional Deduction Policy

The scope of application of this policy for additional deduction of R&D expenses includes systematic activities with clear objectives that enterprises continue to carry out in order to acquire new knowledge in science and technology, creatively apply new knowledge in science and technology, or substantially improve technology, products (services), and processes.

Types of R&D expenses that can be additionally deducted include personnel costs, direct investment costs, depreciation costs, amortization of intangible assets, new product design fees, new process specification development fees, clinical trial fees for new drug research and development, on-site trial fees for exploration and development technology, and other related expenses (the total amount of expenses shall not exceed 10% of the total amount of R&D expenses that can be additionally deducted).

Policy of Additional Deduction for Commissioned, Cooperative, and Centralized R&D Expenses

The expenses incurred by enterprises in commissioning external institutions or individuals to carry out R&D activities shall be included in the R&D expenses of the commissioning party and calculated for additional deduction at 80% of the actual amount incurred. The entrusted party shall not make any additional deductions. The expenses incurred in commissioning R&D activities overseas shall be included in the overseas R&D expenses commissioned by the commissioning party at 80% of the actual amount incurred. The overseas R&D expenses commissioned shall not exceed two-thirds of the domestic R&D expenses that meet the conditions and can be additionally deducted, and can be additionally deducted before the enterprise income tax according to the regulations.

For projects jointly developed by enterprises, the additional deduction shall be calculated separately based on the R&D expenses actually borne by each cooperating party.

For projects that require high technology requirements, large investment amounts, and centralized R&D based on the actual situation of production and operation and technological development of an enterprise group, the actual R&D expenses incurred shall be reasonably allocated among the member enterprises in accordance with the principle of consistency of rights and obligations, and sharing of expenses and benefits. Relevant member enterprises shall calculate the additional deduction separately.

Accounting and Management of R&D Expense Super Deduction Policy

Enterprises should handle R&D expenses in accordance with the requirements of the national financial accounting system. At the same time, for R&D expenses that are eligible for super deduction, enterprises should set up auxiliary accounts based on R&D projects to accurately collect and account for the actual amount of deductible R&D expenses incurred in the current year. If an enterprise engages in multiple R&D activities in a tax year, it should separately collect deductible R&D expenses for different R&D projects.

Enterprises should separately account for R&D expenses and production and operating expenses, accurately and reasonably collect various expense payments, and not apply super deduction to expenses that are not clearly divided.

Future Impact

After the percentage of R&D expense super deduction was raised to 100% for manufacturing and technology SMEs, “Announcement No. 7” has further increased the super deduction percentage to 100% for all eligible R&D expenses, further increasing the preferential tax support for technological innovation.

The implementation of this new policy will reduce the amount of corporate income tax payable, thereby reducing the financial burden on enterprises, improving their cash flow, and providing funding support for their R&D investments.

Since R&D expenses can enjoy double deduction before tax, the actual R&D expenses of enterprises are reduced, which in turn encourages them to increase their R&D investment. This policy can effectively reduce the R&D costs of enterprises, improve their technological innovation capabilities, and promote their development. In this way, enterprises can better adapt to market demand, improve their product competitiveness, and promote the upgrading and development of industries.

Therefore, the introduction of the R&D expense super deduction policy before tax has a positive impact on promoting enterprise R&D investment, improving their technological innovation capabilities, and promoting industry technological progress.

Q&A

1. Will enterprises in the information transmission, software, and information technology service industries be eligible for additional deductions for R&D expenses incurred in 2023?

Answer: Yes, they will be eligible for additional deductions.

1. If a technology service enterprise incurred R&D expenses of 10 million yuan in 2023 and recorded them in the current period's profit and loss statement, how much can they deduct before taxes?

Answer: If the R&D expenses of 10 million yuan incurred in 2023 have not formed intangible assets and are recorded in the current period's profit and loss statement, the enterprise can deduct the actual amount of 10 million yuan before taxes and can also enjoy additional deductions at a rate of 100%, resulting in a total deduction of 20 million yuan before taxes.

1. If an enterprise creates an intangible asset in the second quarter of 2022, how can they apply the policy of additional deductions for R&D expenses in 2023?

Answer: The enterprise can amortize the intangible asset's cost at a rate of 200% before taxes in 2023.

1. Can a tax-collected enterprise enjoy the policy of additional deductions for R&D expenses as stipulated in Announcement No.7?

Answer: According to Caishui [2015] No. 119, enterprises eligible for additional deductions for R&D expenses must be resident enterprises with sound accounting practices, undergo auditing and taxation, and accurately account for R&D expenses. Tax-collected enterprises do not meet these conditions and are not eligible for the policy of additional deductions for R&D expenses.

1. After the additional deduction rate for R&D expenses was raised to 100%, can enterprises still enjoy the additional deductions for the first three quarters of R&D expenses when prepaying taxes in October?

Answer: According to current regulations, when companies prepay and declare the third quarter (quarterly prepayment) of their corporate income tax in October each year or in September (monthly prepayment), they may choose to independently decide whether or not to enjoy the additional deduction preferential policy for R&D expenses incurred in the first three quarters of that year, based on factors such as their profit and loss situation, R&D expense accounting, and the amount of R&D expenses. Enterprises that does not choose to enjoy the policy of additional deductions for R&D expenses during the prepayment declaration period in October can uniformly enjoy the policy during the tax settlement and payment process for the current year.

1. After an enterprise enjoys the additional deductions for R&D expenses for the first three quarters during the October declaration period, do they need to report the R&D expenses for the first three quarters during the tax settlement and payment process?

Answer: When an enterprise handles the annual tax settlement and payment process for the previous year, they need to report the R&D expenses incurred for the first three quarters that they enjoyed the additional deductions for in the October declaration period together with the R&D expenses incurred for the fourth quarter to fully enjoy the tax benefits. Otherwise, it may result in a reduction of the tax benefits and affect the enterprise's legitimate rights and interests.