Today, many foreign owned R&D centres in China will control their cash flows by setting their mark up rate at the lowest level as possible, for instance below 10% or even below 5%.  This is certainly an effective way of controlling cash flows but the risks involved are unimaginably high.  The tax authorities might trace back the enterprise’s profits for the previous 10 years, reset the previous profit rate at a more reasonable level, for example, at 13-15%(The China Tax Authorities will often consider the average rate used by neighboring countries, for example, the average rate set in India is at 15%)and ask the enterprise to transfer back the eroded and shifted cash flows to China.  If the headquarters (HQ) does not transfer back the cash to the subsidiary bank account, a 10% withholding tax will be set on overseas profits distribution and a higher rate of 35% of Corporate Income Tax (CIT) willbe chargeable on local profits.

 

Besides the above tax risks, the Chinese Government has been encouraging multinational companies, especially in the R&D and Technology field, to step in the Chinese market.  The government has been offering a plethora of both tax and financial incentives tothese types of enterprises. For instance, an R&D multinational company established in China can benefit from the following incentives:

 

1.    Value AddedTax (VAT) exemption on R&D revenue

(Caishui(2013) No. 106 Attachment 3, State Tax Announcement (2014) No. 49 & China Tax Administration Section 51)

2.    VAT exemptionon overseas revenue related to technology R&D, technology services or technology consulting or even zero-rated VAT on these revenues with a VAT inputrefund

(Caishui (2013) No.106 Section 1& 7, State Tax Announcement (2014) No. 11, Caishui (2015) No.118 &State Tax Announcement (2015) No. 88)

3.    Financial subsidy, meaning for every 1 USD of overseas technology revenue, obtain 0.1 RMBof subsidy

4.    CIT ratereduction from 25% to 15%

 

For better illustration, let’s assumean R&D centre with an annual cost of 50 million RMB and a mark up of 15%.

Incentives	Before Incentives	After Incentives
VAT Exemption	VAT= 3,864,000 (57.5 million*6.72%)	VAT= 0
Financial Subsidy	Subsidy Amount= 0	Subsidy Amount= 884,615 ((57.5 million/6.5USD)*0.1)
CIT Reduction	CIT= 1,875,000 (7.5million*25%)	CIT= 1,125,000 (7.5million*15%)

Up to now, RTF has helped over 100 foreign invested companies to control their tax risks but also helped them tosave around 5 billion RMB of taxes and to gain 10 million RMB of subsidy. Isreducing tax risks and minimising costs your principal goal?  If it is a YES, then RTF will definitely be the best right-hand man to help your companyto achieve these corporate goals.  Should there be any questions, our consulting team is at your disposal.