China alert Tax and regulatory developments  TAX
Background
Article 30 of the new CIT Law and Article 95 of the Implementation Rules state that if R&D expenses are incurred for the development of new technology, products and techniques which have not been capitalised as intangible assets, an additional 50% deduction can be claimed for CIT purposes. If the expenses have been capitalised as intangible assets, 150% of the intangible assets’ cost could be amortized for CIT purposes.  Main contents of Circular 116
Circular 116 stipulates the relevant conditions and scope of qualified R&D expenses for additional deduction, and allows R&D expenses to be allocated within group companies. Its key points are as follows: • Conditions for qualified R&D expenses
− R&D activities shall fall within the categories listed in High and
New Technology Areas with Key Support by the State  and Guidance for Development of  Prioritised Key Areas of High Technology Industries (2007 edition).
− R&D expenses should be incurred for continuous R&D activities
with the explicit objective of acquiring new knowledge of science and technology (excluding humanities and social science). Excluded R&D expenses also cover those incurred for regular upgrading activities on products/services or the direct implementation of existing R&D results (for example, direct usage of new techniques, raw materials, devices, products, services and knowledge that are publicly available).
R&D expenses deduction for Corporate Income Tax Issue 53, December 2008  In Brief  • The State Administration of Taxation issued Guoshuifa  [2008] No. 116 (Circular 116), effective 1 January 2008, which clarifies the treatment for claiming additional deductions of research and development (R&D) expenses for Corporate Income Tax (CIT) purposes. Relevant regulation discussed in this issue:  Administrative Measures of R&D Expenses Deduction for CIT Purposes (Trial), Guoshuifa [2008] No.116, issued by the State Administration of Taxation on 10 December 2008
−Enterprises should accurately classify and record the relevant R&D expenses.
•Detailed scope of deductible R&D expenses
−There are eight kinds of expenses which can be classified as R&D expenses for additional deduction.
−Those expenses not deductible for CIT purposes prescribed by other regulations cannot be recorded as R&D expenses.
•Additional deduction for development projects consigned to third parties
−An additional deduction could be claimed by the consigners, subject to the satisfaction of the abovementioned conditions.
Consignees cannot re-apply for additional deductions.
•Allocation and additional deduction of R&D expenses within group companies
−For centrally developed R&D projects, reasonable allocation methods can be used to allocate R&D expenses to enterprises
within the group for additional CIT deductions, subject to the
satisfaction of the abovementioned conditions.
•Applicable period for additional deduction of R&D expenses
−An additional deduction of R&D expenses is only applicable at the time of the annual CIT filing. The actual amounts of R&D
expenses incurred should be used for quarterly CIT filings.
•Tax disputes
−Tax authorities are empowered to adjust R&D expenses and the additional deduction for CIT purposes.
−Certification issued by the relevant technology authorities would need to be submitted if tax authorities disagree on the R&D
projects reported by enterprises.
−If tax authorities disagree on the allocation method and amounts of R&D expenses allocated among group companies, the
relevant tax authorities at central or provincial levels can issue
comments through arbitration.
KPMG observation
Circular 116 stipulates the detailed scope for the classification and recording of R&D expenses for CIT purposes. In particular, it lists the relevant materials and documents to be lodged with tax authorities by enterprises, for the allocation of R&D expenses among group
companies as well as those incurred via consignment arrangements.  Compared with past practice, there are now stricter requirements for enterprises to follow. Enterprises should accurately classify and record R&D expenses incurred during 2008 in accordance with the requirements of Circular 116 and ensure the completeness of the relevant documents.    By Anthony Chau, Partner and Wayne Tan, Manager    All issues of China alert  are accessible on www.kpmg or www.kpmg.hk                          Contact us
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