Features of tax incentives for the integrated circuit industry in the People's Republic of China

Обновлено 29.01.2024 04:41

The article analyzes the measures of tax incentives for the production and design of integrated circuits in the People's Republic of China (PRC). Explanations are given on the specifics of legislative techniques in the field of taxation. The historical stages of regulation of the scientific and technical sphere of the People's Republic of China are considered. It is noted that in the context of increased global demand for integrated circuits, the legislator of the People's Republic of China has provided various measures to stimulate enterprises engaged in the production of integrated circuits, their design, as well as the production of equipment for the assembly of integrated circuits.

Keywords: the taxation system of the People's Republic of China, income tax, VAT, tax incentives, integrated circuit industry.

The interest in measures to stimulate the integrated circuit industry is due to the shortage that has developed in recent years. In 2021, the excess of demand over supply was estimated at 30% <1>. The spheres of distribution of integrated circuits are all industries, communication systems and means, transport, agriculture, medicine, defense, and everyday household needs. To date, the chip crisis, which dates back to 2020, has affected over 170 industries <2>.

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Against this background, the industry of integrated circuits in the People's Republic of China demonstrates impressive dynamics. In 2021, 33.3% more chips were produced in China compared to 2020, when the production growth rate was 16.2% <3>. Under the conditions of restrictions imposed on the People's Republic of China by traditional leaders in the field of high-tech solutions <4>, the People's Republic of China manages to increase its own production, ensure the creation of completely independent solutions <5>.

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Taking into account the similar needs of the Russian Federation, it is of interest to analyze the reasons for such an enviable dynamics of the PRC, in particular the tax and legal incentives introduced by the legislator for the production and design of integrated circuits.

Conducting a historical analysis of the regulation of innovation activity in the People's Republic of China, the authors G.P. Belyakov, S.A. Belyakov, A.S. Shpak note that the consistent implementation of the policy of stimulating research activities has been carried out since the 80s of the XX century. Here are some of the programs of scientific and technological development of the People's Republic of China highlighted by the authors.

1. The "Assault Plan" program.

The program, which provided for measures aimed at the following areas: agriculture, energy, transport, healthcare, new materials, telecommunications, environmental protection.

2. Program 863.

Prioritized the areas of biotechnology, space technology, information and telecommunication technologies, laser technology, robotics, composite materials, technologies in the field of energy and ocean exploration.

3. The Torch program.

The objectives of the program are the commercialization of scientific achievements and the introduction of high and latest technologies.

4. Program 973.

It is devoted to the development of fundamental research <6>.

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<6> Belyakov G.P., Belyakov S.A., Shpak A.S. China's experience in reforming the system of strategic planning and management of scientific and technological development // Economic relations. 2019. Vol. 9. N 3. pp. 1575 - 1586.

In the course of implementing the policy to improve the scientific and technical sphere of the People's Republic of China, the Law of the People's Republic of China "On Stimulating the Introduction of Scientific and Technical achievements", adopted by the Standing Committee of the National People's Congress on May 15, 1996, was put into effect <7>. This Law sets goals to transform scientific and technical achievements into real production, accelerate scientific and technological progress, use scientific achievements to create products in demand by the market, and ensure national security through the use of advanced scientific and technical achievements.

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In 2015, the "Made in China 2025" program was adopted <8>. This program noted the insufficient level of development of the national industry, at the same time pointed to the ongoing changes in the international division of labor, which represented a chance to change China's place in the global economy, contributing to the realization of the Chinese dream of a great revival of the Chinese nation. Among the strategic guidelines and goals, the main focus of the program is the promotion of intellectual production. In order to achieve these goals, the key measure is recognized as the "merging" of innovative activity with production, the "industrialization" of scientific and technical achievements.

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In order to implement these programs, the legislator of the People's Republic of China has established special taxation conditions for enterprises engaged in the development and production of microcircuits.

Here it is necessary to explain the specifics of the legislative technique of the People's Republic of China. Chinese law began to acquire a modern appearance only from the end of 1978. <9> Researchers of modern law of the People's Republic of China note that in the modern legal system of the People's Republic of China there are very few laws themselves, there is no division of laws into federal constitutional and federal laws adopted in Russia. In order to understand the specifics of the legal regulation of a particular kind of public relations in the People's Republic of China, it is necessary to carefully study the by-laws of lawmaking <10>.

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<9> Gudoshnikov L.M. Formation and modernization of legal institutions // China on the path of modernization and reforms. 1949 - 1999. M., 1999. p. 420.

<10> Troshchinsky P.V. The influence of tradition on the law of modern China // Journal of Russian Law. 2014. N 8. pp. 94 - 106. DOI: 10.12737/issn.1605-6590.

For a long time, there were no codified regulations in China. Despite the adoption of separate codes in the modern period, the Tax Code does not exist to date. Researchers divide the sources of Chinese tax legislation into two levels. The first is made up of laws, the second is normative legal acts other than laws, which can take various forms. From the contents of Article 2 of the Instruction dated October 15, 2002. "On the application of the Law of the People's Republic of China "On Tax Collection Management" it follows that the sources of tax law of mainland China are: The Law of the People's Republic of China dated September 4, 1992 "On Tax Collection Management" (ed. dated 04/28/2001) <11>, the named Instruction, as well as tax laws and administrative regulations <12>. Some authors translate the title of the PRC Law of September 4, 1992 as "On Tax Collection Management" <13>, which seems to be more consistent with the terminology adopted in the Russian Federation.

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<11> The Law of the People's Republic of China "On Tax Collection Management": adopted at the 27th session of the Standing Committee of the National People's Congress of the VII convocation on September 4, 1992 (amended in accordance with the decision to amend the Law of the People's Republic of China on Tax Collection Management, adopted at the 12th session of the National People's Congress of the VIII convocation on February 28, 1995 G.).

<12> Shepenko R.A. "The second level" of the tax legislation of the People's Republic of China // Bulletin of MGIMO University. 2008. N 1 (1). pp. 55-59.

<13> Troshchinsky P.V. Legal policy and legislation of the People's Republic of China during the period of reforms and openness // Law studies. 2019. Vol. 63. N 2. pp. 285 - 308.

The next feature of the legislative technique of the People's Republic of China, including in the field of taxation, is "collective law-making" <14>, that is, the adoption of one normative act by several bodies.

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<14> Alekseenko A.P. Legal aspects of restrictions on ICO and cryptocurrencies in China // 70 years of the modern Chinese state: materials of the annual scientific conference of the Center for Political Research and Forecasts of the IDV RAS (Moscow, March 20 and 22, 2019). Moscow: IDV RAS, 2019. p. 347.

This digression is intended to help the reader perceive the following list of normative acts, in which the above-mentioned features of the legislative technique of the People's Republic of China are manifested.

In the field of tax incentives for enterprises designing and manufacturing integrated circuits, the following acts have been adopted:

- Notification of the Ministry of Finance, the State Tax Administration of the People's Republic of China on VAT refund when purchasing equipment by integrated circuit manufacturing enterprises dated November 14, 2011 <15>;

- Notification of the Ministry of Finance, the State Tax Administration, the State Committee for Development and Reform, the Ministry of Industry and Informatization of the People's Republic of China on corporate income tax in order to further stimulate the development of the integrated circuit industry dated March 2, 2015 <16>;

- Notification of the Ministry of Finance, the State Tax Administration, the State Committee for Development and Reform, the Ministry of Industry and Informatization on issues of preferential tax policy for enterprises in the software and integrated circuits industry dated May 4, 2016 <17>;

- Notification of the Ministry of Finance, the State Tax Administration of the People's Republic of China on VAT refund for integrated circuit manufacturing enterprises dated February 24, 2017 <18>;

- Notification of the Ministry of Finance, the State Tax Administration, the State Committee for Development and Reform, the Ministry of Industry and Informatization on issues of preferential tax policy for integrated circuit manufacturers dated March 28, 2018 <19>;

- Notification of the Ministry of Finance, the State Tax Administration of the People's Republic of China on corporate income tax for integrated circuit developers and software developers dated May 17, 2019 <20>;

- Notification of the Ministry of Finance, the State Tax Administration of the People's Republic of China on the applicable policy for calculating corporate income tax in 2019 for integrated circuit developers and software developers dated May 29, 2020. <21>;

- Notification of the Ministry of Finance, the State Tax Administration, the State Committee for Development and Reform, the Ministry of Industry and Informatization of the People's Republic of China on measures to administer corporate income tax to promote the qualitative development of the integrated circuits and software industry dated December 11, 2020 <22>;

- Notification of the Ministry of Finance, the General Customs Administration, the State Tax Administration of the People's Republic of China on import taxation policy in support of the development of the integrated circuit industry and the software industry <23>;

- Notification of the Ministry of Finance, the State Committee for Development and Reforms, the Ministry of Industry and Informatization, the Main Customs Administration, the State Tax Administration on measures to administer the import taxation policy to support the development of the integrated circuit and software industry dated March 22, 2021. <24>;

- Notification of the State Committee for Development and Reform, the Ministry of Industry and Informatization, the Ministry of Finance, the General Customs Administration, the State Tax Administration of the People's Republic of China on the requirements for compiling a list of integrated circuit developers and software developers using preferential tax policy dated March 29, 2021. <25>;

- Notification of the Ministry of Industry and Informatization, the State Committee for Development and Reforms, the Ministry of Finance, the State Tax Administration on the conditions for enterprises developing integrated circuits encouraged by the state dated April 22, 2020 <26>;

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The listed acts establish the following tax incentives for the integrated circuit industry:

- full exemption from corporate income tax for the first two years, starting from the year of profit;

- a 2-fold reduction in the corporate income tax rate over the next three years;

- refund of VAT paid;

- payment of export VAT in installments for 6 years (0% in the first year, 20% in the next 5 years).

Let us explain that in accordance with Article 4 of the Law of the People's Republic of China "On Corporate Income Tax", the income tax rate of resident enterprises is 25%.

To use these incentives, integrated circuit manufacturers must meet the following conditions.

1. The company is a resident registered under national law in China, with the exception of Hong Kong, Macau and Taiwan.

2. The average monthly number of employees with a specialist degree for enterprises producing chips with a size of less than 0.8 microns should be more than 40% of the total number of employees for enterprises producing chips with a size of less than 130 nm - 30%.

3. The company must own key technologies and use them in its activities. At least 2% of the total income of the enterprise should be deducted in the form of expenses for financing research and development work. 60% of these costs should be allocated to finance research and development work carried out in China.

4. Revenue from sales of integrated circuits must be at least 60% of the total income of the enterprise.

5. The enterprise must have the basic means and technical capabilities to produce products, ensure certification, including certification of the quality system according to ISO standards.

6. In the year of application of the established incentives, no major accidents or accidents, as well as serious environmental violations, should be recorded at the enterprise.

Let's focus on some of the listed requirements.

Regarding the established threshold for R&D expenditures for integrated circuit manufacturers, it can be noted that it corresponds to the share of R&D expenditures in the gross domestic product of the People's Republic of China, which amounted to 2.41% in 2020 and 2.44% in 2021. <28>.

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<28> Rossiyskaya gazeta. 2022. September 2.

The legislator considered it necessary to distinguish incentives depending on the size of the chips produced. For enterprises producing smaller chips, the requirement for the number of employees with a specialist degree has been lowered. This is due to the fact that the needs of the market dictate the need to use smaller and smaller chips.

The establishment of a requirement for the level of education of employees is due to the fact that historically the level of education of the population of the People's Republic of China has not been high. According to the results of the 2020 census, 2.67% of the illiterate population was registered <29>. The efforts of the Chinese legislator to stimulate the population and business to increase the level of education are manifested in the establishment of educational requirements for employees of enterprises. It should be borne in mind that in the PRC, the qualification of a specialist (zhuanke,) is assigned to a person who has successfully graduated from a higher professional educational institution (an institute with a profile, a professional or vocational college), the duration of which is two or three years <30>.

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<29> The education level of the Chinese population continues to rise.

<30> Guruleva T.L. The education system in the People's Republic of China: structure and main directions of development // Higher education in Russia. 2017. N 7 (214). pp. 152 - 164.

Additional requirements have been established for integrated circuit development companies. In addition to the requirements set out above for manufacturers of integrated circuits, which remain relevant for development enterprises, an increased requirement has been introduced for the share of costs for the development of integrated circuits. This share must be at least 6% of the total income of the enterprise.

The requirements for the education of employees of the developer company have also been increased. The average monthly number of employees with a bachelor's degree or higher should be more than 50% of the total number of employees. Since the implementation of integrated circuit design activities is possible through the efforts of a small number of employees, the legislator introduced a lower limit on the number of employees - 20 people.

The absolute value of the total income of the developer enterprise has been established - at least 15 million yuan. The share of income attributable to the integrated circuit design services provided by the enterprise should be at least 60%.

Taking into account that the activities of developer enterprises are innovative in nature, additional requirements in the field of intellectual property are also established. An enterprise developing integrated circuits must have exclusive rights to at least 8 intellectual property objects used in its activities.

The establishment of better tax conditions for developer enterprises correlates with the increase in requirements for them. In addition to the tax incentives listed above, which are common to the integrated circuit manufacturing and design industry, the following additional incentives have been established for development enterprises:

- reduced depreciation period of equipment - up to 3 years;

- the possibility of deducting the costs of training employees of enterprises in the design of integrated circuits from the taxable base for corporate income tax in the actual amount.

It should be noted here that the Law of the People's Republic of China "On Corporate Income Tax" does not establish a division of expenses for income tax purposes, similar to the division into expenses related/unrelated to the production and sale of products adopted in Russia. Article 8 of the Law of the People's Republic of China "On Corporate Income Tax" provides for the deduction of expenses related to income generation. Article 10 of the said Law establishes a ban on deduction of expenses not related to income <31>. Taking into account these general norms, it can be noted that the envisaged reduction in the tax base for corporate income tax by the amount of employee training costs is a serious incentive for the employer to provide advanced training for employees of integrated circuit designers.

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<31> The Law of the People's Republic of China "On Corporate Income Tax": adopted at the fifth session of the National People's Congress of the X convocation on March 16, 2007.

The legislator singled out enterprises producing equipment for the production of integrated circuits in a separate group.

The threshold value of operating revenue from core activities has been set at 15 million yuan. At the same time, the sale of equipment and key parts for the production of integrated circuits should account for at least 30% of operating revenue.

An enterprise manufacturing equipment for the production of integrated circuits must be the owner of exclusive rights to at least 5 inventions.

The most preferential tax conditions are provided for the following group of taxpayers - key integrated circuit design companies. They are completely exempt from paying corporate income tax from the first to the fifth year of profit, then the specified tax is charged at a rate of 10%.

The list of key development companies is formed by the Ministry of Industry and Informatization in cooperation with the Ministry of Finance, the State Tax Administration of the People's Republic of China and other relevant departments.

The requirements for the number of employees with a bachelor's degree and above, the share of R&D expenses, and the number of intellectual property objects for key enterprises coincide with the requirements for non-key developer enterprises. In addition to these requirements, it is established that key developer enterprises must meet at least one of the following conditions:

- annual income is at least 500 million yuan, taxable income is at least 30 million yuan; or annual income is at least 5 billion yuan and 8% of the income is R&D expenses;

- when carrying out activities in key areas of integrated circuit design, encouraged by the state, annual income is at least 30 million yuan, taxable income is at least 3.5 million yuan.

The analysis allows us to trace the stages of regulation of the scientific and technical sphere in the People's Republic of China, which currently demonstrates a specialized approach to various industries, including such an important industry in the economy as the production of integrated circuits. The dynamics of growth of China's own high-tech production demonstrated in recent years makes it possible to recognize the effectiveness of incentive measures introduced by the legislator, including in the field of taxation.

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