In recent years, the state has optimized and improved the R&D expense deduction policy for many times to support enterprise R&D and promote enterprise transformation and upgrading. On March 24, 2023, the executive meeting of the State Council decided to increase the pre-tax deduction ratio of R&D expenses of enterprises in eligible industries from 75% to 100% as an institutional arrangement for long-term implementation. Subsequently, the Ministry of Finance and the State Administration of Taxation jointly issued the Announcement of the State Administration of Taxation of the Ministry of Finance on Further Improving the Policy of Pre-tax Deduction of R&D Expenses (Announcement No. 7 of 2023 of the State Administration of Taxation of the Ministry of Finance, hereinafter referred to as Announcement No. 7), which clarified the specific policies. With the issuance of Announcement No. 7, all enterprises will apply the same policy uniformly, and there is no need to judge the "identity" of enterprises. With the increase of the additional deduction ratio, whether the R&D expense collection is compliant or not directly affects the calculation result of taxable income.
1. Grasp the essence of R&D activities and be vigilant against confusing the real with the false
According to the Notice on Improving the Policy of Pre-tax Deduction of R&D Expenses (CS [2015] No. 119, hereinafter referred to as Document No. 119), R&D activities are systematic activities with clear objectives that enterprises continue to carry out in order to obtain new knowledge of science and technology, creatively apply new knowledge of science and technology, or substantially improve technologies, products (services) and processes. It can be seen that the key points of R&D activities are reflected in the following three aspects: first, there are clear innovation goals, such as obtaining new knowledge, new technologies, new processes, new materials, new products, new standards, etc.; Third, the R&D results are uncertain, the results of R&D activities cannot be expected in advance, there is a risk of failure, and there is a large uncertainty, so the failed R&D activities that meet the requirements can also be deducted. Circular 119 further explains that R&D activities are subject to a negative list and that R&D activities are eligible for pre-tax additional deductions, except for those that are not eligible for additional deductions, provided that other conditions are met.
In the actual operation process, enterprises should accurately grasp the essence of R&D activities, and must not treat non-R&D activities as fake and real, and enjoy the preferential pre-tax deduction of R&D activities, resulting in underpayment or non-payment of taxes. For example, Company A is a game development company, and with the iterative upgrade of 5G network coverage and smartphones, the boom of mobile online games has been born, and Company A's business performance has repeatedly reached new highs. Due to the relatively fierce competition in the industry, in order to maintain a certain market share, Company A increased its investment in R&D expenditures, and in 2022, when balancing the company's operating profits and R&D expenditures, the financial personnel of Company A misapplied the preferential policy of pre-tax deduction of R&D expenses to non-R&D activities. During the inspection, the tax authorities found that Company A included errors in the R&D activities of after-sales technical support, maintenance of game failures and routine upgrades of games, as well as quality control, testing and analysis, and repair and maintenance as industrial (service) process links or routines, resulting in an error in the collection of R&D expenses and an underpayment of enterprise income tax. Under the guidance of the tax authorities, Company A reorganized and correctly collected R&D expenses, corrected the declaration and paid the enterprise income tax. Accurately grasping the essence of R&D activities is the first step in the collection of R&D expenses, and enterprises need to attach great importance to it, and be vigilant against non-R&D activities to falsely increase R&D expenses, resulting in underpayment or non-payment of enterprise income tax.
2. Accurately distinguish the scope of R&D expenses and prevent blindly increasing the base of additional deductions
According to Circular 119, the scope of R&D expenses that can be deducted is divided into seven categories, and the first six types of expenses are listed in a positive manner, and the scope of each expense is exhaustive. The seventh category of expenses is other expenses stipulated by the Ministry of Finance and the State Administration of Taxation, which reserves a certain space for the expansion of the scope of R&D expenses that can be deducted in the future. In the process of production and operation, there may be overlap between R&D activities and non-R&D activities in the personnel and labor costs, direct input costs, depreciation expenses and amortization expenses of intangible assets involved in the enterprise, and it is necessary to allocate R&D expenses and production and operation expenses according to reasonable methods such as the proportion of actual working hours, and no additional deduction shall be made if they are not allocated. Therefore, when analyzing the R&D expenses of an enterprise, pay attention to the proportion of R&D personnel of the enterprise, if it exceeds a certain proportion in the industry, there may be a tax risk that the R&D personnel are engaged in both R&D activities and daily business activities without reasonable division.
(1) Personnel and labor costs
According to Circular No. 119 and the Announcement of the State Administration of Taxation on Issues Concerning the Scope of Pre-tax Deduction and Aggregation of R&D Expenses (Announcement No. 40 [2017] of the State Administration of Taxation), the following two points need to be paid attention to in the labor costs. Auxiliary personnel, of which auxiliary personnel refer to the technicians involved in research and development activities, and do not include personnel engaged in logistics services for research and development activities; second, personnel labor costs include the wages and salaries of personnel directly engaged in research and development activities, five social insurances and one housing fund, and the labor costs of external research and development personnel. Employee welfare expenses, supplementary pension insurance premiums and supplementary medical insurance are other related expenses and do not belong to the category of personnel and labor costs.
In the process of operation, enterprises may include the wages, salaries and five insurances and one housing fund of non-R&D positions in R&D expenses, as well as the supplementary endowment insurance and supplementary medical insurance premiums paid by some enterprises for employees in personnel labor costs, resulting in inflated personnel labor costs and inflated R&D expenses. For example, Company B is a technology-based enterprise, and in 2020, when the financial personnel collect R&D expenses, the chairman, general manager, deputy general manager in charge of R&D activities and the person in charge of finance will be listed as R&D personnel, and the wages and salaries of these personnel will be included in the personnel labor costs in R&D expenses. At the same time, Company B not only paid five insurances and one housing fund for employees, but also paid enterprise annuity and supplementary medical insurance to maximize the welfare of employees, but the enterprise annuity and supplementary medical insurance premiums paid for employees were mistakenly included in the personnel labor costs in the R&D expenses. Therefore, the personnel and labor costs in R&D expenses not only have requirements for the applicable objects, but also have strict limits on the scope of application.
(2) Direct input costs
In the process of collecting direct input expenses, enterprises tend to ignore two details: one is that the material costs corresponding to the products formed by external sales and R&D activities shall not be deducted, and the other is that special income needs to be offset by R&D expenses. For the above two details, it is necessary to consider the industry attributes, and the evaluation criteria for different industry attributes are also different.
If the R&D activities of the enterprise directly form products or sell the products formed as a component, the corresponding material costs in the R&D expenses shall not be deducted, and the calculation process is reflected in the "A107012 R&D expenses plus deduction preferential schedule" lines 47-49. Considering that the external sales of products directly formed or formed as components of the enterprise's R&D activities may occur in different tax years from the corresponding material costs, and the material costs have been included in the R&D expenses, the R&D expenses of the current year can be directly offset with the corresponding material expenses incurred in the year of sales. The R&D expenses in the year of sales are only the corresponding material costs, and the corresponding labor, fuel, power and other expenses in the R&D expenses do not need to be deducted. For example, Company C, a chemical company, found that the annual R&D activities of Company C directly consumed materials accounted for more than 40 million yuan, accounting for 85% of the annual R&D expenses and more than 35% of its total annual raw material procurement. In view of the fact that the raw materials of chemical enterprises are basically chemical products, and some of the raw materials contain toxic substances, some of the materials of 40 million yuan used by it have formed finished products and have been sold, but the 48 and 49 columns of its "Preferential Schedule for Additional Deduction of A107012 R&D Expenses" do not reflect the amount of material expenses corresponding to the finished products.
When calculating the additional deduction of R&D expenses in the year in which the income is recognized, the special income shall be deducted from the collected R&D expenses, and if the deduction is insufficient, the additional deduction of R&D expenses shall be calculated as zero, and the calculation process is reflected in line 46 of the "Breakdown of Additional Deduction of A107012 R&D Expenses". It should be noted that the special income such as scraps, defective products, and intermediate trial products formed in the R&D process of the enterprise does not calculate the materials, labor, fuel, power and manufacturing costs consumed in detail, but all deducts the income from external sales of scraps, defective products, and intermediate trial products. At the same time, the amount of sales revenue of scraps, defective products, and intermediate trial products is generally relatively small, and the additional deduction of R&D expenses is reduced to zero, and it will not be carried forward to the following years to continue to deduct. For example, Company D is a power supply manufacturing company, whose main business scope is the research and development, manufacturing and sales of batteries (except for national special approval projects). In 2021, a total of 24.5244 million yuan of lead, sulfuric acid and plastic parts, separators, and black battery raw materials were used, and the "special income part" in line 46 of the enterprise income tax return A107012 of company D in 2021 was 0, which showed a greater tax-related risk. According to the inspection by the tax authorities, the special income such as scraps and defective products formed in the R&D process of Company D in 2021 totaled 8.0748 million yuan, the total amount of adjusted R&D expenses was 25.7596 million yuan, and the taxable income was 1.9485 million yuan.
(3) Depreciation expenses and amortization expenses of intangible assets
Depreciation expense refers to the depreciation expense of instruments and equipment used for R&D activities. In the course of business operation, since the accounting caliber of R&D expenses is greater than that of the tax law, the depreciation of houses, the long-term amortized expenses incurred in the process of reconstruction, modification, decoration and repair of R&D facilities are usually included in the R&D expenses, so the above-mentioned R&D expenses shall not be included in the scope of additional deduction. Secondly, in the final settlement of 2017 and subsequent years, if the instruments and equipment used by the enterprise for R&D activities meet the provisions of the tax law and choose the preferential policy of accelerated depreciation, there is no need to consider the lesser of accounting and tax depreciation, and the depreciation part of the pre-tax deduction will be calculated and deducted on the pre-tax deduction when enjoying the pre-tax additional deduction policy for R&D expenses. For example, the equipment used for R&D activities in a project of Company E was purchased in May 2021 with an original value of 360,000 yuan, and the accounting adopts the straight-line method for depreciation, and the depreciation period is 4 years, and the minimum depreciation period under the tax law is 10 years, which meets the conditions for accelerated depreciation, and the enterprise shortens the depreciation period to 6 years, and the net residual value is not considered in the depreciation. The accounting depreciation in 2022 is 90,000 yuan (360,000÷4), and the accelerated depreciation under the tax law is 60,000 yuan (360,000÷6), so the depreciation expense in the R&D expenses that can be deducted in 2022 is 60,000 yuan.
Amortization expense of intangible assets refers to the amortization expense of software, patent rights, and non-patented technologies (including licenses, know-how, designs and calculation methods, etc.) used for R&D activities. It should be noted here that the tax law allows patent rights, while the R&D expenses of high-tech enterprises are intellectual property rights, and the scope of intellectual property rights is greater than that of patent rights. If the intangible assets used for R&D activities comply with the provisions of the tax law and choose to shorten the amortization period, the treatment principle is similar to that of depreciation expense when enjoying the pre-tax additional deduction policy for R&D expenses, that is, the amortization part of the pre-tax deduction is calculated and deducted.
(4) Other related expenses
Other related expenses need to be directly related to R&D activities and are listed in a list format, and if the expenses incurred are not within the scope of the list, they are not other related expenses. The lesser of the limit of "other related expenses" and the actual amount of "other related expenses" shall be used as the basis for calculating the pre-tax additional deduction. The Announcement of the State Administration of Taxation on Issues Concerning the Further Implementation of the Policy of Additional Deduction of R&D Expenses (Announcement No. 28 [2021] of the State Administration of Taxation, hereinafter referred to as Announcement No. 28) adjusts and optimizes the calculation method of the limit of "other related expenses" compared with the Announcement of the State Administration of Taxation on Issues Concerning the Policy of Pre-tax Additional Deduction of R&D Expenses of Enterprises (Announcement No. 97 [2015] of the State Administration of Taxation, hereinafter referred to as Announcement No. 97). The original calculation of the "other related expenses" limit for each R&D project has been changed to the unified calculation of the "other related expenses" limit for all R&D projects, which not only simplifies the calculation method, but also allows the "other related expenses" limit of multiple projects to be adjusted and used, and generally increases the amount of additional deductions.
For example, Company F has two R&D projects in 2022. The sum of the five expenses of project A's personnel and labor is 1.35 million yuan, and other related expenses are 180,000 yuan, and the sum of the five expenses of project B's personnel is 1.5 million yuan, and other related expenses are 120,000 yuan. According to the calculation method of Announcement No. 97, the limit of other related expenses of Project A is 150,000 yuan [135×10%÷ (1-10%)], and the actual amount incurred is 180,000 yuan, and the other related expenses that can be deducted are 150,000 yuan according to the principle of whichever is smaller, and the limit of other related expenses of project B is 166,700 yuan [150×10% ÷ (1-10%)], the actual amount incurred is 120,000 yuan, and the other related expenses that can be deducted according to the principle of whichever is smaller are 120,000 yuan. The total amount of other related expenses that can be deducted for items A and B is 270,000 yuan. According to the calculation method of Announcement No. 28, the limit of other related expenses of Project A and Project B is 346,700 yuan [(135+150)×10%÷(1-10%)], and the actual amount incurred is 300,000 yuan (18+12), and other related expenses that can be deducted are 300,000 yuan according to the principle of whichever is smaller.
3. The relevant information should be kept complete to confirm that the conditions for enjoying tax incentives are met
When an enterprise enjoys the preferential policy of additional deduction of R&D expenses, it adopts the handling method of "self-determination, declaration and enjoyment, and retention of relevant information for future reference". According to the different ways of organizing enterprise R&D activities, enterprise R&D projects are generally divided into independent R&D, commissioned R&D, cooperative R&D and centralized R&D. There are certain differences in the data retained for future reference by different R&D methods. For example, a contract shall be signed for commissioned R&D and cooperative R&D projects, and the contract for entrusted and cooperative R&D shall be registered by the administrative department of science and technology, of which the entrusting party shall register with the administrative department of science and technology for entrusting overseas R&D activities. Therefore, no matter what method the enterprise adopts to conduct R&D, it must retain the relevant information for future reference in accordance with the requirements, and bear legal responsibility for its authenticity and legitimacy. In the follow-up management process, the enterprise shall, in accordance with the requirements of the tax authorities, provide retained materials for future reference in accordance with the prescribed time limit and manner to confirm that the preferential policy of additional deduction of R&D expenses meets the conditions. In the actual course of operation, enterprises often fail to provide the retained information for future reference as required by the tax authorities, or the retained information provided for future reference is inconsistent with the actual business situation and financial accounting, etc., and cannot prove that they meet the conditions for enjoying the preferential policy of additional deduction of R&D expenses, resulting in the tax authorities recovering the preferential enterprise income tax they have enjoyed in accordance with the law.
For example, Company G is a packaging company, and its R&D expenses in 2022 are 291,417.65 yuan, of which 120,000 yuan is the cost of entrusting overseas institutions to carry out R&D activities. When the tax authorities inspected the overseas R&D contract, they found that the contract for the overseas R&D was not registered with the administrative department of science and technology, but included this part of the expenses in the R&D expenses plus deduction base. According to the Notice on Policy Issues Concerning the Pre-tax Deduction of Overseas R&D Expenses Entrusted by Enterprises (CS [2018] No. 64), a technology development contract shall be signed for entrusting overseas R&D activities, and the entrusting party shall register with the administrative department of science and technology. Since the overseas R&D contract entrusted by Company G has not been registered with the administrative department of science and technology, the R&D expenses incurred in entrusting overseas institutions to carry out R&D activities cannot be used as the basis for additional deduction, and Company G needs to increase the taxable income of enterprise income tax for the current year. At the same time, according to Circular No. 119, if an enterprise meets the conditions for the additional deduction of R&D expenses but fails to enjoy the tax preference in a timely manner after January 1, 2016, it can retroactively enjoy and perform the filing procedures for a maximum period of 3 years. Company G can go to the science and technology management department to make up the registration, and after completing the registration and filing, it can retroactively enjoy the preferential policy of additional deduction of R&D expenses, and the retrospective period is up to 3 years.
Authors: Xie Jiazhen, Chen Yao, Unit: Tax Cadre College of the State Administration of Taxation, Lanxi Taxation Bureau of the State Administration of Taxation