Accurately determine the nature of R&D activities, and enjoy additional deduction benefits in accordance with regulations

Accurately determine the nature of R&D activities, and enjoy additional deduction benefits in accordance with regulations

Source: China Tax News; 12.07.2024; Edition: 07 ; Author: Wu Jian, Wan Xiaoling, Wang Juan

R&D activities are the source of the core competitiveness of enterprises and a powerful driving force to promote independent innovation of enterprises. According to the data released by the National Bureau of Statistics, in 2023, the investment in research and experimental development of the whole society will reach 3,327.82 billion yuan, and the intensity of investment will reach 2.64%, an increase of 0.08 percentage points over the previous year. In order to encourage enterprises to increase R&D investment, the Enterprise Income Tax Law stipulates that the R&D expenses actually incurred by enterprises in R&D activities can be deducted before tax according to the regulations.

In general, scientific and technological activities are divided into three categories: research and experimental development (R&D) activities (hereinafter referred to as R&D activities), application of R&D results, and scientific and technological services. R&D activities can be divided into three categories: basic research, applied research, and experimental development. According to the notice of the Ministry of Finance, the State Administration of Taxation and the Ministry of Science and Technology on improving the policy of pre-tax deduction of research and development expenses (CS [2015] No. 119), R&D activities refer to 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 technology, products (services) and processes. In my practical work, the author found that some enterprises have doubts about the judgment of R&D activities, and the common questions mainly include whether product upgrading is a R&D activity? How should R&D activities be distinguished from industrial production activities?

FAQ 1: Is product upgrading a R&D activity?

Company A's main business is the manufacture of computer peripherals, and a certain display produced by it has been patented and marketed. In May 2023, in order to meet customer requirements, Company A made some simple upgrades and improvements on the basis of existing products. Company A believes that this is a R&D activity, so the personnel labor expenses and depreciation expenses of this simple upgrade will be deducted before tax. According to the provisions of the Cai Shui [2015] No. 119 document, the routine upgrade of enterprise products (services) and the technical support activities provided by enterprises to customers after commercialization are not subject to the policy of additional deduction of R&D expenses. Company A judges the routine upgrade or simple integration of the product as R&D activities, resulting in the risk of incorrectly enjoying the additional deduction of R&D expenses.

In the author's opinion, enterprises can judge whether the projects they carry out are R&D activities from three aspects. First of all, judge whether the project has a clear innovation goal, such as to obtain new knowledge, new technology, new process, new materials, new products, new standards, etc. Specifically, does the activity explore previously undiscovered phenomena, structures, or relationships? Is it necessary to break through the existing technical bottlenecks to a certain extent? Are the results of the development unpredictable? If the project carried out by the enterprise can meet these conditions, it means that the activity has a clear innovation objective. Secondly, judge whether the project has a systematic organizational form. R&D activities should be organized in the form of projects and topics, focusing on specific goals, with relatively definite human, financial, material and other support, and through the organizational process of project establishment, implementation and conclusion, so it is bounded and measurable. Finally, judge whether the R&D results are certain. Normally, the results of R&D activities cannot be completely predicted in advance, and must be tried and tested repeatedly, with great uncertainty and the possibility of failure.

It should be reminded that in practice, the R&D activities of enterprises are often complex. If the enterprise is still unable to judge whether the project is a R&D activity from the above three aspects, it can consult the administrative department of science and technology.

FAQ 2: How to distinguish R&D activities from production activities

Company B's main business is the manufacture of mechanical engineering equipment, and its R&D activities are closely related to design. Company B is a small low-profit enterprise and has not set up a separate R&D institution. The prototype of a small test equipment developed by Company B has passed the small-scale test, pilot test and small-scale trial production and sales, and will soon be transferred to large-scale production. In December 2023, in order to carry out large-scale production, Company B carried out the final design of the product before production based on market feedback, and obtained the technical parameters required for large-scale production. Based on the relevant data, the relevant R&D personnel of Company B carried out product finalization design and drawing of the equipment, and deducted the R&D expenses of personnel labor costs, depreciation costs, and material costs for this activity.

In the industrial field, it is difficult to distinguish R&D activities from R&D results application activities and production activities. In the author's opinion, enterprises can be distinguished from the direct purpose of their activities. R&D activities whose direct purpose is technological innovation or substantial improvement; In order to turn the obtained technical achievements into production or actual use, the application of existing technical knowledge to design, trial production, and test suitable for production or practical use is the application of R&D achievements; If the product process, production process and treatment method have been determined, and the direct purpose of the activity is to enter the market, for which the pre-production plan is formulated and the production process or control system is operated normally, it is a production activity.

In order to mass-produce the products officially put on the market, Company B carries out activities such as product finalization design and drawing, and there is basically no uncertainty. The direct purpose of its activities is to enter the market for sales, which obviously does not belong to the R&D activities of substantial improvement of technology and innovation, and cannot enjoy the preferential policy of additional deduction of R&D expenses. It can be said that the design carried out for R&D activities belongs to R&D activities, such as the design procedures, the formulation of technical specifications, the development of other uses, etc., and such activities have the characteristics of clear innovation goals, systematic organizational forms, and uncertainties. However, design for production is not an R&D activity.

In short, the development of new products or the technical substantial improvement of existing products, or the design, manufacture and testing of major improvements to the performance of existing products belong to research and development activities. When developing a new product, the prototype is generally modified and improved, and the prototype research and development is over after the final test is satisfied. After the end of R&D, the enterprise manufactures a replica of the prototype, even if it is attended by R&D personnel, it is not part of the R&D activity. In order to open up the market in the future, the existing technology is used to modify and adjust the product, which is imitation or imitation, and its design, manufacturing and testing do not belong to R&D activities, and the samples manufactured can only be regarded as replicas.

It should be noted that whether the intermediate test is a R&D activity needs to be analyzed on a case-by-case basis. If the purpose of the intermediate test is to gain experience and collect data to further improve the product, process or production process in terms of technology, the activity is an R&D activity; If it is for the purpose of finalizing the design of the product and obtaining the technical parameters required for production, then this activity is not a research and development activity, but the application of R&D results.

(Author's Affiliation: Suqian Taxation Bureau of the State Administration of Taxation, Gansu Yongcheng Tax Agent Office)