China Regulatory Brief: Six New Tax Cut Measures for 2017, Key Tasks for Economic System Reform

State Council introduces six tax cut measures for 2017

At the executive meeting of the State Council last week, a series of six tax cuts were introduced. The following details the plans:

(I) A continuation of the Business Tax to value-added tax (VAT) reform, in the form of simplification of VAT rates from four brackets to three. As of July 1, 2017, the 13 percent bracket will be eliminated, leaving only the 17 percent, 11 percent and 6 percent brackets. Furthermore, agricultural products and natural gas VAT rates will be reduced from 13 percent to 11.

(II) The scope of small and micro profit enterprises entitled to preferential enterprise income tax (EIT) rates will be widened. From January 1, 2017, the upper limit of taxable income has been increased from RMB 300,000 to RMB 500,000, valid until December 31, 2019.

(III) The proportion of weighted pre-tax deduction of R&D expenses of high-tech SMEs will be increased. From January 1, 2017 to December 31, 2019, the proportion of R&D expenses deducted before EIT will be increased from 50 percent to 75 percent.

(IV) A pilot program in eight comprehensive innovation and reform zones, including in Beijing, Tianjin, Shanghai, and Guangdong. Beginning on January 1, 2017, venture capital enterprises and individual investors that invest in the science and technology enterprises during the startup stage can enjoy taxable income deducted at 70 percent of the investment amount.

(V) A pilot policy of pre-tax deduction for IIT expenditures on health insurance products across the country beginning July 1, 2017.

(VI) For polices which were set to expire in 2016, such as the 50 percent cuts to Urban and Township Land Use Tax on bulk commodity warehouse facilities owned by logistics enterprises, and the VAT exemption on the interest on income derived by the financial institutions from small loans to farmers, a three-year extension will be applied.

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Key tasks for the economic system reform listed

35 key tasks for realizing the ongoing economic system reform in 2017, published by the National Development and Reform Commission (NDRC), have been released.

Reform pledges include forming a compilation of civil code by revising laws and relevant clauses; reforming the mixed ownership of SOEs in the electricity, petroleum, natural gas, railway, civil aviation, telecommunication, and defense industries; fully implementing the negative list management model and pre-access national treatment for foreign invested companies; launching overseas RMB cooperation funds; reviewing the blacklist for overseas investment; developing the improvement scheme of local tax and accounting systems; and expanding the scope of the current water resource tax reform.

Development and support for China’s new pilot free trade zones

The General Administration of Customs has issued 25 measures for supporting the development of the seven new pilot free trade zones in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi.

The measures include developing tax collection and administration at customs bureaus; improving the integration and optimization of customs’ special and bonded supervision zones; supporting the development of areas such as foreign trade of culture, cross-border e-commerce, service outsourcing, production-oriented service sector, and finance leasing, etc.; and implementing legal protection of intellectual property to safeguard the innovation of enterprises operating in those areas.

The new free trade zones started operation on April 1 this year, mostly located away from coastal areas to promote more inland trade. China hopes to attract further investment to spur growth in its less wealthy inland areas, especially in its western regions.

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