Tax Relief for Manufacturing SMEs Bears Fruit as China Defers US$39 Billion

China’s tax bureau revealed that small and medium-sized manufacturing businesses had benefitted from over US$39 billion in tax deferrals in March 2022. This number is a result of a range of tax relief measures given to small businesses in the manufacturing sector in late 2021, which were extended to the first half of 2022. The government has released a raft of China tax incentives for small businesses in a range of industries, particularly for those hardest hit by the pandemic, in an effort to bolster this crucial segment of the economy. We look at some of the incentives available to small businesses and discuss how far they will go to boost China’s economy.

According to a notice (link in Chinese) posted on the State Tax Administration’s (STA) website, China deferred RMB 256.7 billion (US$39.1 billion) in taxes for manufacturing small, and medium-sized enterprises (SMEs) in March 2022. The tax deferments have benefited 2.57 million enterprises, which basically covers all tax-filing manufacturing SMEs. On average, medium-sized enterprises deferred around RMB 440,000 (US$67,038) in taxes while small enterprises deferred around RMB 50,000 (US$7,618).

This tax deferment amount is the result of a raft of tax measures implemented in the last quarter of 2021 and 2022 to ease the tax burden on manufacturing SMEs, which are the “foundation of the real economy” and “play an important role in employment, activating the market, and improving livelihoods”, as explained in the most recent notice.

China has released several tax relief measures for SMEs over the past few years in order to ease the financial burden on the thousands of small and individual businesses that form the backbone of the economy. As these companies are also some of the most vulnerable to disruption caused by the COVID-19 pandemic, rising operational costs, and uneven demand, Beijing has also continued to extend tax relief measures to help them weather the storm.

In this article, we provide a brief overview of some of the tax relief measures granted to China’s small businesses. For an in-depth overview of tax incentives for small businesses, see our article on the topic here. For a full overview of the tax relief measures available to businesses in Shanghai during the current COVID-19 lockdown, see our article on the topic here.

Current taxes relief measures for micro, small, and medium-sized enterprises

Starting in late 2021, China rolled out a raft of tax incentives for small businesses to provide financial relief in the face of economic pressure from continued COVID-19 disruption and rising operational costs. Industries covered include manufacturing, services, and technology, as well as low-profit enterprises in other industries.

In addition to industry-specific tax relief measures, China has also provided relief measures for value-added tax (VAT) payments, pre-tax deduction on R&D expenditure, and corporate income tax (CIT) deductions for certain enterprises.

Note that MSMEs is a specific legal designation in China and refer to enterprises engaging in industries that are not restricted or prohibited by the state and that satisfy the following criteria, depending on which industry they are in:

• Information transmission, construction, and leasing and commercial service enterprises must have less than 2,000 employees, business revenue of no more than RMB 1 billion (approx. US$156.9 million), or total assets of no more than RMB 1.2 billion (approx. US$188 million).
• Real estate enterprises may have business revenue of no more than RMB 2 billion (approx. US$313.8 billion) or total assets of no more than RMB 100 million (approx. US$15.7 million); and
• Enterprises in other industries must have less than 1,000 employees or business revenue of no more than RMB 400 million (approx. US$62.7 million).

China has also extended tax relief measures to small and low-profit enterprises (SLPEs). This refers to businesses that: 

• Have an annual taxable income of up to RMB 3 million (approx. US$457,623); 
• Have 300 or fewer employees; and 
• Have total asset value of up to RMB 50 million (approx. US$7.6 million). 

Tax relief for manufacturing MSMEs

On October 27, 2021, China’s State Council announced a series of tax relief measures for small and medium-sized manufacturers, individual registered entrepreneurs, certain unincorporated firms like sole proprietorships and partnerships, and coal-fired power plants and heating firms.

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The decision was made at an executive meeting (link in Chinese) of the State Council chaired by Premier Li Keqiang on October 27, 2021, as Beijing sought to cushion the impact of rising commodity prices and production costs to help small businesses, especially manufacturers, tide over difficulties.

On October 29, 2021, the STA and the Ministry of Finance (MOF) released the STA MOF Announcement [2021] No.30 (link in Chinese), which clarified the tax deferment policy for MSMEs (including sole proprietorships, partnerships, and individual businesses) in the manufacturing sector. The Announcement took effect on November 1, 2021.

The following taxes can be deferred under this announcement:

• Corporate income tax (CIT), domestic value-added tax (VAT), domestic consumption tax, and urban construction and maintenance tax paid by MSMEs in the manufacturing sector; and
• Individual income tax (IIT) paid by individual businesses, sole proprietors, and partnership enterprises (excluding withholding tax).

Small and micro-enterprises in the manufacturing sector (including individual businesses) whose annual sales revenue is less than RMB 20 million (US$3.13 million) can defer payments on all taxes for the fourth quarter.

Medium-sized manufacturing enterprises with annual sales revenue between RMB 20 million (US$3.13 million) to RMB 400 million (US$62.51 million) can have 50 percent of their taxes deferred for the period. However, those with special difficulties can apply to the government for full tax delay.

The tax reprieve period, which was originally set for three months to cover the fourth quarter of 2021, was extended for another six months, per an announcement (link in Chinese) from the STA and MOF released on February 28, 2022. The new tax reprieve period took effect immediately and was implemented retroactively from January 1, 2022.

The announcement clarified that manufacturing SMEs can voluntarily apply for tax refunds (fees) and enjoy the extension of the tax deferment policy, if they had already paid the taxes previously deferred in the fourth quarter of 2021 after the original tax reprieve period was up on January 1, 2022, and before the new announcement on the extension was issued.

The taxes allowed for deferral include CIT, individual income tax, domestic VAT, and domestic consumption tax incurred by manufacturing SMEs from January through June 2022 (payable on a monthly basis) or in the first and second quarters (payable on a quarterly basis) of 2022, as well as surtaxes.

The RMB 256.7 billion (US$39.1 billion) that the STA announced it had granted companies in March 2022 is primarily a result of the above measures.

Tax relief for service MSMEs and SLPEs

To ease the tax burden on MSMEs in the services sector, the National Development and Reform Commission (NDRC) released a document titled Several Policies on Promoting the Recovery and Development of Service Industries in Difficulty (the “policy list”) (link in Chinese) on February 18, 2022. In the policy list, the NDRC outlined 43 measures to provide fiscal and logistical support for service industry businesses that have been particularly hard hit by the COVID-19 pandemic and related restrictions, in particular catering, retail, and travel.

The policies provide extensions on several tax reductions for small businesses in China. These include:

• Extending the policy of additional deduction of VAT in the service industry. In 2022, the deductible input tax of taxpayers in the production and living services industries will continue to be deducted by 10 percent and 15 percent of the taxable amount, respectively.
• Extending the applicable scope of the “six taxes and two fees” policy in 2022. This policy, first introduced in 2019 to help ease the tax burden of small-scale VAT taxpayers, allows provincial governments to reduce the “six taxes and two fees” within 50 percent of the tax amount.

The “six taxes” are:

• Resource tax
• Urban maintenance and construction tax
• Property tax
• Urban land use tax
• Stamp duty (excluding securities transaction stamp duty)
• Farmland occupation tax

The “two fees” are:

• Education surcharges
• Local education surcharges

This tax benefit was originally applicable between January 1, 2019, to December 31, 2021, and applied only to small-scale VAT taxpayers. The policy has now been extended to December 31, 2024 and expanded to include eligible SLPEs and individual industrial and commercial merchants in the services industry.

New preferential tax policies for small-scale VAT payers

On March 24, 2022, the MOF and the STA released a new announcement clarifying issues related to VAT exemption for small-scale VAT taxpayers.

Here, small-scale taxpayers refer to taxpayers whose annual VAT taxable sales do not exceed RMB 5 million (approx. US$784,560).

Accordingly, from April 1, 2022, to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment. Moreover, the taxable sales income that small-scale VAT taxpayers earned before March 31, 2022 will be taxed at a reduced rate of 1 percent instead of 3 percent.

Super pre-tax deduction on R&D expenditure for technology SMEs

The 2022 Government Work Report released on March 5 during the 2022 Two Sessions, which outlines the country’s economic and development roadmap for the year, also launched an additional R&D expense deduction ratio for technology-based small and medium-sized enterprises (TSMEs), raising it from 75 percent to 100 percent.

An announcement from the MOF, STA, and the Ministry of Science and Technology (MOST) released on April 1 clarified that from January 1, 2022, if R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount. If the R&D expenses have formed intangible assets, they can be amortized before CIT at 200 percent of the actual cost of intangible assets.

Increased proportion of CIT deduction for new equipment and instrument purchases for MSMEs

On March 4, 2022, the MOF and STA released the Announcement of the Policy on Pre-tax Deduction of Taxable Corporate Income on Micro, Small and Medium-sized Enterprises for Purchase of Equipment and Instruments, which clarified specific deduction rules.

Accordingly, during the period from January 1, 2011 to December 31, 2022, MSMEs can voluntarily apply for a pre-tax deduction of a certain proportion of their costs for the purchase of new equipment and instruments with a unit value (price) not exceeding RMB 5 million (approx. US$760,000). Specifically:

• MSMEs purchasing equipment and instruments with a minimum depreciation period of three years would be entitled to a one-off deduction of the total purchase costs from taxable income.
• MSMEs purchasing equipment and instruments with a minimum depreciation period of four, five, or ten years would be eligible for a 50 percent deduction of the total purchase costs from taxable income, while the remaining 50 percent shall be deducted in the remaining depreciation period.

If an enterprise chooses to apply the above policies to the current year and the deduction amount outnumbered the taxable income, the relevant loss can be carried forward in the following five tax years to deduct the taxable income.

CIT reduction for SLPEs

On March 18, 2022, the MOF and the STA released an Announcement on Further Implementing Preferential Income Tax Policies for Small and Low Profit Enterprises (the “Announcement”), which will be retrospectively implemented from January 1, 2022 to December 31, 2024. The incentive was first disclosed during the 2022 Two Sessions.

Accordingly, the corporate income tax (CIT) liability of SLPEs will be halved for the portion of taxable income exceeding RMB 1 million (approx. US$152,541) but less than RMB 3 million (approx. US$457,624).

All types of SLPEs in China are able to enjoy a reduced CIT rate of 20 percent in combination with a reduction of their tax base. With the retrospective implementation of the Announcement, SLPEs are subject to:

• 20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million (effective from January 1, 2021 to December 31, 2022); and
• 20 percent CIT rate on 25 percent of their taxable income amount for the portion of taxable income in excess of RMB 1 million but not exceeding RMB 3 million (effective from January 1, 2022 to December 31, 2024).

As a result, for an SLPE’s taxable income amount of up to RMB 1 million, an effective 2.5 percent CIT rate will apply; for the portion of taxable income between RMB 1 million and RMB 3 million, an effective 5 percent CIT rate apply.

Because the SLPE evaluation is carried out at the entity level (instead of at the group level), small subsidiaries of foreign multinational enterprises (MNEs) in China can also benefit from these CIT cuts.

Can tax relief for SMEs give a much-needed boost to the Chinese economy?

The Chinese government is hoping that the tax relief measures extended to the country’s small businesses will help to shore up growth and ensure a degree of stability in a time of considerable economic pressure.

China has set itself a relatively ambitious goal for GDP growth in 2022 – 5.5 percent – which even before the current COVID-19 disruptions, was met with surprise and skepticism by some analysts. Policymakers have been pulling out almost all the stops to stimulate the economy in the face of continued uncertainty, and many incentive and supportive policies target MSMEs specifically.

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China’s small businesses play an exceedingly important role in the country’s economy. Private MSMEs are sometimes called the “56789” contributors because they pay approximately 50 percent of the country’s taxes, account for 60 percent of the GDP, contribute 70 percent of technological innovation through patent filings, provide 80 percent of employment, and make up 90 percent of all companies in the country.

But these industries are also among those that have struggled the most during the economic turmoil unleashed by the pandemic. As was pointed out by the Chinese economist Ren Zeping (link in Chinese), small businesses in China are the most vulnerable to market volatility and crises, as has been seen most recently by the impact of the COVID-19 pandemic.

Manufacturing MSMEs, whose main workforce is usually required to be on-site and cannot work remotely, have often felt the brunt of COVID-19 containment measures, such as lockdowns and restrictions on movement. Other hard-hit businesses include those in the services sector, which similarly suffer from having a bulk of employees in high-risk customer-facing roles.

Tax relief has been a favorite tool of policymakers in addressing these issues, along with other supportive measures, such as waivers on rent for companies leasing state-owned property. But it is not yet clear whether it will be enough to ensure China hits its economic targets for 2022, and many have been eagerly awaiting more hard-hitting economic stimulus.

Although officials have repeatedly stated that the government would not “flood” the market with liquidity, advocating instead for a “proactive fiscal policy and a prudent monetary policy”, there are signs that it is coming round to wide-ranging economic stimulus.

At a summit in Beijing on Sunday, April 24, 2022, and in the run-up to the monthly Politburo meeting on Friday, April 29, which is expected to focus on the economy, member of the Monetary Policy Committee of the People’s Bank of China (PBOC) Wang Yiming stated that China needed more “forceful” macro policies to hedge against the impact of the pandemic. He also stressed that this, among other measures such as containing the current COVID-19 outbreak by mid-May, was “particularly important” in order to achieve the 5.5 percent GDP target.

He also provided a hint of what may be to come by musing the idea of providing direct subsidies to low-income people, especially poor families, to stimulate consumption. This kind of support to stimulate consumption would provide a much-needed boost to small businesses in the aftermath of the current COVID-19 disruption that tax relief alone could not achieve.

However, whether the government will indeed launch such a stimulus remains to be seen. Businesses are advised to pay close attention to the upcoming Politburo meeting, as well as other possible policy measures from the State Council, PBOC, and MOF.

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