China VAT : Understanding the Eligibility for VAT Incentives in R&D Centers
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China has provided clarification on certain Value Added Tax (VAT) incentives for purchase of equipment by foreign-funded Research and Development (R&D) centers. In a recent circular, authorities provided additional guidance on the eligibility requirements and criteria for claiming the tax exemption.
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China VAT : Understanding the Eligibility for VAT Incentives in R&D Centers China has provided clarification on certain Value Added Tax (VAT) incentives for purchase of equipment by foreign- funded Research and Development (R&D) centers. In a recent circular, authorities provided additional guidance on the eligibility requirements and criteria for claiming the tax exemption. China VAT R&D: Highlights from Circular (93) Clarification of certain criteria for import VAT exemption for foreign-funded R&D centers (Circular 115) Circular (93) clarifies that the relevant commerce authorities must approve the establishment of foreign- funded Research and Development centers. Circular (93) specifies that the annual R&D expenditure (as stated in Circular 115) refers to the average annual R&D expenditure of the last two years. Circular (93) provides the definition of full-time R&D personnel (as stated in Circular 115). Circular (93) clarifies that equipment orders already made and where the delivery is by the end of 2010 can be regarded as qualifying equipment. Verification of eligibility requirements Circular (93) clarifies that relevant commerce authority will review and inspect the application of the foreign- funded Research and Development center. It also specifies that status of the approved foreign-funded Research and Development centers will be revisited every two years. For centers that are disqualified, the VAT exemption and VAT refund will be revoked. Supervision of tax exempted/refunded equipment Circular (93) clarifies that there is emphasis on the supervision of the tax exempted or refunded equipment. A foreign-funded Research and Development center could incur a penalty for transfer, sale, disposal or use of the equipment for another purpose without approval. China VAT R&D: The Background Earlier, authorities allowed general VAT taxpayers to deduct input VAT incurred on purchases of fixed assets from their output VAT. Exemption from import VAT on equipment for R&D centers was also abolished, adversely affecting the R&D centers as they are not general VAT taxpayers and cannot credit input VAT incurred on purchased equipment against the output VAT. Later authorities moved to resolve this issue and the Ministry of Finance (MOF), General Administration of Customs (GAC) and State Administration of Taxation (SAT) jointly issued a circular (Circular 115) stating import VAT Tax exemption is available on equipment imported by R&D centers and a full VAT refund is available on domestically-manufactured equipment purchased by the centers. VAT Exemption on Imported Equipment The import VAT exemption to foreign-funded Research and Development centers includes independent legal entities, R&D departments or R&D branches of foreign-invested companies provided certain conditions are met. Financial benefits are a critical factor in your international business expansion. As the main goal of any business is to make profits, any incentives that a government has to offer makes it more attractive to set up a business in a particular country. Therefore partnering with an expert can help tremendously in understanding the complexities of taxation be it VAT or tax equalization expat or internal audit compliance. Professionals have the expertise to guide and ensure a trail blazing success in your international expansion Click here for more on international financial reporting & intercompany transfer pricing
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