Home  Contact Us
  Follow Us On:
 
Search:
Advertising Advertising Free Newsletter Free E-Newsletter
Magazine
  
      2024       2023       2022       2021       2020       2019       2018       2017       2016       2015       2014       2013       2012       2011       2010       2009       2008

FINANCE: New Working Guidelines for the Administration and Assessment of High and New Technology Enterprises (HNTEs) Opportunities and challenges
Share to

New Working Guidelines for the Administration and Assessment of

High and New Technology Enterprises (HNTEs)

Opportunities and challenges

By Kelvin Lee, PwC Tianjin


In brief

In order to implement the State Council's call to support start-ups and innovation as well as drive economic upgrade, the Ministry of Science and Technology (MST), Ministry of Finance (MOF) and State Administration of Taxation (SAT) (hereinafter collectively as "three Ministries") jointly released the Notice Regarding the Amendment of the "Administrative Measures for the Assessment of High and New Technology Enterprises (HNTEs)" (Guokefahuo [2016] No.32, hereinafter referred to as "Circular 32") on 29th January 2016, which provides the policy direction for HNTE's assessment under a new regime.


After the issuance of Circular 32, the refinement of supporting working guidelines has become the main focus of all relevant parties. Due to the absence of the latter, the HNTE assessment for 2016 has been suspended at local levels. Finally, on 22nd June 2016, the three Ministries released the Notice Regarding the Amendment of the "Working Guidelines for the Administration and Assessment of HNTEs" (Guokefahuo [2016] No.195, hereinafter referred to as "the New Working Guidelines") to kick off the HNTE assessment under the new regime. The New Working Guidelines took effect from 1st January 2016.


Highlights of the New Working Guidelines include: 1) emphasis of the leading role of technology; 2) refinement of the evaluation mechanism of innovation capability; 3) clarification to the definition of certain terms for the purpose of assessment; and 4) enhanced supervision and administration.


In detail

Background


BT 201610 140 01 FinanceAccording to the prevailing Corporate Income Tax Law (CIT Law) effective from 2008, HNTEs specially supported by the State could enjoy a reduced CIT rate of 15%. Based on this incentive, the three Ministries jointly released the Administrative Measures for the Assessment of HNTEs (Guokefahuo [2008] No.172) and the Working Guidelines for the Administration and Assessment of HNTEs (Guokefahuo [2008] No.362). These two circulars formed the HNTE tax regime in China (the previous regime) and have made great contribution to promoting the innovation and development of such enterprises over the past eight years.


In recent years, to support start-ups and innovation, the need to improve HNTE policies and encourage enterprises to increase innovation input was proposed in the 2015 Chinese Government Work Report and through various executive meetings of the State Council held in early 2016. Against this backdrop, Circular 32 was released on 29th January 2016 to define the policy direction of HNTE. Following that, the New Working Guidelines were issued on 22nd June 2016 to further clarify the detailed administration and assessment of HNTEs. As such, a new HNTE regime has been established.


Highlight 1: Emphasizing the leading role of technology


Encouraging innovation in research and development (R&D) and driving economic upgrade have always been the spirit of HNTE policies. The New Working Guidelines reflect this spirit and emphasizes the leading role of technology either explicitly or implicitly in many areas.


1. Importance of core technology
The New Working Guidelines stress the importance of core technology for HNTEs. For instance, it reiterates the high and new technical products (services) should contain technology that makes a core technical contribution. This requirement is consistent with that in Circular 32 and more straight-forward than that under the previous regime. Enterprises are suggested to carefully study the interpretation related to "technology" in the New Working Guidelines to avoid any overlooking or misunderstanding.


2. Clarification on relevant R&D concepts
Accurate identification of R&D activities is the cornerstone of obtaining and maintaining the HNTE qualification. While inheriting the definition and determination approaches of R&D activities set forth in the previous HNTE regime, the New Working Guidelines has elaborated the "capability to transform scientific and technological achievements", expanded the scope of intellectual property (IP) right and classified IP right into different categories, which provide a more practical reference for enterprises to evaluate their R&D and technology capabilities.


3. Optimising provisions on IP rights
The New Working Guidelines optimises the provisions in relation to IP rights in the following areas:

- Scope of qualified IP rights: The provision that IP right could be acquired via an exclusive global licence has been removed. In addition, new state-level agricultural varieties, new state-level medicines, state-level grade-1 protected traditional Chinese medicine are included into the scope of qualified IP rights.
- Classification of IP rights: The New Working Guidelines has classified the IP rights set out therein into two categories (i.e., category I and category II) for evaluation purpose. For example, patent for invention, new varieties of plants, state-level agricultural varieties, new state-level medicines and state-level grade-1 protected traditional Chinese medicine, exclusive rights to layout-design of integrated circuits, etc. should fall into category I, while new utility model patent, design patent, software copyrights (excluding trademarks) should fall into category II.
- Frequency of using IP right for HNTE application: IP right under category II should only be used one time for the HNTE application.
- Ownership of IP rights: In case of multiple owners of a single IP right, only one owner could use the IP right for HNTE application and other owners cannot use it for application purpose throughout the valid period of that owner's HNTE qualification.
- Proof of validity: In addition to the authorisation certificate, an authorisation notice together with the payment receipt can also be used to prove the validity of patents. This solves the previous issue that it usually takes a relatively long time to obtain the authorisation certificate.


Highlight 2: Refinement of the evaluation mechanism of innovation capability


The New Working Guidelines has upgraded the evaluation mechanism under the previous HNTE regime to an innovation capability evaluation mechanism and made some refinements, which demonstrates the State's growing emphasis on and rigid view in innovation capability. Key changes of the upgraded mechanism include:


1. Previously, the evaluation of IP rights only relates to quantity. Now the quality of IP rights will also be considered with three factors, i.e. advancement of technology, core technical contribution to the main products (services) and the source of the IP right. In particular, IP rights obtained through self R&D will get more credit than those through grant/transfer, donation, merger and acquisition, indicating the State's determination to encourage self R&D activities. Moreover, factors such as contribution to the formulation of the national standard, industry standard, examination methods or technical code will also be taken into account for reference.

2. For the evaluation of transformation capability of scientific and technological achievements, a higher requirement is imposed on the number of transformed achievements, e.g. at least five transformed achievements (instead of four) are needed for the purpose of being recognised as having a strong transformation capability. In addition, the New Working Guidelines provides the interpretation of "scientific and technological achievements" and "transformation" of these achievements and lists the forms of transformation. These practical guidelines would help enterprises to do a better self-evaluation of their transformation capability.

3. The evaluation of the organisational and management capability for R&D activities covers a wider range of factors such as the organisation and management system of R&D activities, financial accounting, in-house R&D department and its R&D competence, cooperation with external R&D institutions, transformation of technological achievements, staff training and incentives, etc. Obviously, R&D management capability plays a significant role in the evaluation. It is also worth noting that the New Working Guidelines reiterated that an auxiliary account must be set up for the calculation of R&D expenditure.

4. For the indicators evaluating enterprises' growth capability, one of previous indicators, i.e. total assets growth rate has been replaced by net assets growth rate, which is more reasonable.


BT 201610 140 03 FinanceHighlight 3: Clarification to the definition of certain terms for the purpose of assessment


The New Working Guidelines has unified the previously inconsistent definition of certain terms used in the calculation. In particular:


1. Main products (services) refer to the high and new technical products (services) satisfying both of the following criteria:
- have ownership of IP rights which make a core technical contribution; and
- revenue derived from such products (services) accounts for more than 50% of the revenue derived from all high and new technical products (services) during the same period.


2. Total employees and scientific and technical personnel should be counted according to the monthly-average number throughout the year.


3. Sales revenue refers to the sum of main operating income and other operating incomes.


4. Total revenue should be calculated by deducting non-taxable income from gross income. It should be noted that the scope of gross income and non-taxable income should be in accordance with the provisions of the CIT Law.

5. Regarding R&D expenditure, the close connection between R&D expenditure and R&D activities under the previous regime has been retained in the New Working Guidelines. Meanwhile, some R&D expenditure has been refined or re-classified. What's more, the ceiling of "other expenses" which can be taken into account for R&D expenditure calculation (i.e. materials fee, consulting fee, meeting fee, etc.) against total R&D expenditure has been increased from 10% to 20%.


Highlight 4: Enhanced supervision and administration


The administration and assessment of HNTEs relies on the collaboration among the Administration Office of the Leading Team, assessment institutions, intermediary agencies and experts as well as continuous monitoring by in-charge authorities. The enhancement on the administration is mainly reflected in the following areas:


1. Enhance the supervision on HNTEs
The New Working Guidelines refine the supervision on HNTE assessment and post-administration. In particular, during the process of assessment, the assessment institution could perform on-site investigation on the applicants where necessary and the Administration Office of the Leading Team could randomly select and examine the quality of the assessment. As for the post-administration, the New Working Guidelines also set out relevant rules regarding key examination, the annual report of enterprises, reassessment of enterprises' qualification on request basis by relevant authorities, requirements in case of name change and other significant changes, cross-region relocation, etc. These standardised rules will provide clear guidance to in-charge authorities and relevant enterprises when dealing with relevant matters.


Enterprises are suggested to pay more attention to the rules relevant to key examination, submission of annual report and re-assessment. It is also worth noting that although under the new regime, the HNTE assessment procedures have been simplified and post-administration is apparently enhanced.


2. Improve the expert panel evaluation mechanism
The evaluation conducted by expert panels is a key part of assessment. The New Working Guidelines have kept the expert appointment system and the practice of dynamical management of the expert database and introduces financial experts to review special reports, tax returns filed and financial accounting reports. It also reduces the number of experts required for database and clarifies the rules of expert evaluation as well as introduces penalty for their violation behaviour.


In addition, technical experts should not be less than 60% of the members of the expert panel and the leadership of the panel should be assumed by a technical expert. These requirements show the important role of technology during the assessment of HNTEs.


3. More stringent requirement on qualified intermediary agencies
Like the previous regime, enterprises should engage intermediary agencies to conduct a special audit or verification on their R&D expenditure and income from high and new technical products (services) and then issue a special report.


It is noted that the New Working Guidelines have recognised tax agents as qualified professionals of intermediary agencies. It also enhances the administration on the discipline of intermediary agencies – for serious misconducts or falsification committed by the intermediary agencies they would be barred from any work in relation to the HNTE assessment in the following three years.

BT 201610 140 02 Finance
The takeaway


2016 is the inaugural year for the new HNTE regime. A lot of implementation issues may arise in practice. Enterprises should attend to the provisions specified in the New Working Guidelines, which in fact put forth more rigid standards on the HNTE assessment. While applying for HNTE qualification and enjoying preferential tax treatment under the new regime, enterprises shall pay close attention to the following matters:


1. Leading role of technology

Technical analysis is the foundation for enterprises to obtain and maintain the HNTE qualification while a reasonable accounting treatment could substantiate their eligibility to HNTE qualification. As the New Working Guidelines stress the importance of leading role of technology in multiple areas, enterprises shall perform technical analysis and assessment in a more cautious manner and appreciate the inherent connection between technology and various assessment criteria such as high and new technology domain, high and new technical products (services), R&D expenditure, scientific and technical personnel, etc. Given the emphasis on the leading role of technology in the New Working Guidelines, it could be anticipated that technology will become a key focus area during assessment and post-administration of HNTEs under the new regime.


2. Comprehensive management of IP rights

The New Working Guidelines optimises the IP right provisions in many aspects such as its scope, classification, frequency of use, ownership, proof of validity and assessment method. Enterprises should pay close attention to the comprehensive management of IP rights and improve the core value of their technology. This is particularly critical for group enterprises. They have to not only ensure that the IP rights owned by key enterprises satisfy the quantitative and qualitative requirements for HNTE assessment but also balance the frequency (i.e. IP rights under category II shall be used only once for HNTE application) and validity of IP rights among other group members.


3. Improve daily management of key indicators

The New Working Guidelines further stress the mechanism of key examination and annual report, which requires HNTEs to monitor in a timely manner and manage their status concerning IP rights, scientific and technical personnel, R&D expenditure and operation income, etc. throughout the valid period of the HNTE qualification. Meanwhile, they are also suggested to improve the documentation for R&D activities and the maintenance of auxiliary accounts for R&D expenditure as well as other relevant documents and ensure the consistency of all reported information.


4. Establish a systematic administration mechanism

From past experience, HNTEs were generally confronted with problems during the application and validity period of HNTE qualification, most of which could be attributed to the negligence of technological issues and lack of an efficient risk-control system. From the perspective of "cost-benefit efficiency", enterprises are recommended to consider setting up a coordinated team comprising of technical experts, financial and tax personnel and developing a systematic risk control mechanism so as to avoid compliance risks.


After the issuance of the New Working Guidelines, the local-level authorities will commence the HNTE assessment work under the new regime. It is expected that the New Working Guidelines will provide more practical guidance for the HNTE assessment and raise the standard on HNTE's daily management. Enterprises are suggested to put more effort in the management of HNTE qualification and relevant tax preferential treatment, enhance compliance level and mitigate relevant risks.


--- End ---

    Subscription    |     Advertising    |     Contact Us    |
Address: Magnetic Plaza, Building A4, 6th Floor, Binshui Xi Dao.
Nankai District. 300381 TIANJIN. PR CHINA
Tel: +86 22 23917700
E-mail: webmaster@businesstianjin.com
Copyright 2024 BusinessTianjin.com. All rights reserved.