Circular of the Ministry of Finance and the State Administration of Taxation on Tax Issues Related to the Implementation of the Decision of the CPC Central Committee and State Council on Strengthening Technical Innovation, Development of High-tech and Realization of its Industrialization

CaiShuiZi [1999] No.273 November 2, 1999

The General Administration Customs, Finance Departments and the State and Local Tax Bureaus of provinces, autonomous regions, municipalitie directly under the Central Government and municipalities separately listed on state plans, Xinjiang Production and Construction Corps:

In order to implement the spirit of the Decision of the CPC Central Committee and State Council on Strengthening Technical Innovation, Development of High-tech and Realization of Its Industrialization (ZhongFa [1999] No.14), encourage technical innovation and the development of the new and high-tech enterprises, the circular concerning tax matters is made as follows:

1. Value-added Tax

(1) For general taxpayers that sell computer software products developed and produced on their own, the part of the actual tax burden exceeding 6 percent shall all be refunded right after its collection after the tax is levied according to the 17 percent statutory tax rate.

(2) Small-scale taxpayers of production enterprises which produce and sell computer software products shall pay the value-added tax according to the 6 percent tax rate; small-scale taxpayers of commercial enterprises which sell computer software products shall pay the value- added tax according to the 4 percent tax rate, and the tax authorities may issue the special value-added tax receipts on behalf of them in light of the different tax rates.

(3) With regard to the software products sold together with the computer network, computer hardware and machinery equipment, its sales amount shall be separately calculated. If it is not calculated separately or the calculation is unclear, its value-added tax shall be levied according to the tax rate applicable to the computer network, computer hardware and machinery equipment and the tax shall not be refunded.

(4) Computer software products refer to the storage medium which record the computer programs and its related files (including the soft disk, hard disk, light disk and etc.). Business tax shall be levied on the computer software registered with the State Copyright Bureau whose copyright and ownership are transferred together at its sale. No value- added tax shall be collected.

2. Business Tax

(1) The income derived from technology transfer, technology development and their related technology consultation and technology service offered by the units or individuals (including enterprises with foreign investment, the research and development centers invested and set up by foreign businesses, foreign enterprises and foreign nationals) shall be exempt from the business tax.

Technology transfer refers to the act of a transferor to transfer non- gratuitously the ownership or the right of use to its own patent or non- patented technology to another person.

Technology development refers to the act of a developer, upon entrustment of another person, to research into and develop new technology, new product, new technique or new material, as well as the system thereof.

Technology consultation refers to the provision of reports concerning a specific technological project on such subjects as feasibility study, technical projection, special technological investigation, and analysis and evaluation.

Technology consultation and technology services related to the technology transfer and technology development refer to the provision of technology consultation and technology services by the transferor (or the agent) to help the transferee (or the principal) master the transferred (or developed upon entrustment) technology according to the provisions of the technological transfer or development contact. In addition, the payment for the technology consultation and technology services is written on the same invoices with that for technology transfer ( or development).

(2) The turnover from technology transfer or development which is exempt from the business tax

a. Whoever provides existing technology or development results with the drawing sheet or materials as the carrier, its turnover exempt from the tax shall be all the prices paid by the other party as well as the expenses not included in the prices.

b. Whoever provides existing technology or development results with the goods as the carrier such as the sample, sample machine or equipment, its turnover exempt from the tax shall not include the value of the goods. The goods such as the sample, sample machine or equipment shall be subject to the value-added tax in accordance with relevant provisions. The transferor (or the agent) shall separately indicate the value of the goods and that of technology transfer or development. If the price of the goods is obviously undervalued, the competent taxation authorities shall appraise and fix the price for taxation in accordance with the provisions of Article 16 of the Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value- added Tax.

c. The parent of microbial bacterium spawn and the new animal and plant varieties provided to supplement the biological technology shall be included in the turnover exempt from the business tax. But the microbial bacterium spawn sold in a large scale shall be subject to the value- added tax.

(3) The procedure for examination and approval of the tax exemption

a. A taxpayer engaged in technology transfer or development who applies for exemption of business tax shall, with the written technological transfer or development contact at hand, go to the administrative department of science and technology at the provincial level in the place where the taxpayer is located for identification. Then the taxpayer shall, with the relevant written contact and the opinions of the competent department of science and technology on examination and verification thereof at hand, report it to the local competent taxation authorities at the provincial level for examination and approval.

If the transfer of technology by foreign enterprises and foreign individuals from outside our territory to the territory of China needs to be exempt from business tax, the technological transfer or development contact in writing, the written application of the taxpayer or its/his agent, and the certificate of examination and verification issued by the administrative department of science and technology at the provincial level in the place where the transferee is located shall, after examination and verification by the competent taxation authorities at the provincial level, be submitted to the State Taxation Administration for approval.

b. Before it is examined and approved by the department of science and technology and the department of taxation, the taxpayer shall first pay the business tax in accordance with relevant provisions. After it is examined and approved by the department of science and technology and the department of taxation, the business tax to be paid later shall be set off by the tax already paid. If no taxable act of business tax takes place within the coming year, or the taxable amount is not enough to set off that of exemption, the taxpayer may apply to the tax authorities in charge of the collection for refund of the tax.

3. Income tax

(1) Where the social forces including the enterprises (with the exception of enterprises with foreign investment and foreign enterprises), institutions, social organizations, individuals and private businesses provide funds to support non-associated scientific research institutions and schools of higher education to research into and develop new products, new technology and new technique, the research and development funds derived therefrom shall be subject to examination, verification and determination by the tax authorities in charge. The supporting funds may totally be deducted from its current year's taxable income. (Another version of translation: With respect to the research and development funds derived from research and development of new products, new technology and new technique conducted by non-associated scientific research institutions and schools of higher education with the financial support of the social forces including the enterprises (with the exception of enterprises with foreign investment and foreign enterprises), institutions, social organizations, individuals and private businesses, the supporting funds may, after examination and determination by the tax authorities in charge, totally be deducted from its current year's taxable income.) If its current year's taxable income is not enough to set off its supporting funds, it may not be carried forward to set off.

The non-associated scientific research institutions and schools of higher education refer to those scientific research institutions and schools of higher education not subordinated to or invested by the supporting enterprises and the results of their scientific research are not only provided to the said enterprises.

The financial support provided by enterprises to their subordinated scientific research institutions and schools of higher education for the funds of research and development may not set off their taxable income.

Where enterprises and other social forces provide the scientific research institutions and schools of higher education with funds for research and development and apply for set-off of the taxable income, they shall provide the project plan for research and development, and the certificate of receipt of funds issued by the scientific research institutions and schools of higher education in addition to other relevant materials required by the tax authorities. If they are unable to provide the relevant materials, the tax authorities may not accept.

(2) The actual pay-roll of a software development enterprise may be deducted from its taxable income.

4. Income tax for enterprises with foreign investment and foreign enterprises

Where an enterprise with foreign investment or a foreign enterprise provides the scientific research institutions and schools of higher education with funds for research and development, the funds may totally be deducted from the taxable income of the supporting enterprise by reference to measures for taxation on donation provided by the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises.

5. Tax on import & export

(1) The equipment for self-use imported by enterprises (including enterprises with foreign investment and foreign enterprises) to make products listed in the Catalogue of the State New & High-tech Products and the technology, accessories and the spare parts imported together with the equipment according to the contract shall be exempt from customs duty and the import-linked value-added tax with the exception of those commodities included in the Catalogue of Imports Not Exempt from Tax for Domestic Investment Projects provided by the Document GuoFa [1997] No. 37.

(2) Where enterprises (including enterprises with foreign investment and foreign enterprises) introduce the advanced technologies listed in the Catalogue of the State New & High-tech Products, the software charges paid to a person outside our territory as provided by the contract shall be exempt from customs duty and the import-linked value-added tax.

Software charges refer to the patent royalties, trademark fees, and the expenses for technical know-how, computer software, materials and etc. paid by the taxpayer of imports to the seller outside of our territory for the manufacturing, use, publication, distribution and broadcasting of the imports' technology and contents within our territory.

(3) With respect to the products listed in the Catalogue for Export of China's New & High-tech Commodities issued by the Ministry of Science and Technology and the Ministry of Foreign Trade and Economic Cooperation, if the rate of tax refunded for its export is lower than that of tax levied, the tax levied may, subject to the examination and verification of the State Administration of Taxation, be refunded according to the rate of tax levied and the current provisions for administration of tax refund for export after the product is exported.

6. Scientific research institutions' transformation of mechanism

(1) The scientific research institutions directly subordinated to the central authorities and those subordinated to the provincial and prefecture (municipal) authorities shall, after their transformation of mechanism, be exempt from the income tax for enterprises and the tax on use of urban land within the five years from 1999 to 2003.

The scientific research institutions mentioned in this article do not include those with mechanism already transformed or merged with enterprises as well as all those engaged in social science research.

(2) The scientific research institutions which enjoy the above-mentioned preferential tax policies shall report it to the local tax authorities in charge with the enterprises' industrial and commercial registration information obtained after their transformation of mechanism and go through relevant procedures for tax reduction or exemption according to the provisions.

7. This circular shall enter into force as of October 1, 1999.

Promulgated by The Ministry of Finance, the State Administration of Taxation on 1999-11-2