Tax Preferential policies
In order to alleviate the business difficulties of the industries affected by the coronavirus outbreak, the Ministry of Finance (“MOF”), General Administration of Customs (“GAC”) and the State Administration of Taxation (‘SAT”) jointly released Circular 6 on 1 February 2020 to expand the scope of duty-free imports specified in the “Interim Measures for Exemption of Import Duties on Charitable Donations”, and stipulate that imported materials donated for epidemic prevention and control shall be exempt from Customs duties, import VAT and consumption tax, with effect from January 1, 2020 to March 31, 2020.
Subsequently, the MOF and SAT jointly released Circulars 8, 9 and 10 on 6 February 2020, laying out a series of preferential tax policies in relation to Corporate Income Tax (“CIT”), Value-added Tax (“VAT”), and Individual Income Tax (“IIT”), etc.
The three Circulars introduce new deductions, tax reduction and exemptions, extending the period of loss carryover, etc., to stimulate actions related to fighting the epidemic outbreak and to relieve the immediate pressure on individuals and businesses.
[Circulars 8] Tax deductions, VAT refunds and exemptions to support certain enterprises’ operation
Accelerated depreciation of new fixed assets
Subject to the Circular 8, for eligible enterprises (*) which produce key materials for epidemic prevention and control, the expenses of purchasing equipment to expand the production capacity can be deducted for CIT purposes on one-off basis.
Refund of incremental VAT credit
The above eligible enterprises can also apply the fully refund of the incremental VAT credit incurred (compared with the balance of VAT credit as of 31 Dec 2019) to the competent tax authorities on a monthly basis after completing relevant monthly VAT returns within the filing period.
*: The eligible enterprises should be determined by provincial or national Development and Reform Commission, or Ministry of Industry and Information Technology.
VAT exemption would be granted to:
- Income derived from transporting key materials for epidemic prevention and control; and
- Income derived by taxpayers from provision of public transportation services, living services and courier and delivery services for residents' requisite daily necessities.
Extension of carryover period of losses
For enterprises in difficult industries that are seriously affected by the epidemic, the maximum period for carrying forward losses incurred in 2020 shall be extended to eight years (from five years).
Enterprises in difficult industries include four categories, namely transportation, catering, accommodation and tourism (referring to two categories: travel agency and the relevant services, and administration of scenic spots), and the specific judgment standards shall be subject to the current Industrial Classification for National Economic Activities. The main business income of enterprises in difficult industries shall account for more than 50% of their total income (excluding non-taxable income and investment income) in 2020.
By the way, a Statement on the Application of the Policy of Extending the Carry-forward Period for Losses should be submitted through electronic tax bureaus at the time of CIT annual filing for year 2020.
[Circulars 9] Tax treatment on donations
Exemption of all turnover taxes
Goods (self-produced, processed on a commission basis or purchased) donated by enterprises, individual industrial and commercial households to public welfare social organizations and Chinese governments at the county level or above (inclusive of its departments) or directly to hospitals undertaking the task of epidemic prevention and control, are exempted from all turnover taxes (VAT, consumption tax, urban maintenance and construction tax, education surcharge and local education surcharge).
Deduction of donation for CIT and IIT purposes
Cash or products donated by enterprises and individuals to public welfare social organizations and Chinese governments at the county level or above (inclusive of its departments), shall be allowed to be fully deducted for CIT and IIT purposes respectively.
Products donated by entities and individuals directly donated to hospitals undertaking the task of epidemic prevention and control, shall be allowed to be fully deducted for CIT and IIT purposes respectively (donors shall retain donation acceptance letter issued by the hospitals to claim the deductions).
[Circulars 10] IIT exemption on 1) subsidies and bonuses of the medical personnel and other public health workers; 2) medical protective products provided by employers to employees
With effect from 1 January 2020, temporary subsidies and bonuses obtained by medical personnel and other public health workers participating in the epidemic prevention and control in accordance with the standards set by the government shall be exempt from IIT.
The aforesaid tax exemption policy shall also apply to the temporary subsidies and bonuses obtained by those who participate in epidemic prevention and control according to the provisions of a people's government at the provincial level or above.
Products / articles (excluding cash) provided by entities to individuals for the prevention of the new coronavirus shall be excluded in wages and salaries income and shall be exempt from IIT.
Extension of the deadline for tax declaration
Pursuant to SAT Circulars No. 27, No. 37 and No. 55, the periods of tax declaration in February, March and April have been extended respectively. In addition, if the taxpayers still have difficulty in handling the declaration within the extended deadline, they can further apply to the competent tax authority for the extension of the declaration according to relevant law and regulations.
Other tax policies
Pursuant to Circular No. 13, from March 1st to May 31st, the VAT of small-scale taxpayers in hubei province is exempted, and the rate of VAT for small scale businesses in other regions is reduced from 3% to 1%.
Pursuant to Circular No. 17, from May 1, 2020 to the end of 2023, second-hand car dealers will be subject to a reduced VAT (at the rate of 0.5% instead of the previous 2%) on sales of used cars.
Based on the decision from State Council executive meeting on 31 March 2020, the subsidy for new energy vehicles and exemption from vehicle purchase tax will be extended to December 31, 2022 (the original period is till December 31, 2020).
Based on the decision from State Council executive meeting on 7 April 2020, the interest income of loans of RMB 1 million and below issued by financial institutions to small and micro enterprises, individual industrial and commercial households, and farmers is exempt from VAT; for the interest income from the loan of RMB 100,000 or less to farmers and the premium income from insurance services for the breeding industry, only 90% of such income should be included for CIT purposes; interest income from loans of RMB 1000,000 and below provided by Microfinance Service Companies is exempted from VAT and 90% of such income is included for CIT purposes, and the loan-loss reserves set at 1% of the year-end loan balance is allowed to be deducted for CIT purposes.
Regional tax measure released alongside national measures
Based on our observation, many local authorities in various regions have also introduced further tax policies to assist local businesses during this period of coronavirus prevention and control.
It is recommended for the taxpayers to keep close eyes on the regulation updates and seek professional advice from tax advisors or experts where necessary.
Other Preferential policies
The central government grants subsidy support on loans to the eligible enterprises determined by provincial or national authorities for epidemic prevention and control as mentioned in Circular 8 at 50% of the People's Bank's special re-loan interest rate, and the support period shall not exceed one year. For other enterprises with outstanding performance in the epidemic prevention and control, local financial departments are encouraged to provide subsidy support on the loan interests.
Reduction and exemption of corporate social insurance premiums
From February to June 2020, provinces, autonomous regions, municipalities (except Hubei Province) and the Xinjiang Production and Construction Corps (collectively referred to as the provinces below) can be exempted from employer part of three social insurances (pension, unemployment and work injury insurances) for small, medium, and micro enterprises based on the impact of the epidemic situation and fund affordability. For large companies, the payment of the above three social insurances shall be reduced by half, during the period of February to April 2020.
From February to June 2020, all enterprises in Hubei Province, irrespective of size, can be exempted from the payment of three social insurance (employer part).
Enterprises affected by the epidemic situation with severe difficulties in production and operation may apply for deferred payment of social insurance premiums. The deferred payment period shall not exceed 6 months in principle, and no late payment interest will be charged during the deferred payment period.
The object of enterprises eligible for the above reduction or exemption shall be determined by provinces, in accordance with the Circular  No.300 “Notice on Printing and Distributing Standards for the Classification of Small and Medium-sized Enterprises” and other relevant regulations.
Deferred payment for housing funds
Enterprises can apply for deferred payment of housing funds before the end of June. At the same time, employees who have not been able to make contributions into their housing fund due to the epidemic situation shall not be treated overdue for payments.
Mazars’ insights and recommendations
1. Evaluating the impact on business and identifying applicable tax incentives
In view of the many policies and regulations issued, it is perceived that the government is "precisely implementing preferential policies on target business and entities", focusing on supporting and stimulating eligible industries. Taxpayers of different industries and business scales need to assess the impact of the epidemic on themselves according to their own situation, and assess and determine the applicable preferential policies.
In addition, it is recommended that taxpayers pay attention to the applicable conditions in relation to the preferential policies and relevant formalities and information/documentation requirements, and ensure the compliance in terms of formalities provided that the business substance meets the requirements of relevant laws and regulations.
2. Assessing the VAT impact in terms of the temporary VAT exemption both from the perspectives from purchasers and sellers.
For VAT exemption business, relevant input from the purchases shall be transferred out as uncreditable input VAT, since the VAT exemption policy is a temporary policy, it is recommended that the taxpayers carry out relevant tax analysis, based on their business (revenue) trend in the future and current situation of input VAT and thus make a sound decision on applying the VAT exemption or not.
From the perspective of purchasers, if the suppliers (vendors) decide to apply the VAT exemption and require the purchasers to return the special VAT invoices and then re-issue the ordinary tax-free invoices, which may incur additional cost to purchasers. Therefore, it is recommended that taxpayers consider the above situation and adjust the contract negotiation and bargaining strategies in the upstream and downstream of the supply chain in a timely manner.
3. Transfer pricing consideration
In view of the current spread of the epidemic in the worldwide, multinational companies may need to comprehensively analyze their business impacts at the group level. If the functional positioning of their subsidiaries in China changes, they need to consider their related impacts from the perspective of transfer pricing and adjust the pricing strategy.in a timely manner.
4. Assessing the cash needs, and re-considering the cross-border arrangement
As above, for multinational companies, the top impact of the current epidemic situation on the business is the cash flow. It is recommended that companies should pay careful attention to the cash flow situation and timely adjust cash arrangements, especially cross-border capital flows.
5. Considering the global mobility and expatriates
The current epidemic may force expatriate employees to return to their home country (or stay in the host country), which may affect the original employment arrangement and thus the tax burden of the foreign national. It is recommended that taxpayers pay attention to the epidemic situation and changes in immigration policies of relevant countries in a timely manner.
6. Business restructuring/liquidation
If the epidemic situation directly affects the business reorganization of the company or the company's liquidation, it is also necessary to analyze the tax impact and other administrative costs in advance (such as the severance of personnel and the cost related to outsourcing services, etc.).