By Wang Biqiang
Published: 2007-11-27

Preferential tax and the period of transition

Second only to the new tax rate itself, the law's two most closely followed topics are preferential taxes and the transitional period in which the law will be implemented.

According to an official from the legislative affairs office of the State Council who wishes to remain anonymous, the Details only engage the two questions on principle, but still fail to provide concrete applications.

It is said that the Details simply state that the State Department will later issue more rules to set a precise framework for tax rates during the transitional period.

Shi Yaobin, director of tax policy at the Ministry of Finance, announced to the National People's Congress recently that the tax rate would increase incrementally until finally reaching 25%.

Although the draft has been largely finalized and has been submitted for approval, the official from the legislative affairs office says that some questions related to preferential tax policy are still under research. The results of the research will be considered after approval of the Details by the State Council, at which point other agencies will release related regulations.

The Details do outline which industries will enjoy preferential treatment-- mainly, high-tech, venture capital, energy conservation and environmental protection, nationally supported public infrastructure projects, safety production industry, agriculture and forestry, and fishing.

According to the section on preferential taxes, high-tech businesses will pay a tax rate of 15%, venture capital firms that have invested in small or medium sized high-tech companies for more than two years, will enjoy discounts, and 50% of yearly research and development costs in new products and technology can serve as tax deductibles.
Aside from these, according to the 27th article of the law, businesses that participate in technology transfers can enjoy tax cuts. The Details have more precise clarifications here--  the first 5 million yuan of earnings made from qualifying technology transfers  are exempt from taxation, and any exceeding the 5 million will enjoy a 50% tax cut.

The Details also present a more focused interpretation of the 57th article of the law, clarifying which businesses will continue to enjoy tax preferences in the future.

According to the 57th article, foreign invested businesses will continue to enjoy preferential policies during the 5 year transitional period, but they will expire within it. Those have not enjoyed the preferential policies will start on January 1, 2008, but will not enjoy them beyond the transitional period.

Continued on Thursday, November 29th: More on the Details
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