According to the relevant laws and regulations of the mainland on enterprise income tax, enterprises in encouraged industries located in the western region can calculate and pay enterprise income tax at a reduced rate of 15%. In other words, the business carried out by enterprises in the western region belongs to the encouraged industries, which is a prerequisite for them to enjoy preferential tax treatment for the large-scale development of the western region in accordance with the regulations.
Recently, a number of listed companies, such as Debe Group and Yuanxing Energy, have received inquiries from investors about their subsidiaries or projects in the western region enjoying preferential tax treatment for the development of the western region. Although the specific details of these questions are different, most of them involve a core question: how to determine whether the invested project belongs to the encouraged industry?
According to the relevant laws and regulations of the mainland on enterprise income tax, enterprises in encouraged industries located in the western region can calculate and pay enterprise income tax at a reduced rate of 15%. In other words, the business carried out by enterprises in the western region belongs to the encouraged industries, which is a prerequisite for them to enjoy preferential tax treatment for the large-scale development of the western region in accordance with the regulations. Relevant experts reminded that enterprises enjoying preferential tax treatment for the large-scale development of the western region need to analyze whether the relevant business is an encouraged industry in light of the current effective industrial catalogue and the proportion of business income. For emerging businesses or special businesses that are difficult to judge on their own, they can communicate with the competent tax authorities in a timely manner to improve the compliance of the application of preferential tax policies.
Common Problem 1: The proportion of income is not up to standard
Tibet Lhasa B Company is mainly engaged in real estate brokerage business, real estate consulting services and property management consulting services. In April 2024, the Lhasa tax department found through big data analysis that Company B may have mistakenly enjoyed the tax incentives for the development of the western region, and immediately carried out further investigations. In the course of communication, Company B argued that the main business of the enterprise belonged to Article 34 of the Tibet Autonomous Region Catalogue of Encouraged Industries in the Western Region (2020 Edition), which was "resident services, repair and other services", and could enjoy the preferential tax treatment for the development of the western region.
"Judging from the actual business of Company B, its main business is not 'resident services, repair and other services', and Company B does have the problem of erroneously enjoying tax incentives." Luo Zhu Sambu, head of the income tax section of the Lhasa Municipal Taxation Bureau of the State Administration of Taxation, said.
According to the Announcement of the Ministry of Finance, the State Administration of Taxation and the National Development and Reform Commission on Extending the Enterprise Income Tax Policy for the Development of the Western Region (Announcement No. 23 of 2020 of the Ministry of Finance, the State Administration of Taxation and the National Development and Reform Commission, hereinafter referred to as Announcement No. 23) and other policies, from January 1, 2001 to December 31, 2030, enterprises in encouraged industries located in the western region will be subject to enterprise income tax at a reduced rate of 15%. Enterprises in encouraged industries refer to enterprises whose main business is the industrial projects specified in the Catalogue of Encouraged Industries in the Western Region, and whose main business income accounts for more than 60% of the total income of the enterprise.
According to the analysis of Company B's business, Luo Zhu Sambu's business scope does involve repair services, and it does have repair service-related businesses. However, from the perspective of the income composition of Company B, its main income comes from the provision of real estate intermediary services, and the income from repair services accounts for a relatively small proportion of the total income of the enterprise, which does not meet the 60% ratio requirement. Therefore, Company B did not meet the requirements for enjoying the preferential tax treatment for the large-scale development of the western region. After the guidance of the tax authorities, Company B made corrections to the relevant annual enterprise income tax declaration, and paid more than 9.3 million yuan in taxes and late fees.
Chai Chengshan, director of Gansu Yongcheng Tax Agent Office, reminded that when calculating whether the proportion of relevant income meets the specified standards, enterprises need to pay attention to whether the range of total denominator income is accurate. According to Article 6 of the Enterprise Income Tax Law, the income obtained by an enterprise from various sources in monetary and non-monetary forms is the total income. It includes income from the sale of goods, income from the provision of services, income from the transfer of property, income from equity investments such as dividends and bonuses, interest income, rental income, royalty income, income from receiving donations and other income. In practice, other common income mainly includes income from excess assets, income from deposits for overdue packaging materials, payables that cannot be repaid, receivables recovered after bad debt losses, income from debt restructuring, income from subsidies, income from liquidated damages, and foreign exchange gains. "When calculating whether the relevant business income of an enterprise has reached the prescribed proportion, the total income of the denominator shall include all the above-mentioned types of income. If the scope of total income is not accurate, it may lead to an incorrect calculation of the proportion of the enterprise, which in turn leads to the risk of incorrectly enjoying tax incentives. Chai Chengshan said.
Common problem 2: Failure to pay attention to directory adjustments in a timely manner
Gansu Zhangye S Company is mainly engaged in hydropower generation, wholesale sales and equipment installation and maintenance business, and has been enjoying preferential tax treatment for the development of the western region in accordance with the encouraged industry "hydropower" projects in the "Industrial Structure Adjustment Guidance Catalogue (2011)" (now abolished, the same below). In November 2023, when the local tax authorities verified the application of the preferential tax policies for the development of the western region of the relevant enterprises, it was found that Company S may not be eligible for the tax incentives.
Zou Sheng, a researcher at the China Large Enterprise Tax Research Institute of Jilin University of Finance and Economics and a partner of ShineWing Tax Agent Firm, said that according to Announcement No. 23, enterprises in encouraged industries that can enjoy tax incentives for the development of the western region refer to the industrial projects specified in the "Catalogue of Encouraged Industries in the Western Region". The Catalogue of Encouraged Industries in the Western Region (2020 Edition) further clarifies that this catalogue includes the encouraged industries in the existing national industrial catalogue and the newly added encouraged industries in the western region. Among them, the catalogue of existing industries of the state mainly refers to the Catalogue for the Guidance of Industrial Structure Adjustment and the Catalogue of Industries Encouraged for Foreign Investment. "The current effective industrial catalogues are the Catalogue of Encouraged Industries in the Western Region (2020 Edition), the Catalogue for the Guidance of Industrial Structure Adjustment (2024 Edition) and the Catalogue of Encouraged Industries for Foreign Investment (2020 Edition). Zou Sheng said.
Zheng Shusen, chief of the enterprise income tax section of the Zhangye Municipal Taxation Bureau, analyzed that the reason why Company S mistakenly enjoyed the preferential tax treatment for the development of the western region was because it did not pay attention to the adjustment of the relevant industrial catalog. Announcement No. 23 clarifies that if the Catalogue of Encouraged Industries in the Western Region is revised within the implementation period of Announcement No. 23, the new version shall be implemented from the date of implementation of the revised version. The Catalogue for the Guidance of Industrial Structure Adjustment (2019 Edition) (repealed as of February 1, 2024, the same below) came into force on January 1, 2020, and refined "hydropower" to "large and medium-sized hydropower generation and pumped storage power stations".
In other words, starting from January 1, 2020, Company S needs to determine whether it is a "large and medium-sized hydropower and pumped storage power station", and then determine whether it can enjoy the tax incentives for the development of the western region. Since the relevant policies do not specify the specific standards for "large and medium-sized hydropower and pumped storage power stations", the tax authorities submitted an application for review and confirmation to the development and reform department of Zhangye City in accordance with the relevant regulations. It was confirmed that the main business of Company S did not belong to the encouraged industries stipulated in the Catalogue for the Guidance of Industrial Structure Adjustment (2019 Edition). Under the guidance of the competent tax authorities, Company S paid the enterprise income tax from 2020 to 2022, and adjusted the tax incentives for 2023 and 2024 according to the latest version of the industry catalogue.
Recently, the National Development and Reform Commission and relevant parties have revised the "Catalogue of Encouraged Industries in the Western Region (2020 Edition)", forming the "Catalogue of Encouraged Industries in the Western Region (Revised Draft for Comments)" and soliciting opinions from the public. Zou Sheng suggested that enterprises enjoying preferential tax treatment for the development of the western region should continue to pay attention to the revision and changes of the industrial catalogue - if according to the latest version of the industrial catalogue, the industrial projects to which the enterprise belongs no longer belong to the scope of encouraged industries, the enterprise should stop enjoying the preferential tax treatment in a timely manner; If the industrial project to which the enterprise belongs belongs to the newly encouraged industry, the enterprise should also judge whether the business is the main business based on the actual business situation, and make full use of the tax incentives under the premise of compliance.
Common problem 3: Inaccurate grasp of special services
Chongqing Jiangjin District Z Company mainly produces cement, concrete special admixtures and admixtures, and its products are widely used in key projects in the city and district. At the beginning of 2020, Company Z introduced a new dry rotary kiln cement production line to reproduce and reuse the waste residue generated in the industrial production process to make cement and improve the utilization rate of industrial solid waste resources. However, Company Z had doubts about whether this business belonged to the project of "co-disposal of waste by using a new dry process cement kiln of not less than 2,000 tons/day (inclusive) or a new sintered brick and tile production line of not less than 60 million pieces/year (inclusive)" in the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition), so it consulted with the competent tax authority.
Cao Song, a cadre of the Income Tax Department of the Jiangjin District Taxation Bureau of Chongqing Municipality, introduced that the use of a new dry cement kiln to co-dispose of waste is a project led by the Chongqing Municipal Government Department, and the cement enterprises designated by the government use cement kilns to incinerate sludge, hazardous waste, domestic garbage and other wastes, so as to achieve harmless treatment, in line with the overall orientation of the mainland to strengthen pollution prevention and control. "This kind of special business is highly specialized and the expressions in the industry catalogue are relatively broad, and it is difficult for enterprises to judge whether they meet the requirements of this clause." Cao Song said.
According to Announcement No. 23, if the tax authorities are unable to accurately determine whether the main business of an enterprise is an industrial project encouraged by the state in the follow-up management, it may request the relevant departments such as development and reform to issue opinions. For those who do not meet the conditions stipulated in the preferential tax policies, the tax authorities shall deal with them accordingly in accordance with the Law on the Administration of Tax Collection and Relevant Regulations. The specific measures shall be formulated separately by the provincial development and reform and taxation departments.
Based on this, the Chongqing Municipal Taxation Bureau further communicated and negotiated with the Chongqing Municipal Development and Reform Commission, the Economic and Information Commission, the Ecological Environment Bureau, and the Housing and Urban-Rural Development Commission, combined with the analysis and research of the production process of the cement industry, and unified the implementation caliber of "using no less than 2,000 tons/day (inclusive) of new dry cement kilns or not less than 60 million pieces/year (inclusive) of new sintered brick and tile production lines to co-dispose of waste" in the city. It has been confirmed that the business of using a new dry cement kiln to co-dispose of waste by Company Z is an encouraged industry and can enjoy the preferential tax policies for the development of the western region. At the same time, Cao Song reminded that in the newly revised "Industrial Structure Adjustment Guidance Catalogue (2024 Edition)", this clause will be adjusted to "not less than 200,000 pieces/day (inclusive) of new sintered brick and tile production lines or new dry cement kilns harmless co-disposal of waste", and the restriction of "not less than 2,000 tons/day (inclusive)" has been cancelled, and relevant enterprises can enjoy preferential tax policies in accordance with their own business practices.
In practice, it is not uncommon for enterprises to have an inaccurate grasp of the terms of the Catalogue of Encouraged Industries. Qinghai A Commercial Bank has also encountered such problems. Bank A is a local bank in Qinghai Province, and its main business scope includes absorbing public deposits, issuing short-term, medium-term and long-term loans, handling domestic settlement, handling bill acceptance and discounting, acting as an agent for issuance, redemption and underwriting of government bonds. According to Article 19 of the Qinghai Provincial Catalogue of Encouraged Industries in the Western Region (2020 Edition), "micro-loan financial services serving the 'three rurals', small and micro enterprises, and individual industrial and commercial households" belong to the encouraged industries, and enterprises whose main business is to provide such services can enjoy preferential tax treatment for the development of the western region. However, Bank A was not sure about the scope of the service "Three Rurals" and the limited scope of the amount of small loans, so it immediately consulted the in-charge tax authorities.
Dong Xuelian, deputy director of the enterprise income tax department of the Qinghai Provincial Taxation Bureau, told reporters that after investigation, it was found that 29 rural commercial banks and 2 urban banks in Qinghai Province have encountered such problems. To this end, the tax authorities have summarized the problems of relevant banks and consulted with the provincial development and reform department to determine the specific implementation standard of "small loan financial services serving the 'three rurals', small and micro enterprises, and individual industrial and commercial households". After research with the Qinghai Provincial Supervision Bureau of the State Administration of Financial Supervision and Administration, the Qinghai Provincial Development and Reform Department has determined to determine the limited scope of the amount of small loans with reference to the provisions of the Ministry of Finance and the State Administration of Taxation on the relevant policies on the exemption of interest income from loans to small and micro enterprises of financial institutions, and the relevant banks can judge whether the main business of the enterprise belongs to the encouraged industries.
"The practice of Company Z and Bank A taking the initiative to communicate with the tax authorities is worth learning." Zou Sheng suggested that if an enterprise has an emerging business or special business, and it is difficult to judge whether it is an encouraged industry in combination with the current effective industry catalogue, it can choose to find the tax incentives of comparable enterprises in the same industry through public information, or consult with the competent tax authorities, so as to avoid the risk of enjoying tax incentives in violation of regulations due to the wrong determination of the industry category.
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