Policy Tools to Facilitate Supply-side Reform— Tax Authorities Perform Five Tasks under Five Concepts

Issuance Date: July 25, 2016     Source: General Office of the State Administration of Taxation

Decapacity, destocking, deleveraging, cutting costs and overcoming weakness to push forward the supply-side structural reform are the priorities of China's economic work in 2016, as well as the key innovation and natural requirements to lead China's new normal of economic development. Tax authorities, following the decisions and plans made at the Fifth Plenum of the 18th CPC Central Committee and the Central Economic Work Conference, are committed to identifying the starting point and using tax policy tools to press ahead with the supply-side structural reform with taxes, serve China's overall development and facilitate the reform to maximize the dividends of reform.

Optimizing tax system for decapacity and relieving pressure on companies

Tax authorities are dedicated to optimizing the tax system and making full use of the regulating role of taxes to pave the way for decapacity and destocking.

- Removing overcapacity. Over the past two years, tax authorities have been committed to accelerating the ad valorem resource tax reform on coal, rare earth, tungsten and molybdenum, linking resource tax revenues with resource prices, which enables automatic rises in resource tax revenues as resource prices hike to curb relevant economic fields from becoming overheated, and therefore plays a crucial role in removing overcapacity. The ad valorem resource tax reform has been in force since July 1, which has further strengthened the role of taxes in this regard.

- Promoting industrial upgrading. The State Administration of Taxation (SAT) works with relevant departments to refine land VAT, corporate income tax and deed tax policies in relation to restructuring, bankruptcy, mergers, split-off, asset transfer and equity (share) transfer of companies and public institutions, and helps enterprise struggling with overcapacity to accelerate resource integration to remove overcapacity and optimize industrial structure, in a bid to enhance the quality and benefits of economic development and promote industrial upgrading.

- Boosting real estate destocking. The State Council has strengthened support to taxation that can promote the development of the real estate industry since last year. After the business tax exemption period for second-hand housing trade was shortened from 5 years to 2 years in 2015, the real estate deed tax policy came into force at the very beginning of this year, reducing the deed tax rate on housing trade. Since the pilot program of transition from business tax to VAT was rolled out nationwide on May 1, the tax burden on second-hand housing trade has been reduced for the second time, and new real estate has been included in the scope of VAT credit, thereby boosting the destocking in real estate markets and effectively promoting the healthy and sustainable development of the real estate industry.

Introducing taxation policies and measures to reduce costs incurred by enterprises

Tax authorities have been playing their roles as tax functions, introducing and implementing a series of tax policies and service measures to boost China's economy to overcome challenges and seek development.

- Deeper tax cuts to reduce tax costs incurred by companies. As at the end of 2015, China reported a tax cut of RMB 641.2 billion, including RMB 313.3 billion by pilot taxpayers, and RMB 327.9 billion by original VAT payers arising from higher input credit to be claimed, thereby dramatically reducing burdens on companies. Since the VAT pilot program was rolled out nationwide on May 1, 11 million pilot taxpayers from the construction, real estate, financial and domestic life industries have been included in the program, with more than RMB 500 billion in tax burdens on companies expected to be reduced, indicating further lower costs for enterprises. According to Fu Wenxia, financial head of Hailun Construction Engineering Co., Ltd. in Weishi County, Henan, the company paid taxes of RMB 2.2 million in June, RMB 1.51 million lower than when business tax was levied, indicating a deep cut in its costs. To support the development of small and micro enterprises, the preferential policy has been ever expanded, with the threshold of monthly sales value or monthly turnover for exemption from paying VAT and business tax raised from RMB 20,000 to RMB 30,000, and that of taxable income of small low-profit enterprises eligible for paying half of CIT increased to RMB 300,000 step-by-step, thereby covering all small low-profit enterprises. In 2015, the implementation of the threshold policy for small and micro enterprises and the self-employed, and half CIT payment policy for small low-profit enterprises contributed to a tax cut of nearly RMB 100 billion.

- Optimizing tax services to reduce financial costs incurred by enterprises. Tax authorities continue to carry out the Spring Breeze Campaign for More Convenient Taxation Services, accelerating taxpayer services in an all-round way, with more than 70% of matters settled immediately, 40% submissions canceled, more than 60% of submission links slashed, and processing timeframe shortened by more than 50%. The launch of electronic invoices, in particular, helps companies save a lot of money. In 2015, JD reported a cost cut of RMB 1.80 million from the Single's Day special offers in Shanghai alone. The Treasury Internet Processing System (TIPS) has been adopted for online automatic and real-time payment of tax, exit from the system, modification and account checking, effectively reducing tax processing costs and account costs arising from too long time en route of taxes. In 2015, a total of more than RMB 9 trillion in taxes was paid through TIPS. The Code of Management of Export Tax Refund (Exemption) by Tax Authorities (1.0) has been implemented to delegate the approval power, open the fast processing channel, and ramp up export tax refund efficiency. Further, classified management of export tax refunds (exemption) has been conducted to allow class-A enterprises with high tax compliance and good reputation to get refunded before being reviewed, thereby significantly shortening the time on tax refunding, with the refunds credited into the account half a month earlier than before to relieve the heavy capital pressure on companies.

- Pushing forward administration streamlining and power delegation to reduce institutional transaction costs. Tax authorities are committed to deepening the tax administrative approval system reform. As at the end of 2015, among the 87 tax administrative approval matters published by the SAT, 80 non-administrative approval matters had been streamlined in addition to 7 matters retained, thus revitalizing the companies. Inno Mongolian Tongliao Mengdong Agricultural Technology Co., Ltd. obtained the "three-in-one" business license one day after its application, compared with at least 10 working days in the past since one document needed photocopying many times, and taxpayers had to visit many departments and registered with them one by one.

Implementing five concepts to overcome weakness

Tax authorities have been implementing the five concepts and made full use of the role of taxes in boosting economic transformation and upgrading in the supply-side reform, which have produced positive results.

- Implementing the concept of innovation, with more preferential policies introduced for stronger support for innovation. Based on the existing preferential policies, the SAT works with relevant departments to study and introduce preferential policies. In 2016, for example, the scopes of R&D activities eligible for super-deduction and of payments have been expanded further, which can be retrospectively enjoyed three years back; the conditions for accelerated depreciation of R&D equipment have been loosened, with more preferential policies adopted in October 2014 and September 2015 respectively for accelerated depreciation of fixed assets like machines and equipment purchased by 27 industries in 10 areas such as biomedicine manufacturing for R&D activities, in a bid to lower the policy threshold and expand the scope of preferential treatment.

- Implementing the concept of green development to refine the green taxation system. The SAT is committed to improving the green taxation system to guide resource saving, energy saving and emissions reduction, environmental protection and green development. First, encouraging the development of new energy automobiles. With the car purchase tax on new energy automobiles exempted starting from September 2014, the sales of new energy automobiles nation-wide were 1.8 times higher than the same time last year, contributing RMB 229 billion to tax revenues, up by 7.2% year-on-year, which was 7 percentage points higher than the average of the manufacturing industry, according to the statistics for the first half of this year. Second, guiding consumption on small-displacement automobiles. From October 1, 2015 to December 31, 2016, the car purchase tax will be levied on passenger cars of 1.6 liters and below at a rate of 5%. Statistics show that a cut of RMB 17.5 billion, or RMB 3,400 per car, in car purchase tax was achieved. Third, adjusting the excise tax rate for environment-friendly products. Starting from February 2015, a 4% excise tax has been levied on battery and paints, and no excise tax has been levied on environment-friendly products including mercury-free battery, lithium battery, Ni-MH battery, solar battery and coatings with a low content of volatile organic compounds under construction, which further shows the reform orientation for boosting environmental protection via the excise tax. Fourth, rolling out the resource tax reform in an all-round way. The ad valorem resource tax reform was rolled out comprehensively on July 1, with fees and funds cleared, and a pilot program carried out on the ad valorem resource tax on water in addition to mineral products and salt, which have helped streamline the relations between resource tax and fees, and refine the green taxation system.

- Implementing the concept of sharing to ensure more benefits to people. Putting people first, the SAT works with relevant departments to introduce diverse tax policies to enhance people's standards of living. For example, the preferential tax policies in favor of accelerating the construction of public rental housing and the renovation of run-down areas have taken effect in many aspects, effectively promoting the improvement of supply and demand of indemnificatory housing; and individuals are given access to preferential treatment with regard to individual income tax in their commercial health insurance, thereby further expanding the scope of tax policies for more benefits to the public. The tax policies in favor of employment have been implemented to support employment and entrepreneurship of struggling groups, retired soldiers, demobilized officers, military family dependents and the disabled. For example, the management of preferential VAT policies that boost the employment of the disabled has been standardized and improved, with the limits of VAT refunds to the disabled raised, thereby stimulating the enhancement of social security and people's livelihood.

- Implementing the concept of balanced development to build a bank-tax authority interaction mechanism. The SAT works closely with financial institutions and they have jointly launched the countrywide services of "mutual recognition of credit standing and interaction" to provide creditworthy enterprises with unsecured credit loans and other financial products, promoting the tax credit system construction and addressing the difficulty facing enterprises especially small and micro enterprises in financing that is costly. In 2015, financial institutions issued more than RMB 130 billion in loans based on the tax credit information, including RMB 58 billion to 51,000 small and micro enterprises.

- Integrating the concept of open development to serve enterprises going global. The SAT has launched 10 measures under the "Belt and Road" Initiative in terms of negotiating and signing agreements to safeguard rights and interests, improving services to promote development, and cooperating more to pursue win-wins, drawing a navigation map for enterprises going global. Specifically, the SAT introduced country-specific tax system research services, signed tax agreements with Vietnam, Russia, Chile, Romania and Zimbabwe, deepened cooperation with the Netherlands, Mongolia, Ethiopia and the BRICS countries in tax matters, held more than 190 bilateral negotiations, and relieved Chinese multinationals from international double taxation of more than RMB 20 billion, ensuring enterprises go global in a smooth and sustainable way.