context: As Beijing strives to achieve common prosperity and domesticate big tech, many tech firms are losing access to one of its biggest policy supports. Alibaba warned investors that it may lose billions in revenue due to a rise in the effective tax rate, international media reported over the last week, and this is now confirmed by tax officials. Moving forward, only companies developing technologies handpicked by the state will enjoy lavish financial aid.
Tax incentives for software firms will soon be updated, an official close to the policy environment told Caixin, and some internet platform companies see their effective tax rate going up significantly.
Integrated circuit design and software firms, per a 2020 policy, enjoy a far lower enterprise income tax rate than other companies. Government agencies including MIIT (Ministry of Industry and IT), NDRC (National Development and Reform Commission) and MoF (Ministry of Finance) clarified in March and April 2021 that so-called 'key software enterprises' are only eligible when they fulfil criteria including
- R&D expenses, the proportion of software product revenue to enterprise revenue, R&D personnel
- only for sub-sectors such as R&D and industrial design software, industrial control software, information security software, etc.
- mobile internet, which appeared in the 2016 version of the regulations, is no longer listed as a preferred area
Internet platforms must invest in preferred sub-sectors and fulfil relevant R&D criteria to continue to enjoy a preferred tax rate.
Regulators are tightening what constitute 'key software enterprises', notes Wei Weibang 魏伟邦 EY Greater China technology, media and telecommunications tax services partner. Companies were expected to apply for the 'key software enterprise' certification between March and April, and they would have to observe a higher tax rate should they fail the application. Based on the list of approved firms this year, a major criterion is a firm's software product or service revenue, Wei adds.