How can pharmaceutical enterprises easily enjoy zero tax rate?

On basis of the 2015 No. 88 Announcement issued by the State Administration of Taxation and with its official implementation on December 1, 2015, the taxable service scope applicable to the zero tax rate policy is set forth below:

Taxable services, including production and distribution services of radio, film and television programs (works), technology transfer services, software services, circuit design and testing services, information system services, business process management services, as well as overseas energy management services contract,  can be eligible for VAT zero tax rate under the tax policy Cai Shui [2013] No. 106- “Notes on taxable services scope”.  VAT zero tax incentives are also applicable for offshore outsourcing business services as per the Offshore Outsourcing Business Services Annex 1. The aforesaid taxable services applicable for VAT zero tax rate are collectively referred to in this announcement as the new zero tax rate taxable services.

Taxable services rendered by a Chinese enterprise or individual to another enterprise or individual within China are NOT within the VAT zero tax rate taxable services’ bracket.
Note: The purpose of applying for zero tax rate is to benefit from VAT tax exemption but also to claim a refund on previous VAT input.

“Cases of zero tax rate in the pharmaceutical industry”

Pharmaceutical Enterprise A

Enterprise A’s businesses can be categorized under 2 types of taxable services:

1. Knowledge Process Outsourcing (KPO) under the Offshore Outsourcing Services  (Pharmaceutical and biotechnology research, development and testing)

2. R&D Services (Research, testing and development on new technologies, new products, new processes or new materials and its systems)

1. RTF Solution: Apply for zero tax rate under the offshoring outsourcing service contracts

Advantage: With all contracts belonging to the offshoring outsourcing services bracket under the latest policy, the process of applying for zero tax rate is now relatively simple.

Risk: The VAT exemption tax policy under the offshore outsourcing services is only valid from January 1, 2014 to December 31, 2018.  Whether or not the policy will be extended after 2018 still remains unknown.
However, once this preferential incentive is cancelled, all pharmaceutical companies will have to change from the former offshore outsourcing service (KPO) contract into the research and development service contract in order to continue qualifying for the zero VAT rate tax exemption.


2. RTF Solution: Apply for the zero tax rate under the research and development services contracts

Advantage: There is currently no time limit on the zero tax rate when applied under the research and development services contract .

Risk: If the contract is changed to cover the scope of R&D services, RTF’s tax team will have to liaise with the enterprise’s technical staff to acquire detailed information about the enterprise’s research, so as to meet the contract’s various requirements.  In addition, experts in the field will have to be invited for acknowledging the research projects.  So, this process is more complicated.

3. RTF Other Solution: Give up on the application of zero tax rate but apply for tax exemption  

Advantage: This is more suitable for enterprises with low VAT input. Even if the application for zero tax rate is successful, enterprises with low VAT input can only enjoy tax exemption because applying for the refund on the VAT input will not be worthwhile. So, the VAT exemption process is much simple.

Risk: Once an enterprise waives the zero tax rate, it is no longer entitled to qualify for the zero tax rate for the subsequent 36 months.