Improve tax incentives for independent Innovation

One of the important cornerstones of innovative country building is to promote enterprises to become the main body of independent innovation. We need to improve our current tax incentives and establish an incentive mechanism to promote enterprises in independent innovation so that enterprises can have both capability and initiative. In order to promote enterprises to become the main body of technological innovation, the State Council issued the Supporting Policies in Implementation of National Medium and Longterm Scientific and Technological Development Plan, which includes eight fiscal incentive policies. The first is to increase the deduction of income tax on investment in independent innovation. The second is to allow enterprises to accelerate the depreciation of research and development equipment. The third is to improve fiscal and taxation policies in promoting the development of high-tech enterprises. The fourth is to support enterprises to strengthen the capacity building on independent innovation. The fifth is to improve the fiscal and taxation policies on the transformation of scientific research institutions to promote its development. The sixth is to support the development of venture capital enterprises. The seventh is to support science and technology intermediary service agencies. The last one is to encourage donation of social funds to innovative activities.

The new policies overcome the shortcomings of the old policies, and the incentive effect is enhanced—such as allowing enterprises to deduct taxes in accordance with 150% of the actual technological development costs, and deduction is valid for five years. This regulation cancels the original one that only profitable enterprises can enjoy and also cancels the limit of 10% increase in technological development to the actual cost in the previous year. The new regulation allows five-year validity of deduction. Another example is that newly established high-tech enterprises in the national high-tech industry development zone can be exempted from income taxes within two years, and after tw'o years the preferential policy is that the enterprises can pay income tax by 15% tax rate. The preferential time is changed from the original “since the date of production” to “profit year”, and so on. An enterprise becoming the main body of independent innovation is the key to innovative country building and to maintain lasting competitiveness. Some tax incentives are not enough to promote the independent innovation of enterprises. We should also form a long-term tax incentive mechanism to promote enterprises to continue independent innovation. Therefore, China should focus on building targeted and sustainable tax incentives.

Clarify the goals of tax incentives on independent innovation

Tax incentives are integral part of the independent innovation fiscal and taxation policy system and the objectives of tax incentives need to be consistent wfith the overall objectives of fiscal and taxation policies on independent innovation. In other words, the general goal of tax incentives is also to enhance the capability of independent innovation and innovative country building. At the same time, the specific objectives of tax incentive policy need to be based on its functional orientation in fiscal and taxation policies in independent innovation. That is, according to the characteristics of incentive policies, they should play a role to create an environment to promote scientific and technological innovation; to promote enterprises to become the main body of technological innovation; and to promote the digestion, absorption, and re-innovation of introduced technologies.

More specifically, tax incentives in independent innovation at this stage need to focus on the following aspects. The first is to focus on supporting the applied research. This is because basic research has a strong external effect, which needs national key investment. The second is to focus on supporting the independent development of technology as w'ell as taking into account introducing technology. In this way, w'e can accelerate China’s economic development wuthout taking the risk of loss caused by repeated development. The third is to focus on supporting high-tech industries as well as taking into account the transformation of traditional technology.

We should improve the fiscal system by establishing institutional fiscal incentives. First, we should overcome the lack of initiatives caused by systematic deficiencies of current fiscal policies and reform and improve the existing fiscal system, including actively promoting the transformation of value-added tax unanimously appealed by the whole society, and improving the unified enterprise income tax system, so as to establish scientific, standardized, and institutional tax incentives. The State Council has proposed to “promote the implementation of transformative reform of value-added tax on high-tech enterprises”. From the experience of the pilot in Northeast China on expansion of deduction range for value-added tax, it is feasible to implement value-added tax transformation in high-tech enterprises timely. However, in the specific implementation, we should change the situation of “incremental deduction”, “quarterly tax rebating”, and “offset owing taxes” and implement the full deduction to enhance the policy effect. At the same time, we should implement transformation of value-added tax as soon as possible in all enterprises. Second, in order to form institutional tax incentives, we should establish a temporary and institutionalized preferential tax policy system. Temporary preferential policies only aim at solving special short-term problems. From the long-term development and standardization point of view, to promote the formation of a lasting innovation and initiation, it is necessary to establish a standardized and regulated policy system and incentive mechanism. Finally, from the perspective of policy coordination, we should establish a strong incentive mechanism that various taxes can organically combine, mutual coordinate, and complement with each other, and we should take into consideration the internal relations of different taxes and characteristics of different preferential forms in designing the tax system, so that they can commonly play a role at all levels and from all aspects.