Accelerated Depreciation of Fixed Assets

According to the decision of the State Council on September 17, 2015 the Ministry of Finance and State Administration of Taxation jointly issued the “Circular on Further Improving the Enterprise Income Tax Policies relating to the Accelerated Depreciation of Fixed Assets” (Cai Shui [2015] No. 106) (hereinafter “Document No. 106”). Furthermore, on September 25 the State Administration of Taxation published the “Announcement of the State Administration of Taxation on Issues concerning further improving the Enterprise Income Tax Policies relating to the accelerated depreciation of Fixed Assets” (Announcement of the State Administration of Taxation [2015] No. 68) (hereinafter “Announcement No. 68”). On September 30, Deputy Director General of the Income Tax Department, State Administration of Taxation Mr. Liu Bao Zhu, during a press conference answered journalists’ questions which additionally helped to deeper understand practical implications. Overall the previous scope of six industries was extended by another four key industries.

(1) The scope of applicable enterprises extended:
First in Cai Shui [2014] Announcement No. 75, the regulation covered six industries:
— Biopharmaceutical manufacturing,
— specialized equipment and
— railway, ships, aerospace and other transportation equipment manufacturing;
— the manufacturing of computers, communication / other electronic equipment as well as
— manufacturing of instruments, meters and information transmission;
— software and information technology services.

On this basis, Document No. 106 and Announcement No. 68 further expanded the scope to four key industries, specifying detailed their scope:
— Light industry;
— Textile industry;
— Machinery and
— Automobile industries;

Remarks:
(a) Decision to which industry an enterprise belongs is based on its main business;
(b) And, if more than 50% of gross income generated of its main business is invested in fixed assets
(c) Basis of calculating those 50% is the time between buying and putting to use.
(d) Previously enjoyed tax preference is not affected by changes after the tax deduction was enjoyed.

(2) Methods of accelerated depreciation:
After January 1, 2015, the enterprise may opt for a reduced depreciation period or adopt an accelerated depreciation method. Where an enterprise shortens the depreciation period, in respect of fixed assets which are newly purchased, the minimum depreciation period shall not be less than 60% of the depreciation period specified in Article 60 of the Implementing Regulations.
Fixed assets’ minimum depreciation period shall not be less than 60% of the remaining period which is the minimum depreciation period specified in Article 60 of the Implementing Regulations minus the years of service.
Where an enterprise adopts an accelerated depreciation method, it may use the double declining balance method or the sum of the years’ digits method.
As explained during the press conference, in practice, the date for the purchased equipment is decided by the date of the issued invoice. For equipment paid by installments or on credit, it is decided by the date of delivery. For fixed assets built/ assembled by the enterprise itself, in principle it is decided by the date of completion.

(3) Special treatment for small, low-profit enterprises:
a) In respect of equipment and instruments which are newly purchased by small low-profit enterprises after January 1, 2015 for common R&D and production purposes, and if the unit price is below CNY 1 mio. (incl.), the entire cost is deducted on a one-off basis in calculating taxable income;
b) If the unit price of such newly purchased equipment is above CNY 1 mio., enterprises may shorten the depreciation period or adopt an accelerated depreciation method.
c) Answers during the press conference confirmed: even if the enterprise in question does not meet the criterion of a small low-profit enterprise in subsequent years after receiving a tax advantage on their fixed assets there are no backdated adjustments.

(4) Choices are in the hand of the enterprise:
An enterprise can chose whether to implement accelerated depreciation policies, based on manufacturing and business needs. Furthermore the enterprise may select one of the preferential policies for accelerated depreciation in cases in which requirements and conditions of Document No. 106 and Announcement No. 68 and for the earlier regulations according to Guo Shui Fa [2009] No. 81 or Cai Shui [2012] No. 27 are met.

(5) Method of enjoying the policy:
(a) For purchases for which the policy is relevant and that were made in the first three quarters of 2015 preferential treatment may be enjoyed at the time of filing prepaid enterprise income tax in the fourth quarter of 2015 OR at the time of calculating and paying enterprise income tax for 2015.
(b) The qualified taxpayer can directly enjoy this preferential policy when filing prepaid or final settlement of enterprise income tax. Approval from tax authorities is not necessary.

Remarks: Enterprises shall retain invoices for the purchase of fixed assets, vouchers, and other relevant information for future reference, and establish account books which accurately reflect the discrepancies between tax law and accounting.

Our observations and suggestions
Document No. 106 and Announcement No. 68 re-flect the efforts of the Chinese government to pull effective investments, promote industrial upgrading, and accelerate the development of regulations and a business environment fitting China’s needs.

Enterprises can control the industry directory and their own business conditions with the help of Document No. 106, so as to determine whether to comply with the accelerated depreciation policy. But it is not advised that all qualified enterprises should choose to enjoy this policy. Instead, they need to consider other tax incentives for example whether applying for incentives should be considered over the possibility of waving non-payed taxes after a certain time period if making losses. Most important, enterprises need not to forget to pay attention to accounting and tax differences brought about by the accounting and compliance risk.

As always, if you need: our professional consulting team and personnel in Shanghai and Taicang can offer you consulting service for both of the above mentioned policies and practices.
German, English, Chinese: Ms Katharina Siegrist, katharina.siegrist@ecovis.cn
English, Chinese: Ms Pingwen Hu, pingwen.hu@ecovis.cn