China to Expand Tax Breaks for High-Tech Services Outsourcing Enterprises

December 2, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI – According to a Nov. 26 announcement of the State Council, China will implement a number of targeted policies to accelerate the development of its services outsourcing industry as means of boosting foreign trade and restructuring the economy toward greater added-value production.

The proposed policies include an expansion to the category of “prioritized outsourcing services” to include the outsourcing of software and information technology, R&D, financial and governmental services, as well as the creation of an “international level” outsourcing platform.

Additionally, to provide greater financial support to small and medium-sized enterprises in the industry, the announcement called for an increase in the number of service outsourcing “model cities”, thereby expanding the number of high-tech services outsourcing enterprises able to qualify for a 15 percent Corporate Income Tax (CIT) rate, employee education deductions, and zero-rated or exempted VAT.

Following the expansion of China’s VAT reform to offshore outsourcing services in January of this year, VAT exemptions were made available for ITO (Information Technology Outsourcing), BPO (Business Process Outsourcing) and KPO (Knowledge Process Outsourcing) services provided by pilot taxpayers to foreign entities under an entrustment contract.

Previously, these preferential policies were only available in twenty-one “model cities”, including Beijing, Shanghai and Xi’an, based on the “Notice on Business Tax Exemptions for the International Service Outsourcing Industry in Model Cities” (2010). Last week’s announcement did not specify which cities would be newly eligible for the tax breaks.

“This move could have a significant impact on payroll and treasury services in China,” says Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates. “But instead of tinkering with the tax base, China should be thinking more strategically along the lines of making the RMB more tradable on global markets. The closed nature of the currency makes it hard to deal with cross-border services, despite the availability of tax breaks. The Government needs to embrace total investment solutions, not just tax incentives.”

“China used to offer a 15 percent CIT rate for foreign investors in the manufacturing industry, and still does for certain encouraged industries and areas promoted for investment. Yet in recent years, the provision of tax sops has proven less and less attractive to investors, due to regulatory barriers or commercial difficulties getting in the way of the intended benefits.”

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