As mentioned in our previous article on the 14th Five-Year Plan, the annual “Two Sessions” were held in Beijing between March 4th and March 11th, 2021. During gatherings of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC), the country’s two major political bodies, the government reviewed progress over the past year and announced policies for the year 2021 and beyond.
During this year’s Two Sessions the 14th Five Year Plan (2021-2025) was published, of which we discuss the key takeaways in our previous article. The other key document that was released during the Two Sessions is the Government Work Report (GWR), which will be further reviewed in the remainder of this article.
The Chinese Government Work Report reviews the government’s accomplishments over the last year and provides further guidance on the government’s social and economic policy direction for the year 2021. As such, the focus of this article is a review of past accomplishments, a discussion on the main targets set out for 2021 and important implications for foreign-invested enterprises in China, and SMEs in particular.
Accomplishments in 2020
Where at the start of 2020 the projections for GDP growth for the Chinese economy were around 6%, this was quickly distorted by the outbreak of Covid-19. In light of the outbreak, the Chinese government has decided not to specify an annual GDP target for the upcoming years for the first time since 2002.
Because China implemented strict measures to contain the spread of the virus, the economy was severely affected at the start of the pandemic. To support its economy, the Chinese government implemented numerous support policies including tax- and administrative fee reductions, which resulted in an overall reduction of the tax burden for companies by more than 2.6 trillion RMB for the year (including 1.7 trillion yuan in social insurance premium exemptions).
Despite the economic headwinds, China achieved a GDP growth of 2.3% for 2020, ensuring the country’s annual gross domestic product exceeded 100 trillion yuan for the first time in its history. Furthermore, employment was stabilized by creating 11.86 million urban jobs, ensuring that after an initial spike at the start of the pandemic, the urban unemployment rate decreased to approximately its original figure of 5.2% at the end of the year. In addition, in 2020 China achieved another key target by officially eradicating extreme poverty.
Main Targets for 2021
As mentioned above, the Government Work Reported presented by Premier Li Keqiang set out several macroeconomic targets to be achieved for the year 2021. The main targets stipulated in the Government Work Report are the following:
- Achieving GDP growth of over 6 percent;
- Create over 11 million new urban jobs;
- Reduce the surveyed urban unemployment rate to around 5.5 percent;
- Increase of CPI by around 3 percent;
- Steadily increase both the volume and quality of imports and exports;
- Achieve a basic equilibrium in the balance of payments;
- Steady growth in personal income;
- A further improvement to the environment;
- Reduce energy consumption per unit of GDP by around 3 percent;
- A continued reduction in the discharge of major pollutants;
- Achieve a grain output of over 650 million metric tons;
Most notably, for the first time since the implementation of Five-Year Plans since 1953, the 14th Five-Year Plan does not include a specific GDP growth target and instead specified that the growth should be kept in “reasonable range” and an annual target would be set based on the specific conditions each year. For 2021 the government has set its GDP growth target at above 6%. This is a shift away from hard targets in the past years and may denote a shift from high-speed growth to high quality growth.
Implications for SMEs
The report also signaled both the continuation of existing policies and implementation of new tax incentives directly affecting SMEs. Below we provide an enumeration of the most important measures affecting small- and medium sized companies active in china.
Extension of Small-scale VAT rate reduction
Due to the outbreak of COVID-19, the government implemented several support measures for SMEs throughout 2020. These support measures included among others exemptions for social insurance premiums and a reduction of the small-scale VAT taxpayer rate. In 2021, the interim preferential tax policies for small-scale VAT taxpayers will be extended, meaning that for small-scale taxpayers the VAT rate will remain 1% (instead of 3%) for 2021.
Increase of Small-scale Taxpayer Revenue Threshold
The VAT threshold for small-scale taxpayers will be raised from RMB 100,000 to RMB 150,000 in monthly sales. This means that small-scale taxpayers with a monthly turnover below RMB 150,000 are exempted from VAT payment.
Further Reduction in CIT Rate for Small and Low-profit Enterprises
According to additional regulations implemented by State Administration of Taxation (SAT), a preferential tax policy exists for small and low-profit companies. According to the existing regulations, to qualify as a small and low-profit company, businesses must satisfy the following criteria:
– Manufacturing companies: employee count below 100, total assets below RMB 30 million.
– Other companies (including trading companies), employee count below 80, total assets below RMB 10 million.
For qualified small and low-profit companies, the following CIT rate is applied:
1. Company profit below RMB 1 million: applicable CIT rate of 5% (equivalent to 20% of the standard CIT rate of 25%);
2. Company profit between RMB 1 million – RMB 3 million: applicable CIT rate of 10% (equivalent to 40% of the standard CIT rate of 25%);
3. Company profit above RMB 3 million: standard CIT rate of 25%.
According to further policy updates from the Government Work Report, the corporate income tax (CIT) liability of small and low-profit enterprises whose income does not exceed 1 million RMB will be halved even further compared to the existing preferential policies. According to the existing policy, small and low-profit enterprises with a profit lower than RMB 1 million, only pay 20% on the CIT rate of 25% of the taxable income amount. This percentage will be further decreased to 10%, meaning the effective tax rate for such enterprises will be 2.5%.
R&D Subsidies
To encourage innovation, the Chinese government will continue to implement a policy which grants an extra tax deduction of 75 percent on enterprises’ R&D costs until 31st December 2023, and raise this to 100 percent for manufacturing enterprises (with no expiry date).
Other Measures
On top of these concrete measures, the report also indicates that banks will be guided to improve the availability of financing for SMEs. Furthermore, the liquidation procedures for SMEs will be simplified. Lastly, the government will push for a reduction in operating fees for SMEs, by for example lowering the average rates for broadband and dedicated internet access services for small and medium enterprises by another 10 percent.
Conclusion
Despite the abnormal circumstances in 2020, China was the only major economy globally that achieved annual GDP growth. The second half of 2020 marked the start of a recovery from the economic downturn caused by Covid-19. With the targets and concrete plans to support businesses as set out in the 2021 Government Work Report, the government intends to continue this recovery and return to strong growth. As a result, China currently presents vast opportunities for foreign-invested enterprises.
The report also proposed several preferential policies for SMEs. If you’d like to learn more about these policies and how your company can make use of this, don’t hesitate to contact us at [email protected].
