Specific manifestations of non-taxable income (statutory scope and recognized conditions)
(i) the statutory three core categories (article 7 of the enterprise income tax act)
1. Financial allocations
The financial resources allocated by the various levels of government to enterprises, social groups, etc. That are included in the budget administration (except as otherwise provided by the state council and the treasury)。
2. Administrative fees, government funds that are collected and incorporated into the financial administration in accordance with the law:
(1) administrative service charges: fees charged to specific clients in public administration or specific services, such as various administrative licence fees。
(ii) government funds: financial contributions for specific purposes, such as education surcharges, water construction funds, etc。
3. Other non-taxable income as defined by the state council
This refers mainly to funds of a fiscal nature that are eligible for specific use (customs [2011] 70)。
(ii) conditions for the identification of funds of a financial nature for specific purposes (fiscal [2011] number 70)
The financial resources obtained by enterprises from the financial and other branches of government at the county level and above are subject to three conditions:
1. Availability of disbursement documents that specify the purpose for which the funds are to be earmarked (specific, not general)。
2. Allocation departments have a dedicated fund management scheme or specific management requirements。
3. Enterprises account for the funds and expenses separately (with special account management to avoid mixing with operating funds)。
(iii) common specific manifestations
1. Special grants for research and development
(1) typical cases
Research and development funds allocated by the government to support technological innovation in enterprises。
(2) points for identification
It must be used to designate r & d projects and account for r & d expenditures separately。
2. Environmental funds
(1) typical cases
Financial subsidies for pollution management, energy conservation and reduction。
(2) points for identification
There are clear environmental objectives and proof of governance effectiveness is required。
3. Policy relocation compensation
(1) typical cases
Compensation for relocation due to public interest。
(2) points for identification
Earmarked funds for relocation reconstruction and separate accounting for income and expenditure
4. Government investment subsidies
(1) typical cases
Financial resources for infrastructure development。
(2) points for identification
Non-capitalization inputs, with special purpose documents。
Expenditure provisions for non-taxable income (core: no income, no expenditure)
(i) basic expenditure rules (article 28 of the implementing regulations for the income tax act for enterprises)
1. Costed expenditure
Non-taxable income is used for expenses incurred and cannot be deducted prior to tax。
2. Capitalized expenditure
Depreciation, amortization used to acquire assets may not be deducted prior to tax。
3. Tax adjustment requirements
The deduction of non-taxable income is required at the time the remittances are collected, and the corresponding expenditure/depreciation amortization is increased。
(ii) prescription of the use of funds (fiscal [2011] number 70)
1. The portion of non-taxable income that has not been expended for five years (60 months) and has not been refunded shall be included in the total taxable income for the sixth year
2. Recalculated funds from taxable income whose subsequent expenditure allows for pre-tax deductions divide
(iii) treatment of exceptional circumstances
1. Superimposed preferential restrictions
Non-taxable income is not subject to tax incentives (e. G. R & d costs plus deductions) for the corresponding expenditure。
2. Disposition of assets
Assets acquired with non-taxable income are disposed of in accordance with normal assets and their net value may not be deducted before tax。
3. Financial repatriation
The financial funds required to return the principal are not included in the total income and expenses are not deducted。
(iv) examples of tax treatment differences
An enterprise receives $1 million in r & d-specific subsidies (non-taxed income) for all r & d expenditures:
1. Accounting treatment
Deferred income is recognized and charged in instalments to other income or against r & d costs。
2. Tax treatment
(1) upon receipt of funds
Reduction of $1 million in taxable income。
(2) when r & d expenditure is incurred
Increase of $1 million in taxable income (reciprocal expenditure not deducted)。
(3) if 200,000 yuan has not been spent in 5 years and has not been returned
In the sixth year, the amount of taxable income was increased by 200,000 yuan, and subsequent expenditures were deductible。
Iii. Tax-related risk analysis and control measures
(i) five core tax-related risks
1. Identification of the risk of missing conditions (most commonly)
(1) risk performance
The absence of any of the recognized conditions (no specific documents, no management, no separate accounting) is treated as non-taxable income。
(2) typical consequences
Tax adjustments, surcharges and suspense payments (if a technology company wrongly treats r & d subsidies of $800,000 as tax-exempt income and pays taxes of nearly $300,000)。
(3) control
The three conditions are checked as soon as the funds are received and the taxable income is charged if it is not met。
Expenditure less risk of non-compliance (core risk)
(1) risk performance
Non-taxable income corresponding to expenditure (e. G. R & d, procurement fees) is deducted before tax and is not taxed。
(2) inspection path
The 8th-9th row of the a105,000 tax adjustment scale is tracked against the audit reports on earmarked funds versus actual expenditures。
(3) control
A “non-taxable income-expenditure” desk is established to clearly indicate the corresponding source of funding for each expenditure and ensure that it is increased。
3. Risks of funds limitation management
(1) risk performance
Funds that have not been used for five years (60 months) and that have not been returned are not included in the taxable income for the sixth year。
(2) typical consequences
Discounted as under-income, tax reimbursements and deferred payments。
(3) control
The application of the countdown to set-up funds is a reminder that the surplus funds are regularly cleared and collected or credited to taxable income in a timely manner。
4. Nature of risk of confusion (non-tax income vs tax-free income)
(1) risk performance
The misdirection of non-taxable income as tax-exempt income (and vice versa) leads to an incorrect deduction of expenditure。
(2) core differences
Tax-free income corresponds to expenditure that is deductible and non-taxable to expenditure。
(3) control
Distinctly distinguish the nature of income and create an income ledger to avoid confusion。
5. Special income miscalculation risk
(1) risk performance
Taxable income (e. G. Sales-linked subsidies, withholding of tax charges) is misdirected as non-taxable income。
(2) typical cases
An enterprise returns a tax charge to a long-standing “other payable”, which is not included in taxable income。
(3) control
The nature of income is judged on a case-by-case basis in relation to policy documents, and taxable income is strongly charged for non-conformity。
(ii) other common risk points
1. Unsatisfactory sources of funding
(1) risk performance
Funds come from sub-district departments (e. G. Town governments, street offices) and are treated as non-taxable income。
(2) policy bases
Fiscal duties [2011] no. 70 is limited to funds for government departments above the county level。
2. Mixed use risk
(1) risk performance
Non-taxable income is used in combination with own-account funds and it is not possible to distinguish between the corresponding sources of expenditure。
(2) policy bases
The implementing regulations require separate accounting and hybrid use will result in the overall non-deductible。
3. Amortization risk of assets
(1) risk performance
Fixed/intangible assets acquired with non-taxable income, the depreciation/amortization of which is deducted before tax。
(2) policy bases
Article 28 of the implementing regulations specifies that no deduction may be made。
(iii) integrated control system construction
Previous audit
Establishment of a financial process for receiving and approving funds, in which the financial, legal and operational sectors jointly review the nature and use of funds。
2. Management at work
(1) set up special accounts to account for non-taxable income and expenditure and ensure “earmarked, separate accounting”。
(2) conduct self-checks on a regular basis (quarterly/half-yearly) to reconcile progress in the use of funds with desk records。
3. Subsequent declaration
(1) when calculating a transfer, focus on filling in the relevant schedules of non-taxable income to ensure that the transfers are accurate。
(2) information on the documentation of the disbursement of retention funds, management practices, accounting desk accounts, etc., for at least 10 years, for the purposes of tax audit。
4. Policy tracking
Focus on the latest policies in the fiscal sector and adapt non-taxable revenue management strategies in a timely manner (e. G. The bridging policy following the implementation of the vat law)。
Core differences between non-taxable and tax-exempt income (key to avoiding confusion)
(i) essential attributes
1. Non-taxable income
It is not taxable and is not taxable at all。
2. Tax-free income
It is taxable and is exempt from tax benefits。
(ii) expenditure rules
1. Non-taxable income
Corresponding expenditure cannot be deducted。
2. Tax-free income
Corresponding expenditure is normally deducted (except as otherwise provided)
(iii) scope of application
1. Non-taxable income
Financial allocations, administrative fees, earmarked financial funds, etc。
2. Tax-free income
Interest on public debt, dividends from dividends among resident enterprises, etc。
(iv) limitations on limitation
1. Non-taxable income
The earmarked financial funds have a five-year lifetime。
2. Tax-free income
There is generally no explicit time limit for use。
(v) reporting requirements
1. Non-taxable income
Declares without filing。
2. Tax-free income
It will normally require prior filing or approval。
Summary
The core logic of non-taxable income from corporate income taxes is that “income is not taxed and expenditure is not withheld”, and it is determined that three conditions (specific documents, specialized management, separate accounting) are strictly met. Enterprises should establish a robust “receiving-accounting-use-declaration” whole-process management system that focuses on three core risks: identification, deduction, prescription, and avoidance of tax penalties resulting from policy misperceptions. If there is any doubt as to the nature of the income, it is recommended that tax authorities or professional tax advisers be consulted in a timely manner to ensure compliance with tax processing。
