By MinterPKU
According to the Administrative Measures on the Identification of the HNTEs (“Measures”) and the Work Guideline for the Identification Administration of the HNTEs (the “Guidelines”), the R & D fees should be accumulated on project by project and accounted under the prescribed 8 items such as employee’s benefits, direct input etc. However, in practices, few enterprises would separately set R & D fees accounting system in accordance with the Measures and the Guidelines, through there are requirements discrepancy between the R & D fees accounting system of the HNTEs under Measures and Guidelines and China’s current financial system.
Most enterprises were used to identify or split a number of R & D projects by a makeshift way and to artificially separate some costs from the accounting system as R & D fees in order to obtain the HNTEs status. After obtaining the HNTEs status, few enterprises would make any planning for the R & D projects and the corresponding R & D fees are not be accumulated accurately. When the review of the HNTEs are upcoming, many enterprises may have to do a crash job to “create” R & D projects and the corresponding fees due to the absence of the enough R & D projects, as well as the failure to meet the proportion requirements of the R & D fees for HNTEs. However, the standards for the review of the HNTEs status are far higher than the same of the identification of the HNTEs status. This change significantly increases the failure risk for the HNTEs to extend their HNTEs status.
Technically speaking, the R & D fees are allowed to make proper adjustment in light of the requirements discrepancy between the R & D fees accounting system of the HNTEs and China’s current financial system. However, the adjustment should be made in advance before a certain time node. For the HNTEs which will participate the next year’s review, it is advisable to establish a standard accounting system of the R & D fees under the Measures and Guidelines and make upfront planning for the R & D projects. And it is very important for those HNTEs to complete the accumulation of the R & D fees in the years of 2010 to 2012 and to fill any leak. These will not only be helpful for the HNTEs to pass the next year’s review, but also favor the application of the super deduction of the R & D fees.
- 1. How to establish standard accumulation system of the R & D fees
It is advisable for HNTEs to establish accounting system of the R & D fees under Measures and Guidelines based on the current accounting system. The HNTEs should establish standard financial model and separately accumulate the R & D fees. And the R & D should be directly showed in the financial statement audited by a CPA firm.
According to our past experiences in relation to the HNTEs identification in various regions, some regions expressly required that the R & D fees should be accumulated under the prescribed 8 accounting items as required by the Measures and Guidelines. If the R & D fees are not separately accumulated, the HNTEs shall prepare the auxiliary book (a separate book to account and accumulate the R & D fees under Measures and Guidelines) in place as support documents before the special audit report is submitted. And the auxiliary book should be consistent with the audit report. Therefore, it may be a regular request of the science and technology commission (the leading authority for the HNTEs identification) to prepare the auxiliary book.
HNTEs need to separately accumulate the R & D fees into the 8 items as provided under the Measures and Guidelines based on the R & D projects planned at the beginning of the year. Therefore, HNTEs shall confirm the R & D projects at the beginning of the year so as to make sure that the R & D fees can be accumulated accurately.
- 2. How to plan the R & D projects
The R & D project refers to a specific group of research and development activities with the characteristics of “creating, independent time, financial support and equipped experts”.
The purpose of the R & D activities is to discover, create and use new knowledge about scientific and technological topics (excluding humanities and social sciences), or to enable substantial development of valuable new technology and products (services). In current circumstances, HNTEs shall try to maintain no less than 4 R & D projects.
According to the Measures and Guidelines, the R & D activities should be innovative and advanced in some extent. HNTEs may demonstrate it by applying for the supper deduction of the R & D fees, or by commissioning their R & D activities to a famous R & D institution.
- 3. Noteworthy Issues in the Accumulation of the R & D Fees
According to Guo Ke Huo Fa [2008] No.362 (Circular 362), HNTEs shall separately accumulate the direct and indirect R & D fees into the following items, i.e., employee benefits, direct input, depreciation and long-term unamortized expenses, design fees, installation and test cost of equipment, amortization fee of intangible assets and other fees. When accumulating the abovementioned fees, HNTEs shall pay closely attention to the following issues:
(a) Employees’ benefits item accounts for the total employee benefits engaging in R & D activities in a financial year. And the on-duty time of the employees mainly engaging in R & D activities should be more than 183 days. And the benefits of the part-time staff are excluded from the employees’ benefits item;
(b) Direct input item. The direct input must be the direct costs incurred by the HNTEs for the R & D projects, such as the purchase cost of the raw materials etc., or the purchase of the mold, sample, prototype and the general test fees incurred for the mentioned equipment and appliance.
(c) Depreciation and long-term unamortized expenses. The buildings used for the R & D projects can also be depreciated.
(d) Design fees. The fees incurred for the purchase of the technology books and materials and the translation fees can be accumulated into the design fee item.
(e) Installation and test cost of equipment. Mass produce cost cannot be accumulated in the item of the installation and test cost of equipment.
(f) Amortization fee of intangible assets. The item of amortization of intangible assets shall accumulate the amortization fees of the intangible assets such as software, patent and know-how etc.
(g) Consigned R & D fees. 80% of the consigned R & D fees can be accumulated. The consigning party can apply for the additional deduction of the R & D projects.
(h) Other fees. The maintenance fee of the patent application and the insurance fee of the high and new R & D projects can be accumulated into the other fees. But other fees cannot exceed 10% of the total fees.
The accumulation of the R & D fees shall play a significant role in the maintenance of the HNTEs status. In order to successfully extend HNTE status in next year, MinterPKU suggests that HNTEs which will participate the next year’s HNTEs review, shall make careful plan in advance, choose appropriate R & D projects to justify their R & D capability and separately accumulate the R & D fees based on the selected R & D projects.
- 4. Noteworthy issues on Adjustment of the R & D Fees
- the adjusted R & D fees should be consistent with the previous submitted materials;
- the R & D fees incurred should be related to the R & D projects and the intellectual property
The various factors as examined in the review of the HNTEs status should be closely related. The fees related to the intellectual property should be accumulated in the item of the amortization fee of intangible assets. In addition, you may consider splitting the big project in order to qualify the minimum R & D projects requirement. Nevertheless, it should be extremely carefully and prudent to make an average allocation to the R & D fees related to the splitting big R & D projects.
- Treatment of the interperiod R & D fees
HNTEs should pay close attention to the budget and acceptance report of the interperiod R & D projects and appropriately allocate the annual R & D fees.
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