China has made notable advances in recent years in technology innovation. For example, in 2012, China’s State Intellectual Property Office (SIPO) received more than 650,000 applicants for invention patents, an increase of more than 26 percent from 2011 and the largest number received by any patent office in the world. Investment in research and development (R&D) activities is also growing, with spending on R&D in 2012 growing more than 17 percent, according to official Chinese statistics.
As a part of these efforts, Chinese authorities have recognized that nondiscriminatory tax policies and a robust legal and regulatory system for protecting intellectual property rights (IPR) play a vital role in fostering innovation. The US-China Business Council (USCBC) acknowledges the efforts of Chinese central and local government agencies to set fiscal and IPR protection policies and programs that advance innovation. USCBC also appreciates the ongoing dialogue between USCBC and various central government agencies to discuss the value of tax and IP protection policies that align with international best practices and the realities of corporate structures. Through this submission, USCBC hopes to continue this constructive conversation about best practices for tax and IP policies that benefit all stakeholders to promote China’s development as an advanced, high-tech industrial economy.
One of China’s core innovation tax policies, the High- and New-Technology Enterprise (HNTE) program, offers qualified company locations a 15 percent tax rate regardless of the company’s investment type and where the company is headquartered. HNTE status is granted by provincial tax authorities for company facilities located within their jurisdictions. To qualify a facility for HNTE status, companies are required to own the proprietary IPR of the core technology used in their products and services in China, or they must give their Chinese subsidiaries a global exclusive license for that IP for at least five years.
While China’s current HNTE program allows both domestic and foreign companies to apply for HNTE status, the structure of the HNTE program presents innovative global companies with three particular challenges, discussed below. These challenges limit the ability of these companies to participate in the HNTE program. The end result is that the innovative companies that officials aim to attract cannot fully contribute to China’s efforts to promote innovation. In addition to discussing these three challenges in greater detail, USCBC recommends potential solutions to address these challenges.