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Tuesday, August 14, 2012

A Comparison of Tax Benefits for New and High-Tech Companies in the U.S. and China

Tax AnalystsYinan Zhang (J.D. 2013, Cincinnati), A Comparison of Tax Benefits for New and High-Tech Companies in the U.S. and China, 67 Tax Notes Int'l 655 (Aug. 13, 2012):

The presence of U.S. companies in China is no longer a secret. While China still serves as the "world's factory," a continued expansion of research and development activities in China draws more attention from the rest of the world. By the end of 2009, more than 400 Fortune 500 companies have conducted R&D activities in China. Many reasons account for this trend -- for example, the relatively cheaper R&D investment environment, including cheaper human resources, and China's foreign exchange control policies, which make it hard for international companies to withdraw capital from China.

This article analyzes this trend from a tax perspective. Section I focuses on R&D tax benefits in the U.S. and explains how they work. Section II discusses the benefits provided in China and compares a company's R&D treatment in China with its treatment in the U.S. This article also tries to predict the future of this tax benefit in China, as Chinese tax law underwent a significant change in 2008 and some implementing rules have not yet been promulgated. The conclusions will be summarized in the last section, with some practical suggestions for U.S. companies conducting R&D activities in China.

This article is written primarily for U.S. companies with divisions or subsidiaries in China3; therefore, it introduces the rules in both countries briefly and focuses more on a comparison of the benefits of locating research activities in either of the two countries. The ultimate purpose of this article is to help companies analyze whether to have R&D activities in China.

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