China's tax relief credit extension positive for tech firms

    On 22 May, China's Ministry of Finance and the State Taxation Administration jointly announced that companies in the integrated circuit and software industries will be entitled to a corporate profit tax exemption in their first and second years of profitable operations, and a 50% tax reduction in their third through fifth years. The tax relief is applicable to companies with taxable income for 2018-23.
  Moody's Investors Service said this tax relief is credit positive for eligible companies because it will reduce their financial burden and help preserve their liquidity. Most integrated circuit and software companies in China are smaller than their global peers.
  This disadvantage limits their cash flow generation and the ability to invest in talent and more advanced technologies. The tax relief will allow them to use the cash that would have gone to the tax to invest in talent and technology development. These investments have the potential to increase the companies' earnings and cash flow, the credit rating agency noted.
  The tax relief is an extension of the one announced in 2012 for companies in these industries, which granted two years of tax exemption and three years of tax reductions through 2017.
  Tax relief is one of the ways the Chinese government is encouraging the country's integrated circuit and software companies to expand and to develop new technology. In the last few years, the government has also established industry funds and injected equity capital into market leaders in these two industries. And it has encouraged policy banks to lend to these companies at low-interest rates. These measures increase companies' access to funding.
  Moody's expects the various forms of government support to continue for China's integrated circuit and software companies. The country's import value of integrated circuit components rose almost 20% year over year and reached US$312 billion in 2018, according to statistics from the General Administration of Customs.
  The Chinese government has publicly expressed its intention to reduce reliance on imported integrated circuit component imports. Moody's believes the most effective way to achieve this goal is to encourage the growth and development of homegrown companies.