When it comes to embedded software companies, they are truly the “invisible giants” of the smart era—ranging from smart home appliances to industrial machine tools, all rely on it. The government has introduced a value-added tax (VAT) refund policy to reduce the burden on enterprises, but in reality, many companies are stuck in several “pits,” and the tax refunds are delayed.
The first ‘tiger’: Invoicing and accounting Embedded software and hardware are usually sold as an integrated package; how do you separate the costs? It’s really a headache. For example, for a smart device, how much is the software worth? How much does the hardware account for? With different cost structures and pricing strategies, plus the inconsistent accounting standards from tax authorities across regions—some use cost-plus, while others allow companies to self-certify “reasonableness.” Companies operating across regions have to relearn the “rules” every time they enter a new area, which is exhausting and prone to pitfalls.
The second ‘tiger’: Policy interpretation The policy documents are written in a professional manner, but the understanding between enterprises and tax personnel often does not align. For instance: what exactly is a “true embedded software product”? Some companies think that having some software control qualifies for a tax refund, only to be rejected; meanwhile, tax audits can yield completely different results due to varying personnel expertise. Companies repeatedly submit materials and communicate back and forth, extending the tax refund cycle. Especially for small and medium-sized enterprises, cash flow is already tight; how can they afford such delays?
The third ‘tiger’: Supervision and risk Tax authorities are also under pressure. The number of companies applying for tax refunds is increasing, leading to a huge volume of audits—copyright certificates, the reasonableness of sales breakdowns… each detail is scrutinized, resulting in an overwhelming workload. What’s more troublesome is that there are always companies trying to exploit loopholes: inflating software sales figures or declaring non-compliant products. Tax authorities want to accurately control risks, but the reality is: how to quickly identify suspicious declarations? How to efficiently investigate? These are all unresolved issues.
✨ The path to resolution: A collaborative effort is needed The intention of the policy is good, but its implementation needs to be smoother.On the government level: Can standards be further unified and processes simplified? Can clear operational guidelines and examples be provided?For enterprises: Understand the policy thoroughly, standardize accounting, and prepare materials in advance to ensure each step is taken steadily.We also suggest: Find reliable professional third-party support to help you avoid pitfalls and speed up the process.For tax authorities: They can leverage digital tools to enhance audit efficiency and risk identification capabilities.
Ultimately, the tax refund policy is designed to encourage innovation and support technology enterprises. Turning the “roadblocks” into “paper tigers” leaves us with much room for optimization. If you are currently struggling with tax refund issues, I hope this article can provide you with some insights.
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Written by: Old Mischief Tax
Reviewed by: Engineer Zhou
Edited by: Dali