In the past few years, local governments have actively
introduced more and more incentives to attract foreign investors to
their locality. Incentive-shopping by foreign investors has become
a popular practice, and one result has been that local governments
have seen their local part of the tax revenues from a lot of local
business decrease significantly.
On 27 November 2014, the PRC State Council released new policies
that are designed to curb such practices. Guofa  No. 62
('Circular') launches a comprehensive reform of various
taxes and other preferential policies, specifically prohibiting
local incentives for new investment and ordering the cancellation
of previously-confirmed incentives.
Tradition of providing incentives by local governments to
attract foreign investment
In the first decades of China's opening up, many
foreign-invested companies could enjoy more favorable tax rates.
When these were abolished in the last decade, local government
throughout China started to introduce other local incentives to
attract foreign investment. Common-seen examples of incentives and
preferential policies include tax concessions, reductions and
exemption of land royalties, counterpart funding, management
services for foreign investment programs, financial guarantees and
favorable interest rates. The establishment of special economic
zones has helped local governments to market their incentives for
Circular prohibits incentives
The new Circular specifically prohibits tax concessions,
stipulating that 'except for tax administration authority
as prescribed in accordance with special tax laws and regulations,
and the Law of the People's Republic of China on Regional
National Autonomy, no region may develop preferential tax policies
without the approval of the State Council'. The Circular
also prohibits reductions and exemptions of land royalties - land
cannot be assigned at a preferential price. Other non-tax
incentives such as waiving administrative fees and providing
government funding are also prohibited, while state-owned assets
may not be transferred at a preferential price. Reducing, exempting
or postponing the collection of companies' portion of social
insurance premiums is specifically prohibited and no company is
permitted to pay premiums at a rate lower than the uniform one
without the approval of the State Council. Other preferential
policies in violation of laws include refunds, expenditures from
retained revenue, fiscal rewards and subsidies, which shall all be
The regulation on counterpart funding and management service is
vague; the Circular refers to 'other preferential policies
shall be gradually regulated' are 'paying social
insurance premiums and other operating costs on behalf of
companies, granting preferential electricity price and water price,
attracting companies from other regions to settle down in the
regions or pay taxes in the regions by means of financial rewards
or subsidies and the overall retainment or incremental refund of
local fiscal revenues in some regions'. There is no also
clear regulation related to monetary policies such as financial
guarantee and favorable interest rates. Overall however, the
message is clear: no more local incentives!
Previous incentives may be cancelled or curbed
Although the order from above clear establishes that past
incentives must be cancelled, it remains to be seen whether local
governments will so strictly execute and become compliant
immediately. Currently for example, negotiations are ongoing
between several large foreign investors and relevant local
governments, on the continuation of preferential policies in direct
conflict with the Circular. More than ever, companies should
liaison regularly with their local government to inquire about the
current status of incentives provided, and where possible negotiate
for temporary relief. In any case there is pressure on local
governments to act: The Circular calls for all regions and all
relevant departments to carry out a special revise of contracts and
agreements as concluded with companies, memorandums, minutes of
meetings or talks as well as requests for instructions, reports and
official replies in the form of 'one case one meeting'.
What does this mean for your decision-making regarding new
investments in China?
When considering on investment in China, foreign companies
should be focusing less on specific incentives that are offered,
and much more on other commercial facts such as convenience of
location, transportation, labor costs, infrastructure, location of
sub-suppliers and customers, nearby ports, industry parks, overall
living environment, expansion options, regional headquarters,
service providers, and so on.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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