Dangerous China Investment Incentives
Thursday, June 19th, 2008June 19 - One of the issues that many foreign investors face in China, when deciding on a location for their business, is evaluating the various incentives offered by the local government.
The problem with this is that many local governments, or even officials, do not follow state law when it comes to offering incentives to foreign investors. At worst, they can sell you something that can be immensely damaging, sacrificing your investment to local business interests, or more commonly, provide incentives that may not be actually backed up in written format and cannot be replied over the long term. These can also prove to have a longer-term impact on your business. It is important to check off investment incentives that are offered to you as part of a package to attract your business with an experienced firm familiar with the issues and able to offer an opinion on the credibility of the deal.
Soft incentives
These typically involve a manipulation of the local government’s tax collection, and can include rebates on business taxes, VAT or similar taxes. Because Chinese tax collection is a two-tiered structure, part collected by the state level tax bureau’s local office and part by the Regional level tax bureau, the local part can be used by the local government to offer this back as an investment to foreign investors. However, in doing so they are out of compliance with their own State directives that specify that such collected revenues go towards local urban development; roads repair, hospitals, schooling, civic amenities and so on. Such revenues are not supposed to be used to attract foreign investment. Accordingly, this is why in practice a local government will never provide a written guarantee of such incentives; they can’t as the money is not supposed to be used in this manner. There are three ways to assess these types of incentives. (more…)












