By Xu Zhijun
The State Council’s announcement in late 2014 to roll back local tax incentives for foreign investors understandably kicked up quite a stir. Foreign companies in part make their investment decisions based on these incentives being available. Equally concerned with the move were local governments, which often make generous use of these incentives to attract more investment into their jurisdictions.
Especially in the light of slowing economic growth, the State Council’s announcement was met with protests from local governments and foreign investors alike. Convinced by these objections, the State Council released a circular on May 10, 2015 amending the original decision. The new circular lets existing preferential policies that included an expiry date continue until that date. For existing incentives that were offered without such an expiry date, local governments will have to now set one.
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The original circular would have abolished the existing tax incentives virtually overnight. Apart from dealing a significant blow to legal certainty and investor protection, foreign investors would have been surprised with a startling jump in their tax bill. This second circular is to correct the somewhat sloppy implementation of the first one. Seen from the big picture, the Chinese government wants to avoid being seen as unreliable in its promises to foreign investors. Had the government pushed on with its sudden claw back of incentives, foreign investors would have had to think twice the next time China would try to attract new investment.
Nonetheless, going forward local governments will not be able to offer incentives to foreign investors without prior State Council approval. This does not mean that foreigners will no longer receive any beneficial tax treatment for investment projects. It does however significantly impair foreign companies’ ability to negotiate deals with local government.
In the past, local governments often used tax and other incentives to attract foreign investment, which in many cases have promoted regional growth and industry concentration. However, the central government is now concerned that the overuse and misuse of such incentives is damaging to China’s long term development. These incentives are believed to hinder the market’s resource allocation and cause the Chinese government to miss out on tax revenues. The measure also intends to level the playing field for domestic investors, who in the past were not eligible for these incentive packages.
The new circular does not address specific incentives. For more details, foreign investors are therefore advised to contact their local government.
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