China Tightens Up Foreign Investment Regime

by Mary Swire, Tax-News.com, Hong Kong

26 November 2002

Mainland China is tightening up on the tax and customs privileges offered to foreign manufacturing investors, partly as a result of WTO entry, which requires a 'level playing field' for manufacturing investment, and partly in order to buttress the domestic manufacturing sector which is now judged much more capable of competing internationally than it used to be.

China has introduced an 'Industrial Catalogue for Foreign Investment' which lists three types of industry, to define their customs and tax treatment. The catalogue distinguishes between industries 'encouraged', 'restricted' and 'closed' in respect of foreign investment. 'Encouraged' industries will continue to receive exemption from customs duties and VAT, but all unlisted industries will be deemed to be 'permitted', meaning that they will only receive exemption if they can prove that imported equipment is used exclusively for export production for a period of five years from installation.

Broadly speaking, the Catalogue is constructed so that only those industries for whose manufacturing equipment China does not have productive capacity will be treated as 'encouraged'.

China has already made it clear that the corporation tax privileges it has historically accorded to foreign companies will be withdrawn. Although no definite timetable has been announced, it is widely expected that this will take place in 2003. The mainland Economic Daily has quoted Finance Minister Xiang Huaicheng as saying that foreign corporate income tax and domestic corporate income tax would be unified at 24% or 25%. At present, companies with foreign ownership or investment pay a rate of between 24% and 27%, and in the Shenzhen, Xiamen, Shantou, Zhuhai and Hainan special economic zones they pay a 15% corporate tax rate. The mainstream rate of corporation tax is 33%.

Despite the tightening-up of customs and corporation tax regimes, individual Chinese regions are doing their best to encourage investment and foreign trade. Earlier this year, for instance, Guangdong Province Vice-governor Tang Bingquan announced measures to strengthen economic co-operation between the booming Shenzhen region and Hong Kong. Reforms included a simplification of the clearance system for moving products from factory to factory - under the old rules, if a Hong Kong firm with a factory in one Guangdong city sold raw materials to another Hong Kong-owned factory in another part of the province, both the seller and the buyer needed to report to their local Customs offices. Now only one visit is necessary, and formalities have been reduced, leading to major reductions in transit times.

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