China To Encourage Hi-Tech Industry With Import Tax Breaks

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

12 February 2007

China is granting importers of certain manufacturing materials tax breaks in an attempt to boost the country's production of hi-tech equipment and infrastructure and reduce future foreign dependence on these imports.

According to a statement on the State Administration of Taxation's website, tax breaks will apply to technology imports for power generation, oil drilling, shipbuilding, high-speed trains, aircraft manufacture, coal mining and electronics.

Beijing's intention behind the move is to increase China's "core competitive power and autonomous innovation ability," the SAT statement said.

The new rule requires companies to convert the savings from tax rebates into state equity and use the funds for research and development, and innovation.

Companies which are partially owned by the state must use the rebates to increase State equity stake. Non state-owned firms, including public companies, will have to bring in the state as a shareholder if they want to benefit from the import tax rebate.

China has been struggling to encourage a culture of innovation and investment in new hi-tech ventures, and Beijing is making a concerted effort to diversify the economy away from its traditional reliance on low-cost manufacturing.

Analysts also note that the new tax policy may also help China reduce its huge trade surplus with its main trading partners, namely the United States and the European Union.

"It may help clear the bottleneck in the manufacture of key equipment, thus speeding up the development of the whole industry," Peng Longyun, senior economist with the Asian Development Bank, was quoted as observing by China Daily.

China's trade surplus increased more than 74% year-on-year to $177.5 billion in 2006, China Daily reported.

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