15% Reduced Profits Tax Rates & Preferential Policies Announced For Foreign Investors In China To Support The Belt & Road Initiative

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Op/Ed by Chris Devonshire-Ellis, Dezan Shira & Associates

China’s State Council has decided to extend preferential corporate income tax policies to further enhance the massive development of the western regions. Following an executive meeting on April 14 this year, China’s Ministry of Finance and the State Taxation Administration has subsequently released the Announcement about Continuing to Implement Preferential Corporate Income Tax Policies for Western Development.

Profits Tax Reduction For Investing In China’s Western Regions
According to the announcement, enterprises will pay a lower corporate income tax rate of 15% if they make investments in encouraged industries in China’s Western regions from January 1, 2021 to December 31, 2030. This includes foreign invested companies. China’s standard profits tax rate is 25%.

China’s Western regions include Chongqing Municipality, Sichuan, Guizhou, Guangxi, Yunnan, Tibet, Gansu, Qinghai, Ningxia, Shaanxi, Inner Mongolia and Xinjiang, while some regions and cities in other provinces, such as Xiangxi, Enshi, Yanbian and Ganzhou, can also adopt the same preferential tax policies. To qualify, investors must fit into categories as provided for in the ‘Catalogue of Industries Encouraged to Develop in the Western Region’. The announcement is effective from January 1, 2021, giving foreign and potential foreign investors in China eight months to conduct market research prior to committing to an investment.

The Western Regions Encouraged Industries List
Encouraged industries are listed in the Catalogue of Industries Encouraged to Develop in the Western Region, and in order to enjoy the preferential tax rate, a company’s main business revenue must account for at least 60% of its total business revenue. This will apply in most cases, but is in place to prevent deliberate exploitation of the preferential reduction by domestic companies.

The Encouraged Industries list varies from region and region, with about 30 differing industries listed for each. In previous, similar lists, these have been typically demanding and highly specialist requirements. What is unusual about this list is that it appears to include fairly standard foreign investment criteria.

The Chongqing list appears to accept as qualifying for the scheme, investment in:

  • Component part manufacturing for household, IT and auto industry, engines;
  • Engineered plastics, light alloys, building materials, glassware;
  • Power, energy, waste and fresh water treatments;
  • Agriculture, medical; teaching aids;
  • Recreational facility developments;
  • Infrastructure development, highways, ports, airports, warehousing, transportation.

To allow further initial research, we have provided a complimentary English language, PDF copy of the Catalogue of Industries Encouraged to Develop in the Western Region for our Silk Road Briefing readers.

(To ensure you receive notice of similar updates, please obtain a complimentary subscription here)

China’s Western Regions: The Export Markets, Value, And Belt & Road Trade Growth 2019  
The reduction in profits tax is especially relevant for foreign investors looking to develop export markets from these regions of China. Data as follows:

Region Main Export Markets Export Value (2019, US$) BRI Trade Growth 2018/19
Chongqing EU, ASEAN 24.8 billion +32%
Guizhou ASEAN 7.4 billion +15%
Guangxi ASEAN 32.8 billion +17.3
Yunnan ASEAN 12.8 billion +15.2
Tibet Nepal, India 400 million
Gansu ASEAN 2.2 billion +2.8
Qinghai Nepal 500 million
Ningxia US, South Korea 2.7 billion +3.1
Shaanxi US, South Korea, Japan 31.6 billion +17.3
Sichuan US, EU, ASEAN, Japan 22.8 billion +24.4
Inner Mongolia Mongolia, Russia, South Korea 5.8 billion +14.6
Xinjiang Middle East, Central Asia 16.4 billion +18.1

(Source: Xinhua)

In overall terms, China’s trade with the Belt and Road countries rose 9.9 percent in 2019, accounting for 29.3 percent of the total national import and export trade volume.

Western China – Geographical Demographics 
In terms of reaching export markets, these can essentially be broken down as follows in terms of regional proximity and the possession of committed, existing supply chain infrastructure, including ports, warehousing and customs facilities. It should be noted that parts of China’s Western regions also have significant consumer bases.

Region Population (millions) International Borders Primary Export Base
Sichuan 110 None Chengdu, Chongqing
Guizhou 34 None Guiyang
Guangxi 48 Vietnam Nanning
Yunnan 46 Myanmar, Laos, Vietnam Kunming
Tibet 3 Nepal, India, Bhutan, Myanmar Lhasa
Gansu 26 Mongolia Lanzhou
Qinghai 5 None Xining
Ningxia 7 None Yinchuan
Shaanxi 37 None Xi’an
Inner Mongolia 25 Mongolia, Russia Baotou, Ordos
Xinjiang 25 Kazakhstan, Afghanistan, Kyrgyzstan, Tajikistan, Mongolia, Russia, India, Pakistan Urumqi, Kashgar

Western China: Existing 2020 And Upcoming Free Trade Agreements 
In terms of tax and free trade, the most obvious candidates for foreign investors to explore with the Western Regions Catalogue of Encouraged Industries and the applicable reduced 15% profits tax rates are as follows:

The Western regions of Yunnan, Guangxi and Tibet all share borders with the ASEAN nations of Laos, Myanmar and Vietnam, of which the latter is the easiest to access. ASEAN also includes Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore and Thailand, and is a free trade bloc in its own right, allowing for free movement of trade throughout the region. This is significant as China has a Free Trade Agreement with ASEAN. This means that products shipped from China from these regions attract reduced or zero duties when landed in ASEAN. This in turn means attacking these export markets may best be done from a base in China’s West, with Yunnan and Guangxi being the easiest choices to do so.

China’s Western regions of Xinjiang and Inner Mongolia share borders with Kazakhstan, Kyrgyzstan and Russia. These countries are part of the Eurasian Economic Union (EAEU), which has signed off a Free Trade Agreement with China. At present, trade attache’s on all sides are negotiating tariff reductions and exemptions. These are not in place as yet, but when they are, will see an significant increase in trade. The date that China set for the implementation of the Encouraged Industries Catalogue for the Western Regions may be a pointer. Typically China introduces these with immediate effect, however on this occasion has unusually elected to delay this until 1st January 2021. It is possible that China and the EAEU except to announce the tariff details as part of the FTA at a date near to this.

How To Apply For Western Regional Profits Tax Reductions & Encouraged Industry Qualification

The first stage is to engage advisors who can determine the following:

  • Does your proposed business activity fulfill the criteria laid down in the Western Regions Encouraged Industries List? This will require liaison with the relevant regional authorities and potentially some negotiation over your permissible and qualifying scope of business. It will be a Yes or No answer.

If positive, this can be followed by:

  • Some investors may require additional export market research.
  • Legal and tax registration procedures to obtain preferential treatment and tax breaks.
  • Assistance with sourcing local customs officials familiar with regional export processes and facilities
  • All other business registration, tax and operational requirements.
  • Match the China business end with ASEAN/EAEU distributors and related contacts.

Qualified Assistance In Western China, and the ASEAN & Russia Supply Chains   
Our firm, Dezan Shira & Associates has been operational in China since 1992 and has handled multiple foreign investments into Western China over the years. The practice published a Business Guide To West China in 2008, and remains familiar with the procedures, regional nuances and applicable government and official contacts.

We also have offices in Vietnam, Singapore and elsewhere in ASEAN as well as Russia and can therefore assist at both ends of the manufacturing supply chain. Please email us at silkroad@dezshira.com for enquiries on how to proceed with market intelligence and obtaining qualification approval for obtaining profits tax reductions related to China’s Western regions investment, and advisory over how to take advantage of this.

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