Chinese Tax Concession and Exemptions for Foreign Direct Investments - Example

Chinese Tax Concession and Exemptions for Foreign Direct Investments Student Name Institutional Affiliation Chinese Tax Concession and Exemptions for Foreign Direct Investments Introduction In respect to the current trend of economic globalization there has been perceived immense increase in the numbers of companies that desires to invest at the international platform. Therefore, each and every country embarked on establishing a formidable preferential tax policy of foreign investments made in their soil. For instance, china embarked on establishing its foreign tax policies upon three fundamental tax concessions. These Chinese-based concessions include tax exemptions, location-based concessions and activity-based concessions. Therefore, the key goal of this paper is to try and expound on the background of foreign companies development in China, the different definitions of the aforementioned tax concessions and the implementation strategies deemed effective. It should also be noted, at this point, that the paper also expounds on the comparison that can be gained in the course of comparing Australia tax concessions and Chinese tax concession activities in respect to foreign company investments. Theoretically, in the Chinese foreign markets potential foreign-based companies are subjected to 30 % corporation tax with an additional 3 % local corporation tax. In a real business scenario, however, the foreign-based companies never have to pay for the full corporate tax rate as required by the Chinese tax structure (Ernst & Young, 2012). Tax Concessions in China It is required that any given manufacturing companies operating in China for a period not less than ten years are guaranteed tax grants exemptions from the fundamental time the aforementioned companies enter their profit zones. Accordingly, within the first two years after entering the profits zone these form of companies are fully exempted from corporation tax. In the preceding three years, these companies are entitled to a further grant that guarantees a 50 % reduction in the foreign-based company’s tax burden (Ernst & Young, 2012). It should be noted clearly that the five-year grant period begins in the year for which there were posts of accumulated profits. This is dependent on the fundamental idea that the computation of profits took into account the loss of carry forwards which are recorded and posted within the company’s timeframe for the very first time. However, it should be made comprehendible that the aforementioned tax exemption does not experience any form of interruption in case after the commencement of the period and the foreign-based manufacturing company posts immediate losses. Additionally, it is required that the taxable losses within a maximum carry-forward timeframe of about five years are considered in the vent of measuring the date at which the company records accumulation of profits altogether (Atkinson and Stieglitz,1980). The following is a list of companies operating within the manufacturing sectors and areas that are considered eligible for preferential taxation treatment in Chinese investment markets; i) Electronic and Engineering industries ii) Energy sectors industry( exclusive of oil and natural gas extraction activities) iii) The metal extraction industry, chemical companies and industries concerned with the manufacture of building and construction materials iv) Light-based industries, textile-based industries, and industries concerned with the manufacture of packaging products v) Medical and pharmaceutical-based industry vi) Industries associated with agriculture and forestry vii) The entire construction industry viii) Transport and communication-based industry in exclusion of passenger transporting industry ix) Industries concerned with scientific research and development, geological-based industries and consulting services The fundamental principle for tax exemption for such companies is based on operation timeframe. It is ascertained that industries operating within the aforementioned activities receive tax burden grants after a 10 year period of existence is founded. In case that the operations of the company ceases before the 10 year period is attained the fundamental Chinese tax law system directs that the pre-meditated tax concessions be repaid (Ernst & Young, 2012). After the country had realized that the need to open-up for foreign investors, the Chinese government embarked on devising such program activities as the Special Economic Zones. The fundamental rationale behind the coming up with this program was based on strengthening China’s then embattled economy structure with immense foreign capital and also to modernize the population through the ever-changing foreign technological world. In consequence, it should be comprehended that any given manufacturing company in China is entitled to a reduced grant of about 15 % in these SEZ, s zones (Ernst & Young, 2012). This grant is distributed as follows; within the first two years of operations the company is entitled to full tax exemption and a subsequent 50 % reduction tax rate in the course of the preceding three years in operations (Ernst & Young, 2012). It is noted clearly that also foreign-based service companies and financial institutions operating within the Chinese economy are subjected to special regulations in the aforementioned SEZ, s areas. These zones are located in such Chinese areas as Shenzhen, Guangdong, Zhuhai, Shantou, Xiamen and Hainan Island (Chen, 1993). In additional to the SEZ, s there was the formulation of the Economic and Technological Development Zones that were founded and established in more than 14 Chinese coastal cities(Ernst & Young, 2012). The fundamental opening of these zones was dependent on the opening up of investment zones for foreign-based investments and also Research and Development activities in the established areas through the constant application of modernized form of foreign-based technology. The agreement demanded that the foreign-based companies operating within the aforementioned zones are allowed full-level infrastructure that was conversant with the international standards. These Economic and Technological Development Zones were later distributed throughout the Chinese economy in order to bring about uniformized developments in both booming and non-booming cities (Bartik, 1991). The Chinese government has taken the move to prioritize the development zones in order to become key favorable destinations for foreign-based investments. This has been achieved through the many allowances provided as concessions and fairly built infrastructures within the local cities. In respect to taxes, the policies have been devised in such a manner that does not allow any form of immense differences between the Special Economic Zones and other Economic and Technological Development Zones. Thus, the Economic and Technological Development zones attract a reduced tax rate of 15 % (Ernst & Young, 2012). In this tax model, the Chinese government allows full tax exemption for the companies for the first two years in operations and a subsequent 50 % reduction in the preceding three years of operations. It should be noted that unlike the Special Economic Zones, the Economic and Technological Development Zones fail to differentiate between foreign companies operating in either manufacturing and service-based companies (Ernst & Young, 2012). In 1984, there were than Chinese cities opened up for foreign investments. Therefore, there were more than 300 coastal-based cities in China that formulated and promoted tax concessions to the immediate Special Economic Zones (Ernst & Young, 2012). In cases where the foreign-based companies are placed in Special Economic Zones, the companies are allowed a further reduced tax rate amounting to 24 % (Ernst & Young, 2012). Additionally, the Chinese governments has formulated a further possible grant reduced tax base of 15 % in cases where the foreign companies businesses falls into either of the below categories; i) Technology-based investment projects or the foreign projects that require high levels of expertise ii) Foreign-based investments whose volume base surpasses $ 300m with a distinctive long repayment period iii) Foreign-based projects that fall within the industries of energy, generation and communications iv) The fundamental state-promoted projects High Tec Industrial development Zones Recently, the Chinese government opted for expanding its immediate economic zones to feature High-Tech Industrial Development Zones which was fundamental in catapulting and developing the scientific arena. This was achieved by improving foreign-based investment projects with foreign capital structures as well as the import of know-how. Nowadays, there are more than 50 High-Tech Industrial Zones in which the foreign-based high tech companies are allowed an immense reduction in taxes. These foreign- based high tech companies enjoy 15 % reduced tax rate (Ernst & Young, 2012). In cases of a joint form of businesses with foreign companies that is deemed to operate for a maximum of 10 years there is a tax exemption of 50 % (Ernst & Young, 2012). Consequently, these tax concessions are made possible by permission of the Chinese Authorities. A good example of High-Tech Industrial Development Zone in China is the Zhongguancun Science and Technology Park located in the outskirts of Beijing (Chaudhuri and Adhikari, 1993). Subsequently, there is the Shanghai Pudong Economic area where foreign-based companies specializing in financial, trade or industrial sectors have continued to enjoy tax concession programs since 1992(Ernst & Young, 2012). It is important to realize that the foreign financial sector of the economy has been perceived to be significant in this scenario. Given the fact that most foreign-based financial institutions have continued to face investment rejection in most of other investment zones, the Pudong economic zone in China has been developed as a financial foreign center. The zone also acts as a formidable center for local stock-exchange activities. In the effort to increase hence expand on its existing infrastructural base, the Pudong economic zone has continued to grant special forms of incentives to foreign-based companies engaging in activities of constructing roads, railways and ports. Notably, these companies are allowed a reduced tax rate of about 15(Ernst & Young, 2012). In cases where the foreign-based companies operating in the aforementioned activities are planning to establish a permanent base then a full tax exemption is guaranteed on their first five years and a 50 % tax reduction affected in the preceding years of operations (Ernst & Young, 2012). In addition the aforementioned economic zones, the Chinese government has set up other regions that allow tax concessions for foreign-based companies in order to promote and upheld development activities in China’s economically weak provinces. These regions include at least 13 free-border cities that are remotely placed in addition to various central and western regions in China. Within the remotest sections of China, foreign based companies are allowed full-tax exemptions for two years of operations and a further tax concession structure for a substantial period that amounts to more than 15 years (Ernst & Young, 2012). The Chinese government has also extended the tax concessions for special sectors and activities operating within the economy as a whole. It is important to realize that the Chinese government has perceived the need to cover tax concessions not only on the choice of location for the foreign-based companies but also their immediate type of business activities. For instance, there is the 70 % tax reduction concession that is allowed for foreign-based companies that have confirmed extensive operations of up to 10 years (Ernst & Young, 2012). Foreign-based companies conducting activities in the Chinese economy are qualified as technologically-advanced entities are allowed to apply for three-year extension request that goes beyond the statutory five year tax concession allowance period. It is safe to postulate that the qualification set forth for such companies are requested mainly in the software-based industry. This is conducted with the sole purpose of transforming China into one of the global leaders in the software production industry. The foreign-based companies operating within the software industry is concerned with Value-Added-Taxes and custom-based taxes as a whole. In consequence, additional levels of tax concessions may be allowed for these companies especially in terms of reduced corporation tax to 15 % only (Ernst & Young, 2012). Other benefits for software-activity based companies include allowance for a shorter depreciation period and a farther increased expense deduction. The efforts to make Chinese economy vast and all-inclusive as well as a developed infrastructure there have been more special tax concessions developed for foreign-based companies involved with activities of port construction and activities conducted in either Hainan and Pudong. Furthermore, the activity-based tax concessions have been expanded to include the fields of airport and railway constructions. These activity-based foreign companies enjoy full tax exemptions for a period of first five years in operations and a farther 50 % tax reduction for the preceding five years (Ernst & Young, 2012). Similarly, the aforementioned tax concessions apply for those activities involving agricultural-like projects. Foreign companies engaged in activities related to Research and Development Centers do enjoy a variety of tax concessions in case they fulfill the Chinese definition of activity-based foreign companies. Such variables as employee level of qualifications, the amount of investment partook, the immediate volume of investment index as well as the quality of the equipment used in the course of the activity form the fundamental platform upon which foreign based companies are evaluated. Accordingly, the level of tax concessions granted to these foreign companies should be associated with the transfer of immediate technological features that have been developed in-house. Significantly, the activity should have allowed associated level of consulting and other activity-based services, the importation of operations equipment that constitute associated models of technologies, distinct accessories and spare parts as well as substantial reduction on activities based on the R&D expenditures (Wall, 1993). On the other hand, those foreign-based companies operating in China under heavy level of industries and plant manufactures are excluded from the aforementioned statutory five year tax concession grant period. Similarly, foreign-based companies operating in the extraction of raw materials also suffer the exclusion tax concession grant. In a bid to counter-offer the exclusions, these companies are allowed to apply for special concessions that are related to authorize write-downs. Additional tax concessions or paybacks in China are allowed in case the foreign-based companies embark on re-investing capital increases or investments into a newer China-based firm. The statutory holds that a payback of about 40 % can be allowed on the basic tax paid that is associated with reinvested profits already claimed(Ernst & Young, 2012). Foreign-based companies that conduct their activities in relation to export or advanced technologies sector can apply for a 100 % refunds. These refunds should be accompanied by substantive level of proof in case the statutory tax exemption is to be affected. Additionally, there are certain factors that are able to attract special levels of attention (Ernst & Young, 2012). This time –related activities include the principle of FIFO in which profits generated within the grant tax concession period are perceived to have been reinvested. In consequence, it should be understood that in the course of the aforementioned periods no taxes should have been paid such that they will qualify for refunds as a result of reinvestment. The foreign-based companies in China are allowed to apply for additional forms of tax concession exemptions in case there is proof of significant capital increments. However, it should be noted that the grant tax exemption is allowed by the Chinese government on the reinvested section of the capital increases. The immediate relevant accounting methodologies are required in order to measure the level of capital increases reinvested into the economy. The resultant utilization of the funds derived from the capital increases is not put into consideration in the course of granting tax exemptions. Notwithstanding, the size of the capital increases that is determined for tax exemptions is dependent upon such variables as at least $ 60M or at least $15M and an additional 50% of the existing stocks present in the course of tax concession(Ernst & Young, 2012). New purchases of products that are manufactured in respect to local Chinese productions are catapulted through tax concession. This is carried out in the form of immense deductions from the immediate taxable base of the resultant costs incurred in acquiring new fixed assets from the foreign-based companies. The tax reduction concession is emphasized on the differences garnered between the immediate current-year tax expense items in exclusion of the tax concession and the previous year tax expense amount. In case of a residual value, it is carried forward for a period between five and seven years (Bishop, Formby and Zheng, 1996). Proposed 2007 Tax Reforms in China There is a tax reform plan that has been proposed to any form of investments in China. In consequence, the proposed tax concession plan is aimed at abolishing the aforementioned concession taxes granted to foreign-based investment companies. This new proposals is aimed at introducing a standard taxation framework that is to be applied to all companies irrespective of their countries of origin. Furthermore, the Chinese Authority has focused on introducing a levy form of tax that will include 10 % on dividends claimed (Ernst & Young, 2012). This proposed tax concession framework will only be affecting companies that set operational base after the period preceding the year 2007. Thus, the existing companies are encourage to maximize the use of the tax concessions as much as possible while those purporting to enter the Chinese economy are advised on checking and analyzing the legal structures of the tax law before commencing with their operations. The Framework of Tax Concessions in Australia Unlike China’s special tax concession considerations for numerous sectors, the Australian tax concession is centered mainly on the resource sector. This biased level of tax concession grants to one sector has proved burdensome in attracting foreign investment to other sectors existing within its economy as a whole. The Australian government allows tax concessions for certain types of assets. The move is meant to provide neutral levels of treating capital allowance assets in respect to their depreciating values. The fundamental rate of depreciation for these assets is matched with their respective economic depreciation framework. The existing Australian tax concessions are currently subjected to such capital assets as tractors, combine harvesters, buses and trucks. Production forms of assets also enjoy this fundamental tax concession (Australia’s Future Tax System, N.d). The current subjection of foreign borrowings for investments in Australia is complex and distortionary in nature. This means that the interest paid on foreign debts should be subjected to immense deductions in respect to the Australian company income tax base. This, in turn, is subjected to the underlying thin capitalization rules. Furthermore, it should be noted that the foreign-based lenders of capital assets may be allowed to pay only interest that withholds tax concessions. The interest with the withhold taxes are applied at standardized rate of 10 % of the underlying cumulative value while the tax concessions is only allowed up to a limit of 3.5 % given the assumption that there are numerous levels of exemptions (Australia’s Future Tax System, N.d). Unlike the Chinese tax concessions that allow foreign based companies certain tax concession, the Australian authority is focused on applying certain taxes irrespective of one’s origin of capital assets. This is perceived by the numerous taxes applied to Australians who lend from non-residence borrowers. The available tax concessions exemptions that are allowed are considered to be minor in nature. This is due to the fact that the subjection to interest withholding tax policy catapults biasness’s in tax concessions. This is evident by the biasness experienced in respect to international debt in dismissal of debt over locally-available equity items (Australia’s Future Tax System, N.d). Thus, the tax exemptions that are availed to the lenders of funds for capital assets create significant distortions. Notably, the inaccessible level of tax concessions even for the local-based lenders of capital assets might limit the manner in which Australian businesses can locate foreign debt capital assets. The resultant effects are lack of competition between financial-based providers that might result to significant reduction of stability within the financial sectors of the economy. A significant instability of the financial sector is a concise variable for possible misallocation of capital assets away from productive uses in favor of less productive activities that attract huge debt financing from within the economy. Accordingly, it is safe to indicate that with introduction and maintenance of interest withholding taxes there has been limited propping-up of multinational businesses in Australia. This is due to the fact that the current interest withholding tax structure promotes thin capitalization of assets for multinationals whose subsidiaries operate within the Australian market. This is depicted by the fundamental fact that these multinational subsidiaries are exposed to excessive payment of interest rates. Thus, with this model, the interest withholding taxes promotes the aforementioned thin capitalization of productive assets and the transfer of pricing regulations. It is thereby encouraged that the Australian government embark on eliminating intermediation of foreign debts and investments. This is achievable by the government ceasing to apply interest withholding taxes to any amount of interest paid to the non-residents. With the favorable policy in hand, it is expected that the proposed exemption of interest withholding tax can cover for imminent deposit-taking entities (Devereux and Griffith, 2003). In consequence, however, the tax exemption should not include the debt that is secured from the corporate treasury of any multi-national firm. This is expected to ensure that the interest withholding tax policy remains subjective to any lender operating in the Australian economy other than the present financial institutions. The tax exemptions will also not affect the insurers whose objective lies in putting their investments in financial instruments rather than availing it as a source for borrowing for capital assets debt financing in the Australian economy. For foreign-based companies, the deposits availed for purchase of capitals assets are subjected to intense compliance and integrity test before recommendation is made. Subsequently, foreign-based companies that operate financial institutions do not have access to existing exemptions for public offered types of managed funds (Australia’s Future Tax System, N.d). For non-profit organizations operating within the Australian economy enjoy a variety of tax concessions that include income tax exemptions, GST credits and exemptions as well as tax deductible gifts. The NFP organizations experience distinctive levels of limits by both the state and the entire federal regulation bodies. Tax concessions are subjected to the NFP organizations operating within the Australian economy because of their immediate highly placed contributions to the overall well-being of the community. The NFP organizations are evident in welfare-based areas of the community, religion sectors and educational services. The non-profit organizations irrespective of their place of origin are established in order to disseminate surpluses in respect to their objectives. These organizations also never involve in activities that promote distribution of profits to their members (Australia’s Future Tax System, N.d). The activity based type of tax concessions applied to this sector of the economy is recognized because these organizations embark on providing both goods and services to public domain and that they are independent of private businesses. These benefits are availed to the public in both direct and indirect methodologies. Second, the organizations are allowed tax exemptions because they provide effective levels of service provision to the entire community given the assumption that it facilitates a cordial and unique coordination with the existing community. Third, it is because the fundamental activities of the non-profit organizations are based on promotion of existing government initiatives within the Australian communities (Australia’s Future Tax System, N.d). It is fair to indicate that the non-for- profit organizations enjoy much support from different fraternities who deliver their immediate support with the availability of tax concessions. Accordingly, the tax concession allowed for these types of organizations are considered to be crucial and long-term sources of financial aid for the existing NFP sector. The aforementioned financial supports are, in turn, used by the organizations to conduct their philanthropic key activities. As earlier noted the Australian government has availed different tax concessions to the non-for-profit organizations. These tax concessions include; tax exemptions, significantly higher GST registration minimum, GST-based credits for inputs, unique capped forms of exemptions as well as FBT. However, it is important to realize that the tax concessions are availed to the NFP organizations depending on the public benefit objective of the non-for-profit entities (Australia’s Future Tax System, N.d). Income-based taxation concessions are allowed for NFP entities in the effort to retain as much untaxed profits as possible. The profits are, in turn, reinvested back to the underlying activities of the non-for profit projects. Despite the immediate decry of the private businesses within the Australian economy of allocating more resources for NFP, they still enjoy the exemptions on the fundamental platform that they are provide vast levels of benefits to the public at large (Clark, 2000). The GST tax concessions that are availed for NFP by the Australian government do not promote elements of competitive neutrality. It is important to realize that NFP commercial-based activities are considered taxable under the efficient GST policies unless valid and verifiable concessions are granted (Australia’s Future Tax System, N.d). Conclusion As seen in the above discussion, it is fair o stipulate that tax concessions between China and Australia are different and unique. For instance, in China tax concessions are applied in respect to tax exemptions, location-based concessions and activity-based concessions. This is depicted by the development of numerous economic zones within the country in order to promote efficient distribution of resources and developments by potential foreign-based companies. However, this is not applicable to foreign –based companies operating in the Australian economy. This is evident by the decision made by the Australian government to disqualify any form of businesses whether locally-based or foreign-based of any tax concessions. Despite the fear that the country will lag behind in respect to infrastructure and technological advances, the tax concessions are applied to non-for-profit organizations mainly because they promote the overall functionality of government projects. NFP are also allowed tax concession because they are considered effective in distributing benefits to the entire public at large. 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