29April, 2015
Local governments around China have often provided incentives to attract foreign investors (including MNCs). China's central government, however, has decided to abolish many such local incentives. Foreign investors and their foreign investment enterprises (FIEs) may need contingency plans to deal with the loss of incentives.
The State Council of China issued its Circular on Cleaning up and Standardizing Tax Incentives and Other Preferential Policies ("Circular 62") on 27 November 2014 requiring all provinces in China to identify illegitimate preferential policies by the end of March 2015. The Ministry of Finance ("MOF") of China then issued itsCircular on Implementing the Circular 62 ("Circular 415") on 22 December 2014 setting out detailed requirements and procedures for the cancellation of the local preferential policies. In the Circular on Further Strengthening Management of Administrative Charges and Governmental Funds issued on 28 February 2015, the MOF stressed the requirement to suspend and revoke all illegitimate preferential policies in respect of administrative charges and governmental funds.
Scope And Requirements
Circulars 62 and 415 set out various requirements for particular types of preferential policies:
- Tax incentives
- Scope: All tax incentives, except for those set out under the national tax laws and regulations or in accordance with special authority delegated under the Regional Ethnic Autonomy Law.
- Requirement: No local government may formulate tax incentives, except pursuant to national law or as approved by the State Council.
- Preferential policies on fiscal revenues
- Scope: Administrative charges, governmental funds, land premiums, state-owned asset transfer prices, social security contributions, and similar revenue streams.
- Requirement: All fiscal revenue must be collected in accordance with the existing policies; no other exemption, deduction, deferral, or transfer at a lower price is allowed.
- Preferential policies on fiscal expenditures
- Scope: Refunds after collection, financial rewards and subsidies, reductions or exemption of land premiums by granting financial subsidies and other fiscal preferential policies linked with the amount of paid taxes or non-tax charges, payment of social security contributions on behalf of enterprises, reductions of the utilities fees, rebates on fiscal revenues and other non-payment-linked fiscal preferential policies.
- Requirement: No preferential fiscal policy may be implemented without the approval of the State Council; all existing payment-linked preferential fiscal policies must be cancelled immediately, while non-payment-linked preferential fiscal policies can be phased out.
In addition, Circulars 62 and 415 emphasize that preferential policies granted via contracts, agreements, memorandums, meeting minutes and "case-by-case" replies to a single enterprise from any governmental authority may also be reviewed for compliance with law. If carried out, such reviews could have a significant impact on existing foreign investment.
Suspension And Revocation
All preferential policies that violate the existing law should have been suspended from implementation from 1 December 2014, following which they are required to be revoked. Preferential policies that the local governments wish to retain and which do not violate existing law must be submitted to the State Council along with reasons for retention and a proposed validity period. If the State Council does not grant approval, the non-violating preferential policies must be revoked.
Also under Circulars 62 and 145, lists of local preferential policies must be formed or updated and published on the website of the relevant authority. A whistleblowing system (including a hotline and online whistleblowing) will be established to help root out illegitimate preferential policies.
Implementation To Date
Since promulgation of Circulars 62 and 415, various local governments have taken action, including revocation of:
- economic incentives for investment in Baishan Town in Changping District of Beijing;
- tax incentives on equity investment funds in partnership in Shenzhen;
- 136 agreements and contracts, and 6 meeting minutes that set out illegitimate preferential policies in Guigang in Guangxi Province; and
- 18 kinds of tax incentives in the industrial park of Ordos in Inner Mongolia Autonomous Region.
Foreign investors have raised particular concerns about losing preferential policies, especially preferential policies agreed bilaterally between the investor and the local government. In part, this is because Circulars 62 and 415 do not provide for compensation for cancelled policies.
In response to some Taiwanese investors, an officer of the Association for Relations across the Taiwan Straits has stated that compensation may be granted. While there is no reported case of any compensation having been granted, various investors have already been affected. Foxconn, for example, will reportedly lose some of its preferential policies granted in Zhengzhou, despite meetings between the chairman of Foxconn and the major of Zhengzhou.
Takeaway Points
Enterprises and investors should check which preferential policies they are enjoying (if any), and confirm against Circulars 62 and 415 whether they are likely to be revoked. Contingency plans may be needed.
Local governments have already reported their preferential policies to the State Council (the deadline was 31 March 2015). The clock is therefore ticking on preferential policies that may need to be revoked. Enterprises and investors should actively coordinate with local governments to minimize the impact on business operations.
For further information, please contact:
Nanda Lau, Partner, Herbert Smith Freehills
nanda.lau@hsf.com
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
Ning Shen, Herbert Smith Freehills
ning.shen@hsf.com
