The Eyes on China Monthly

September 2009

Editor´s Note

Welcome to the second issue of the Eyes on China Monthly. This month, we will take a look at three hot topics affecting the Chinese business climate. The theme surrounding each of these is change. The fact that China is developing and changing rapidly is not new. However, it is important to take a closer look at which sectors drive development and also which sectors are specifically designated as such by the government.

China’s main policies adjustments are aimed at re-capturing growth levels previously stunted by the Global Economic Crisis. The stimulation of a gentle recovery has been targeting the strengthening of certain key avenues for growth; loosening regulations for foreign direct investment, revising Value Added Taxation structures towards the promotion of expansion of scales of production and nurturing development of China´s Green renewable energy market.

                                                                                                                      Marco van der Putten, Managing Director, COO

1. Changes to China’s Investment Law for FDI
2. China’s Revised VAT System
3. China’s Green Energy Promotion
4. Upcoming Events

1. Changes in Chinese Investment Law

A series of new rules simplifies the inflow of foreign direct investment (FDI) to a considerable extent. The Ministry of Commerce has introduced the first of the new policies, which allows FDI inflows below US$100m to skip the bureaucracy in Beijing in the National Planning Department or the Technological Renovation Administration and seek approval from the regional commerce authorities. For this reason, representatives from the Ministry of Commerce will soon be dispatched to the Yangtze and Pearls River Deltas in order to undertake a feasibility study.

The reasons for the changes mainly concern the rising number of FDI proposals, which are increasingly flooding the authorities in Beijing, while it has also been mentioned that several sub-laws within the FDI law are similar and could be simplified.

Conversely, in 2007 the National Development and Reform Commission (NDRC) has tightened regulations concerning FDI inflows into the real estate sector, with two notable restrictions. Firstly, FDI is no longer allowed in resorts, golf courses, office buildings, luxury housing and conference centres. This is a rather surprising move, yet the previous categories are in the “restricted” category, which de facto prohibits them.

These developments reflect the jungle of bureaucracy that is China. One could take an educated guess and predict that rapid economic development gradually eases the red tape concerning business in the country. However, it seems that the government is at liberty to implement protectionist measures such as the former.

2. China’s Revised VAT System

There have been many changes in China’s tax system recently. As the country develops economically, at a rather speedy rate, the authorities must adjust tax systems accordingly in order to maintain the most efficient tax system. One of the important changes occurred only at the beginning of this year, namely the shift from a production-based VAT to a consumption-based VAT. This section shall examine the most important changes and the significance for the business climate in China.

1993 — 2008

In 1993, the Chinese government introduced “The Provisional Regulation of the People’s Republic of China on Value Added Tax”. It aims to “unify taxation management, [equalize] the tax burden, [simplify] the tax system and [to guarantee] financial revenue”. This law has solidified China’s value added tax system and has been in force since its inception in 1993. After eleven years, in 2004, the government experimented with a further reform, albeit in only 3 provinces initially. This new tax reform of “increment deduction” is aimed at boosting the stagnating industrial centres in the Northwest of the country. After a successful trial period, the system was expanded to another eight areas in the country, including the earthquake-stricken region of Wenchuan in Sichuan province.

2009

The Chinese government announced in late 2008 that as of January 2009, there would be significant changes to the VAT system in the country. And significant they were indeed: the government completely revamped the country’s VAT tax system throughout all of China, applicable to most industries (the government still noted some exceptions). Therefore, as of 2009, China has successfully made the shift from a production-based VAT to a consumption-based VAT, a change which relieves businesses in all industries in China by approximately RMB 120 billion this year.

So what are the main reforms?

Firstly, companies are now able to claim VAT deduction on some fixed assets that the company bought when the resulting products are sold. This is meant to encourage production and boost the domestic economy.

Secondly, relative thresholds have been discarded and the VAT rate for small taxpayers was reduced from 4% or 6% (depending on the turnover) to a standard 3%.

Thirdly, VAT deductions on imported tools to be used in assembly or contract manufacturing, as well as the compensation trade no longer apply.

Fourthly, VAT paid on the input into the production of consumables, i.e. goods consumed by taxpayers directly is not deductible any longer.

Fifthly, the import tax exemption for “encouraged” industries no longer applies.

Lastly, purchased, domestically-manufactured equipment for companies in “encouraged” industries is no longer VAT deductible.

The Bottom Line

Generally speaking, the introduction of a consumption-based VAT is advantageous to most businesses owing to the huge tax relief. More specifically however, it is important to mention that the absence of a tax relief on imports on domestically-manufactured equipment for encouraged industries could cause liquidity issues in these industries. In conclusion, a consumption-based tax should facilitate the accumulation of fixed assets, in other words it should encourage investment in new equipment and machinery and boost the development of technology.

3. China’s Green Energy Promotion

Policy

A new tax on renewable energies in China is aimed at boosting competitiveness in the sector. In one of many (surprising) moves by the Chinese government to further its “green” policies, the National Energy Administration#8217;s Renewable Energy Department introduced a tax of 1.09RMB per kWh particularly to solar power. The Ministry of Finance promised to earmark funds for greener energy projects, including wind power, solar power stations and energy efficient electrical appliances. The new NEA has been called to existence in mid-2008 and its effectiveness is somewhat disputed. Since the late 1940s, the Chinese government has frequently changed the structure of agencies, which has led to a quasi paralysis in the energy sector. Yet, it is doubtful to what extent the NEA can change this tradition. In China, the state-owned energy companies call the shots and have a political agenda.

Industry and Companies

At present, 98% of China's photovoltaic production is shipped overseas, mainly owing to the fact that it is too expensive for the domestic Chinese market. However, the Chinese government has introduced some ambitious goals for introducing renewable energies.

The cheapest clean energy is wind power, which will also receive the largest chunk of the government’sinvestment package. China has vast potential to adopt wind energy owing to 10.000km of coastline. Furthermore, a string of producers have already begun to produce 3 megawatt (MW) turbines to be installed offshore. Hence, there is ample incentive to implement this technology, not least owing to its cost efficiency.

Even though the government promised a cheap price for solar energy, the actual future price will largely depend on the traditional (and cheaper) alternatives, such as coal and oil.

Despite the new NEA, the big energy companies in China will continue to exert their influence over new energy projects, while making use of the red tape that characterises the energy sector in China.

At the same time, China is aggressively pursuing its green energy agenda. Concretely, this has several notable implications. Firstly, China will probably be the biggest manufacturer for renewable energy products, especially when taking into account future domestic use. Secondly, China will be the biggest user of renewable energy and thirdly, China will simultaneously not cease to be the biggest polluter. It remains to be seen to what extent the country will meet its ambitious targets and when it will scale down its emission of pollutants.

Following Newsletter
October 2009
Upcoming Events
  • Worshop China quo vadis II: China's present situation and future of its global role / The Hague, Sep.28

  • *China Sourcing Fair (Electronics & Components) / Hong Kong, Oct. 12-15

    *China Import & Export Fair / Guangzhou, Oct. 15-19 (Phase I)

    *China International Industrial Fair / Shenzhen, Oct. 15-19

  • For information about more upcoming events across China, please see Eyes on China´s news and events page here.


Contact us

For business establishment, legal as well as accounting and tax advisory services please contact Marco van der Putten in the Beijing office of Eyes on China at mvanderputten@eyesonchina.com or +86 (0) 10 65880899 ext. 808.