China Moves to Lure Multinationals With Provincial Tax Breaks

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By John Butcher

China’s southernmost province of Hainan will soon see significant tax breaks as part of the country’s drive to attract multinationals.

President Xi Jinping announced plans April 13 to create a free trade zone on the island by 2020 and a free trade port by 2025, turning Hainan into a beacon for tax reform. Tax breaks will be a top priority among the proposed changes as China seeks to counter the 14 percentage-point tax cut in the U.S.

Hainan could be used as a testing ground for a wide swath of corporate tax breaks this year, which may then be implemented across the country, practitioners told Bloomberg Tax. Officials have “expressed concerns” about the impact of tax cuts in the U.S., which will likely attract companies to invest there, a lobbyist who spoke on the condition of anonymity told Bloomberg Tax April 24.

“This may be a way of piloting new tax incentives to companies in a fairly contained area,” the lobbyist said. “The Ministry of Finance has indicated that tax reform is at the top of the priority list this year.”

The government’s plan also includes combating tax evasion, modernizing government systems, and promoting foreign investment in China. The tax authority didn’t return a request for comment.

Tax Changes

Tax reforms could include “reducing the corporate income tax rate, reducing the withholding tax on dividends, and value-added tax regime simplification,” said Jake Parker, vice president of China operations at the U.S.-China Business Council in Beijing.

“Reforms like these in the Hainan Free Trade Zone would create a welcome environment for foreign investors,” he told Bloomberg Tax April 24.

Any tax breaks are likely to start being implemented in the third quarter of this year, Hiltung Fong, vice president of Guangzhou Xin Zhong Nan, a tax consulting firm, told Bloomberg Tax April 23.

The government will need to tie the measures to other developments in services and industry to attract multinationals, he said, because the island remains highly underdeveloped compared to many other regions of China.

Some steps officials are already taking include developing the port and starting horse racing and sports lotteries.Hainan earlier this month broadened a visa free travel arrangement for foreign travelers to 59 countries from 26, including the U.K., the U.S., Japan, and New Zealand.

Challenges Remain

While the development of Hainan as a free trade zone is positive for multinationals, it also comes with potential downsides, the lobbyist said. For example, it could affect nearby jurisdictions, the lobbyist said.

They would be “unlikely to uproot,” in the short term, but if incentives were high enough they could be tempted to relocate from places like Hong Kong or Singapore, the lobbyist said.

A major complaint of foreign companies importing to or exporting from China is a lack of uniformity among customs departments at different ports, the lobbyist said, and creating a new free trade port could simply amplify that problem.

To contact the reporter on this story: John Butcher in Beijing at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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