What the Shanghai FTZ tax system might look like
September 18, 2013 | BY
clpstaff &clp articles &Tax breaks may not be enough to lure foreign investors to Shanghai's recently approved pilot free trade zone. The officials in charge of the zone will need to find more innovative ways to attract investors
Following the authorisation of the free trade pilot area (FTPA) on August 30, the market is full of rumours about Shanghai's plan for the Zone, which echoes the central government's financial and industrial reform vision
Lawrence Hu, a tax lawyer of MWE China Law offices in Shanghai, said that leaked comments from officials have indicated only select industries in the FTPA would be granted a reduced 15% corporate income tax (CIT) rate, while others will pay the nationwide unified 25% CIT.
“I think this approach is appropriate. If all companies are given the same tax reduction, it is just like the old days of launching the special economic zones in Shenzhen and Zhuhai. That would be dated,” said Hu.
Leonard Khaw, deputy national tax leader of Deloitte China, agreed that the government will not be giving too many tax incentives because the aim is to establish a new model for Shanghai “to become the first step for inbound investment in China and a pilot location for an open economy”.
|Differences with a special economic zone
There are comparisons between Shanghai's FTPA and Qianhai and Hengqin in southern China – two modern servicse industry cooperation zones established in 2011. A 10% corporate and individual tax deduction in those special zones is seen as a big attraction.
“The nature of reduced tax rate in the two zones in Guangdong is that they want to attract talent from Hong Kong and Macau for human-driven businesses like fund management. So they need to make sure they don't pay higher tax there,” explained Khaw. The CIT levied in Hong Kong is 16.5%; the rate in Macau is no higher than 12%.
“Boldly I would say, tax advantage is an old measure used normally to attract businesses to developing areas, but Shanghai is already a very developed place. It needs other systematic innovation,” Hu said.
Other possible tax benefits include provisional tax payment instalments imposed both on corporates and individuals. Sources suggest that assets gained by land appreciation and option-triggered personal income may not be taxed annually in the FTPA. “It is like the government has provided a free loan to corporates and individuals, because money has time value,” said Hu.
Khaw also noted that the zones in Shanghai and Southern China have different positions. While Qianhai and Hengqin are seen as extended areas for Hong Kong and Macau, Shanghai's FTPA, according to Khaw, has bigger ambitions.
|Opening-up restricted investments
Certain prohibited or highly restricted foreign businesses might be allowed to establish and operate in the FTPA, without complex approval procedures. “It is a bit like Singapore,” Khaw observed. “They are going to take this approach that if you can convince the government your business is good for the industry and the area, you will be permitted entry.” It may also be possible to exchange foreign currencies in the FTPA.
Financial services, especially offshore banking and offshore trading could enjoy great benefits from the policies. Khaw predicted many multinationals might find this area an attractive destination to set up their Asia Pacific headquarters in the future.
|Doing business with the rest of China?
With the official provisions not yet announced, there are many questions about the practicality of this zone. “Although the area is part of China, it has a different system with the rest of China. So here comes the puzzle: if a company sets up in the zone, can it also do business in the rest of the China market?” said Khaw.
The 28.78 square-kilometre FTPA covers four existing bonded areas at the coastal area of Shanghai. Launched in 2005, the bonded areas have already attracted number of companies involved in cross-border trading in this region. “The preferred policies for foreign investment coming in have put those existing companies' future in question,” said Hu.
Entrepreneurs in Shanghai's neighbouring Zhejiang province, which is China's flagship area for manufacturing and international trade, might find the FTPA a great attraction.
“Geographically, Zhejiang is close to Shanghai, so I believe they would be very willing to come into the FTPA and get international exposure,” said Clare Lu, partner of Qinli Law Firm. However, Lu admitted that that it is not yet clear whether domestic businesses will enjoy same preferable terms as foreign investors.
According to official Shanghai Securities News, a drafted official document will come out at the earliest this week and the policies will be in place when the zone is launched later this month.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now