Non-fiscal Attractions

    China’s preferential taxation climate for foreign-funded enterprises has indeed played a positive role in attracting foreign investment and in promoting rapid economic growth. However, preferential treatment is not the decisive factor in a country’s investment environment. As an incentive system, its role is limited, since a foreign investor has more factors to consider when deciding whether to invest in a country.

    Political stability, consistent policies and sound legislation are the most solid protection for the rights and interests of investors, and are preconditions for the investment decision. In addition, an assessment of the investment environment looks at factors such as raw materials, labor force, market, work efficiency, transportation, power supply and telecommunications. Since it adopted the policy of reform and opening-up, China has maintained a stable political situation and provided a safe environment for investors. China has established a relatively complete legal system with respect to foreign investment and has continued to perfect it, providing reliable legal guarantees for foreign investment. The rapidly growing Chinese economy is also providing a fine economic foundation. China’s relatively cheap labor and vast market are also important factors attracting foreign investors.

    Zheng Yibing said, “Although our company’s preferential period will expire in two years’ time, we are optimistic about future development. Compared with developed countries, labor in China is inexpensive, and the rapid growth of the Chinese economy provides a huge market for our products. Therefore, the ending of preferential treatment in taxation will not affect our development plan.”

    Although there is a transition period of five years, preferential taxation treatment for foreign-funded enterprises is being phased out. Even so, foreign investment in China is not in decline. According to statistics released by the Ministry of Commerce, the amount of foreign investment actually used was US $82.658 billion in 2007 and US $92.395 billion in 2008. In 2009, despite the global financial crisis, direct foreign investment of US $90 billion flowed into China.

Call for Fair Play

    Since joining the WTO in 2001, according to the principle of fair competition, China must solve its problem of unfair tax burden. The Urban Maintenance and Construction Tax and Education Surcharge are purpose-specific taxes that go into special governmental funds. Since their enactment more than 20 years ago, they have been levied only on Chinese citizens and domestic enterprises. As of December 1, 2010, these two taxes have been extended to foreign enterprises and foreign nationals, so as to unify the tax burden on both domestic and foreign-funded enterprises, as well as Chinese and foreign individuals. This is fair to all and will promote fair competition.

    According to an official of the Beijing Municipal Local Tax Bureau, the Urban Maintenance and Construction Tax and Education Surcharge are levied on the basis of value-added tax, consumption tax and business tax (product tax, value-added tax and business tax before 1994) actually paid. The Urban Maintenance and Construction Tax is applied at three rates: 7 percent, 5 percent, and 1 percent, according to the location of the taxpayer (city, county or other areas). The Education Surcharge is applied at a unified rate of 3 percent. For instance, an enterprise in Beijing with an annual turnover of RMB 1 million should pay business tax of RMB 70,000, Urban Maintenance and Construction Tax of RMB 4,900, and Education Surcharge of RMB 2,100. The last two items represent only 0.3-0.7 percent of its total turnover, having little impact on the enterprise.

    An official of the Ministry of Finance said that the Urban Maintenance and Construction Tax and Education Surcharge are used specifically for public facilities and education. Any units and individuals enjoying the use of public facilities and education services should pay such taxes. Therefore, foreign-funded enterprises and domestic enterprises have the same obligations.

    With the unification of taxation on domestic and foreign-funded enterprises, the latter lose some preferential treatment, but this will spur them to reconsider and perhaps adjust their business mode, investment structure, selection of investment location, and financing tactics. Investors now will pay more attention to the natural resources, local environment and talent pool of the areas in which they invest. Thus, making strategic and profitable investments will become another driver of industrial upgrading. For domestic enterprises, this is conducive to building their competitive strength, and will help reduce the incidence of pseudo foreign-funded enterprises in which funds are transferred abroad and returned to China as “foreign investment” so as to enjoy a preferential tax regime. It will benefit the building of a fair market environment, and conforms to the basic principles of the market economy.