Abstract
In order to understand the relationship between Chinese tax incentives and the WTO’s subsidy rules, this chapter has two parts. The first part introduces the chronological evolution of Chinese tax incentives and the background for discussing China’s attitude towards tax competition. It therefore establishes an internal benchmark to evaluate China’s granting of tax incentives. The second part focuses on current direct and value added tax (VAT) incentives that are specific according to the criteria of the subsidy rules in the WTO and EU State aid law. The overview of the present tax incentives prepares for the following testing and understanding of the interactions with the international benchmark.
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Notes
- 1.
Law of the People’s Republic of China on Enterprise Income Tax, March 16, 2007, Law of the People’s Republic of China on Enterprise Income Tax, March 16, 2007, by the National People’s Congress (NPC). For official English translation, see <http://www.npc.gov.cn/englishnpc/Law/2009-02/20/content_1471133.htm>.
- 2.
Excluding Hong Kong, Macau and Taiwan, there are 4 centrally administered cities (Beijing, Shanghai, Tianjin, and Chongqing), 22 provinces and 5 ethnic autonomous regions (Tibet, Xinjiang, Guangxi, Ningxia and Inner Mongolia).
- 3.
- 4.
Ibid.
- 5.
Chinese pin yin.
- 6.
The National People’s Congress (NPC) is the supreme organ of state power in China. It is composed of NPC deputies who are elected according to law from 35 electoral units from the people’s congress of provinces, autonomous regions, municipalities directly under the central government, the People’s Liberation Army, the deputy election council of the Hong Kong Special Administration Region and the Taiwan compatriots’ consultation election council. The NPC has the power to amend the Constitution and oversee its enforcement, to enact and amend basic laws governing criminal offences, civil affairs, state organs and other matters, to elect and appoint members to central state organs, and to determine major state issues. The NPC Standing Committee is the permanent body of the NPC. It normally meets once every two months, and is responsible to the NPC and reports to it on its work. It has legislative power, supervisory power, the power to decide upon major state issues, and the power to appoint and remove from office members of state organs. See Article 7, 8, 9 of the Legislation Law of the People’s Republic of China (LL). See also the NPC’s official website <http://www.npc.gov.cn/englishnpc/Organization/node_2846.htm> accessed 24 November 2015.
- 7.
Chinese pin yin.
- 8.
The State Council is China’s central government, which is the executive body of the supreme organ of state power and also the supreme organ of State administration. See Article 65, 66, 67, and 68 of the LL. For the functions of the State Council, see <http://www.npc.gov.cn/englishnpc/stateStructure/2007-12/06/content_1382098.htm> accessed 24 November 2015.
- 9.
- 10.
Legislation Law of the People’s Republic of China (2015 Amendment) (LL), by the NPC, 15 March 2015. See Cui (2011b) 75–77.
- 11.
Article 87 of the LL.
- 12.
Article 88 of the LL.
- 13.
Article 91 of the LL.
- 14.
According to the Merriam-Webster dictionary, socialism means “any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods”; capitalism means “an economic system characterized by private corporate ownership of capital goods, by investments that are determined by private decision and by prices, production, and the distribution of goods that are determined mainly by competition in a free market”. See Merriam-Webster online dictionary, <http://beta.merriam-webster.com> accessed 20 November 2015.
- 15.
Before 1949, the history of China can be divided into ancient China, imperial China, and modern China. Ancient China covers the time from 2070 to 221 BC before the Qin dynasty, which mainly includes Three Dynasties, Xia dynasty, Shang dynasty, and Zhou dynasty; Imperial China is from the time of Qin dynasty starting in 211 BC to the end of the Qing dynasty in 1911; Modern China refers to the establishment of the Republic of China in 1912 to the establishment of the PRC in 1949. See Huang (1988), Loewe and Shaughnessy (1999), Rossabi (2013), and Zhuoyun et al. (2012).
- 16.
Following the international background of the Cold War, China signed a Treaty of Friendship and Assistance with the Soviet Union to receive technology transfers from the Soviet Union to stimulate the industrialization of China. The Cold War was a state of political and military tension after World War II between powers in the Western countries (led by the US and its allies) and powers in the Eastern countries (led by the former Soviet Union and its allies). See Leffler and Westad (2010) and Wong (1997) 179–190.
- 17.
- 18.
Chai (1997) 3.
- 19.
Jin et al. (2005) 1719–1723.
- 20.
Wong (1994).
- 21.
Li (1991) 14.
- 22.
Vogel (2011) 221–226.
- 23.
The 1970s witnessed impressive economic successes of the regions of Eastern Asian, such as South Korea, Taiwan, Hong Kong, and Singapore.
- 24.
Chai (1997) 139.
- 25.
Yasheng Huang, ‘The Benefits of FDI in a Transitional Economy: the Case of China’ in OECD (2002).
- 26.
From the perspective of tax competition, if China failed to build similar preferential tax regimes, China would be in a disadvantaged position compared to these regions. Ibid.
- 27.
- 28.
Jiang (1997) 557–559.
- 29.
Issued by the NPC on 1 July 1979.
- 30.
Issued by the NPC on 13 December 1981.
- 31.
The SEZs include Shenzhen, Zhuhai, Shanto in Guangdong province, and Xiamen in Fujian province. The main tax incentives were reduced tax rate, tax holidays, and tax exemptions.
- 32.
From north to the south, they include Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. See GuoFa [1984] No. 161, Provisional Regulations for Special Economic Zones and 14 Coastal Cities on Reduction and Exemption of Enterprises Income Tax and Consolidated Industrial and Commercial Tax, by the State Council, 15 November 1984 (expired).
- 33.
For instance, Article 1 of the Provisional Regulations for Special Economic Zones and 14 Coastal Cities on Reduction and Exemption of Enterprises Income Tax and Consolidated Industrial and Commercial Tax by the State Council of the People’s Republic of China: “a 15 percent preferential enterprise income tax shall be levied on the income derived from production, business and other sources by any joint venture, cooperative enterprises or wholly foreign-owned enterprises, for enterprises engaged in industry, communications and transport, agriculture, forestry and livestock breeding, which have a contract life of 10 years or longer, a two-year tax holiday commencing from the first profit-making year is granted followed by a 50 percent reduction from the third to the fifth year, upon application and approval by the special zone tax authorities”. See by Halkyard and Ren (2010) 6–7.
- 34.
Export-oriented enterprises were defined as “enterprises that produce goods mainly (over 70%) for export and maintain a net positive foreign exchange balance at the end of the year”; technologically-advanced enterprises were “enterprises which, with advanced technology provided by foreign investors, are able to develop new products, or upgrade existing products, and therefore earn foreign exchange through exports or import substitution”. See footnotes 32 and 33, cited by Li (2007) 8 Florida Tax Review 675–676.
- 35.
Shen et al. (2012) 9.
- 36.
There were six forms of contracts: incremental contracting, basic proportional sharing, proportional sharing, and incremental sharing, remittance incremental contract, fixed remittance, fixed subsidy. See Ming and Quanhou (2004). Paper presented at the International Symposium on Fiscal Decentralization in Asia Revisited. http://www.econ.hit-u.ac.jp/~kokyo/APPPsympo04/China.pdf. 2004.
- 37.
Cui (2011a) 461.
- 38.
Ibid.
- 39.
Decision on Issues Concerning the Establishment of a Socialist Market Economic Structure, the third plenary session of the 14th central committee of the Chinese Communist Party (CCP), 14 November 1993.
- 40.
As Deng Xiaoping, the second generation leader of China and chief architect of the Reform and Opening Policy, pointed out, socialism was not to be judged according to whether it was based on a plan or the market but on whether or not it can expand and develop the productive forces and raise people’s living standard. He also explained “we should not hesitate to draw on the achievements of all cultures and to learn from other countries, including the developed capitalist countries, all advanced methods of operation and techniques of management that reflect the laws governing modern socialized production”. Xiaoping (1994) 361–362.
- 41.
Qian and Wu (2003) 48.
- 42.
Ibid.
- 43.
Halkyard and Ren (2010) 4–5.
- 44.
The nominal tax rate was 33% (30% national tax and 3% local tax), but FIEs located in SEZs and some other special areas were taxed at a reduced rate of 15%. See Article 5 and Article 7 of the FEITL.
- 45.
Law of the People’s Republic of China Concerning the Administration of Tax Collection (expired), issued by the Standing Committee of the National People’s Congress in 1992. It was amended in 1995, 2001, and 2013.
- 46.
Article 1 of Interim Provisions of the Ministry of Finance of the People’s Republic of China Concerning Reduction and Exemption of Enterprise Income Tax and Consolidated Industrial and Commercial Tax for the Encouragement of Foreign Investment in China’s Open Coastal Economic Areas (expired), the Ministry of Finance [1988] No. 91.
- 47.
- 48.
Cui (2011a) 461.
- 49.
Shen et al. (2012) 9.
- 50.
Guofa [1993] No. 85, Decision Regarding the Implementation of the Tax Sharing System of Fiscal Management (the 1993 Decision), by the State Council, 15 December 1993.
- 51.
Ibid. For a detailed introduction to the content of the tax division, see Cui (2011a) 468.
- 52.
Article 3 and Article 84, Law of the People’s Republic of China on the Administration of Tax Collection (LATC) (2015 Amendment), by the NPC, 24 April 2015. The Articles explicitly forbid the unauthorized tax reduction, exemption, refund, or non-collection or cessation of taxes; otherwise, the responsible governmental organs, entities or individuals shall be liable.
- 53.
Tax incentives expanded with the extension of the economic and technological development zones (ETDZs) to inland regions. See Zeng (2010) 8–16.
- 54.
Lai (2002) 445–446.
- 55.
Ibid.
- 56.
Shih (2004) 427–451.
- 57.
Lai (2002) 445–446.
- 58.
Western regions include Chongqing, Sichuan, Guizhou, Yunnan, Shanxi, Gansu, Ningxia, Qinghai, Xizang, Neimenggu, Guangxi, Xinjiang. Western regions are underdeveloped compared to eastern and central China. Most ethnic minorities live in these areas, which accounts for 56% of the nation’s ethnic minorities. See ibid. 445–446.
- 59.
Guofa [2000] No. 33, Circular of the State Council Concerning Several Policies on Carrying out the Development of China’s Vast Western Regions, by the State Council, 26 December 2000.
- 60.
The major tax incentives are reduced tax rates and tax exemptions. See Caishui [2001] No. 202, Notice on Tax Incentives Issues Related to the Western Development, by the MoF, the SAT, and the General Administration of Customs, 30 December 2001 (expired); Caishui [2002] No. 47, Notice on the Implementation of the Relevant Taxation Policies for the Western Development, by the SAT, 5 October 2002 (expired).
- 61.
The Protocol of China’s Accession to the WTO. See https://www.wto.org/english/thewto_e/acc_e/completeacc_e.htm#chn.
- 62.
- 63.
Chen (2009b) 93–94 and Li (2007b) 522. According to the 2005 Foreign Direct Investment Confidence Index (Kearney 2005), China was ranked as the most attractive FDI location in the world, and it maintained this position until 2007. The 2005 Foreign Direct Investment Confidence Index, A.T. Kearney Global Business Policy Council, 2005, cited by Chen (2009b) 93–94.
- 64.
Law of the People’s Republic of China on Enterprise Income Tax, by the NPC, 16 March 2007. For official English translation, see http://www.npc.gov.cn/englishnpc/Law/2009-02/20/content_1471133.htm.
- 65.
The Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises and its implementation rules were repealed by the new EIT law.
- 66.
In order to ease the fear of foreign investors who previously enjoyed preferential tax treatment, the new law allowed existing FEs and FIEs to continue to enjoy the tax preferences until 2013 or until the specified period was over. See Article 57 of the EIT Law.
- 67.
Li (2007) 669–712.
- 68.
Article 1, Constitution of the People’s Republic of China (2004 Amendment).
- 69.
Article 6, Constitution of the People’s Republic of China (2004 Amendment): “in the primary stage of socialism, the State upholds the basic economic system in which the public ownership is dominant and diverse forms of ownership develop side by side and keeps to the distribution system in which distribution according to work is dominant and diverse modes of distribution coexist”.
- 70.
Based on this theory, productive forces are facilities for creating or making usable material goods, facilities that are necessary to meet the physical demands of the production process. Productive relations are “relations of effective power over persons and productive forces, which govern processes of production”. The level of development of the productive forces is the determining factor for the development of society. The relationship between productive forces and productive relations is mutually active. Productive forces determine the level of productive relations, while productive relations react to productive forces. Marx et al. (2001) 32, 56, and 63.
- 71.
Cao (2009) 48–51.
- 72.
The “gradualist” approach means a step-by-step transition compared to the “big bang” approach adopted by the former Soviet Union and Eastern European countries. It entails changing all elements of the centrally-planned economy as quickly as possible into a capitalist economy by the privatization of property and enterprises, freeing prices by market forces, eliminating monopolies, fostering market competition, and opening the market to the outside world, etc. For the distinction between the “big bang” approach and the “gradualist’ approach, see Whyte (2009).
- 73.
Qian and Wu (2003) 48–61.
- 74.
Bell et al. (1993) 73–74.
- 75.
See the efficiency requirement in the market in Sect. 2.2.1 in Chap. 2.
- 76.
- 77.
At the Third Plenary Session of the 18th Central Committee of the Chinese Communist Party (CCP) on 12 November 2013, the Committee approved the Decision of the Central Committee of the CCP on Some Major Issues Concerning Comprehensively Deepening the Reform (the 2013 Decision). The 2013 Decision announced, “let the market decide the allocation of resources, the primary task is to build an open and unified market with orderly competition”. For a non-official English version of the 2013 Decision, see the English version of the 2013 Decision, China Daily (18 November 2013) <http://language.chinadaily.com.cn/news/2013-11/18/content_17112855.htm> accessed 10 March 2016.
- 78.
Szamosszegi et al. (2011) 33–34.
- 79.
Absolute control normally means the majority of ownership, but strong control means 30 to 50 percent shares of ownership. Szamosszegi et al. (2011) 33.
- 80.
Ibid. 33–34.
- 81.
For foreign investment, a list of market access to different industries can be found in the Catalogue for the Guidance of Foreign Invested Enterprises (amended in 2015). There are three categories of foreign investment: encouraged, restricted, and forbidden. See Sect. 4.6.2.2 in this chapter.
- 82.
Sobel (2004) 21–22.
- 83.
Law of the People’s Republic of China on the Administration of Tax Collection (2015 Amendment) (LATC), by the NPC, 24 April 2015.
- 84.
Anti-Unfair Competition Law of the People’s Republic of China (AUCL), by the NPC, 2 September 1993.
- 85.
Article 1 of AUCL: this law is drawn up in order to safeguard the healthy development of the socialist market economy, encourage and protect fair market competition, prohibit unfair competition, safeguard the legal rights and interests of managers.
- 86.
Article 1 of LATC: this law has been formulated with a view to strengthening the administration of tax collection, regulating tax collection and payment, guaranteeing the tax revenue of the State, protecting the legitimate rights and interests of taxpayers and promoting economic and social development. Article 3 of LATC: no governmental organs, entities or individuals may be permitted without authorization, by violating laws or administrative regulations, to make decisions regarding the collection of tax or the cessation thereof, the reduction, exemption or refund of tax, the payment of tax dodged or overdue or decisions in conflict with other tax laws or administrative regulations.
- 87.
The 2013 Decision confirmed that it was necessary to improve legislation, clarify powers and responsibilities, reform the taxation system, stabilize tax burdens, have transparent budgets, increase efficiency, and establish a modern fiscal system to stimulate the initiative of both the central and local governments. See V of the 2013 Decision. The fiscal reform is accompanied by a balance between the role of the government and that of the market. It is important to let the market play a decisive role in allocating resources. See I (3) of the 2013 Decision.
- 88.
V (18) of the 2013 Decision. As explained by the Minister of Finance, the current tax incentives, especially regional tax incentives were excessive. Some local governments discretionally render tax relieves through disguised methods, which has seriously affected the State’s tax regulation and fair competition in the market. They must be cleaned up and consolidated. No new regional tax incentives would be approved in principle because they will be regulated uniformly by tax laws and regulations. Discretionary tax incentives were strictly forbidden. See Lou Jiwei, Eliminate the Drawbacks of the Fiscal System, Establish a Modern Fiscal System, Xinhua News (21 November 2013) <http://www.MoF.gov.cn/zhengwuxinxi/caizhengxinwen/201311/t20131121_1014330.html> accessed 21 August 2014.
- 89.
Guofa [2014] No. 62, Notice on the Clearance of Tax and Other Incentives, by the State Council, 27 November 2014.
- 90.
Ibid.
- 91.
The SAT notice [2015] No. 73, Notice on the Issuing of the Code Directory of Tax Incentives, by the SAT, 29 October 2015; the SAT notice [2015] No. 76, Notice on the Issuing of Administrative Regulation of Corporate Tax Incentives, by the SAT, 12 November 2015.
- 92.
See Sect. 3.2.4.2 of Chap. 3.
- 93.
Dodge (2004–2005) 399–461.
- 94.
Vanistendael (2011), 426.
- 95.
Athar Hussain and Juzhong Zhuang, Enterprise Taxation and Transition to a Market Economy, in Brean (2013).
- 96.
The SAT notice [2015] No. 73, Notice on the Issuing of the Code Directory of Tax Incentives, by the SAT, 29 October 2015; the SAT notice [2015] No. 76, Notice on the Issuing of Administrative Regulation of Corporate Tax Incentives, by the SAT, 12 November 2015.
- 97.
Enterprise established in China means an enterprise, non-profit entity, social organization or other type of entity that derives income and is created in accordance with Chinese laws or administrative regulations. See Article 3 of the EIT Law. Place of effective management refers to the place where the substantial and overall management and control of the production and business operations, personnel, finances, assets and other matters are executed. See Article 4 of the EIT Law. For a further explanation, see Article 4 and 5, Regulation on the Implementation of the Enterprise Income Tax Law (RIEITL), by the State Council, 6 December 2007. For more introduction, see Li and Huang (2008) 276–277.
- 98.
Article 3 of the EIT Law.
- 99.
Other types of income include income derived from assets, amounts payable that cannot be settled, collections from accounts receivable that were previously written off as bad debts, income from debt-restructuring, subsidies, damages for breach of contract, exchange gains, etc. See Article 22 of the RIEITL.
- 100.
Article 26 of the EIT Law.
- 101.
Li and Huang (2008) 279.
- 102.
Li (2007) 521–522.
- 103.
Ibid. In 2007, the average enterprise income tax rate was 28.6% in 159 countries around the world and 26.7% in China’s 18 neighboring countries. Thus, the rate of 25% was regarded as conducive to enhancing enterprise competitiveness and attracting foreign investment. See Jin Renqing, former Minister of Finance, Explanation on Draft Enterprise income Tax Law, the full text of the speech in English is available at <www.china-embassy.org/eng/gyzg/t302221.htm> accessed 26 November 2015.
- 104.
Halkyard and Linghui (2010) 35–59.
- 105.
Li and Huang (2008) 276–277.
- 106.
Jin Renqing, former Minister of Finance, Explanation on Draft Enterprise income Tax Law, the full text of the speech in English is available at <www.china-embassy.org/eng/gyzg/t302221.htm> accessed 26 November 2015.
- 107.
Article 11, Guokefahuo [2016] No. 32, Administrative Measures for Determination of High-tech Enterprises, issued by the Ministry of Science and Technology, the MoF, and the SAT, 29 January 2016 (the 2016 Guidelines). The general conditions: (1) the enterprise must have been registered for over one year; (2) products (services) are within the scope prescribed in the high-tech Sectors Eligible for Key Support from the State; (3) the proportion of R&D expenditures to sales revenue is not lower than a prescribed ratio; (4) the proportion of the revenue derived from high-tech products (services) to the total revenue of the enterprise is not lower than a prescribed ratio; (5) the proportion of the number of research and development personnel to the number of all employees is not lower than a prescribed ratio, etc.
- 108.
It was confirmed in the 2016 Guidelines for Identification of High-tech Enterprises that a high-tech enterprise identified under the Guidelines may apply for tax incentives according to the EIT Law, the RIEITL, the Law on the Administration of Tax Collection (LACT), and the detailed rules on the Implementation of the Law on the Administration of Tax Collection. See Article 4 of the 2016 Guidelines. See also Caishui [2010] No. 111, Notice on Related Corporate Income Tax Issues of Resident Enterprise’s Technology Transfer, issued by the MoF and the SAT, 31 December 2010.
- 109.
Detailed rules can be found in Guoshuifa [2008] No. 16, the Administration Guidelines for Tax Deductions for Enterprise’s R&D Expenses (Tentative), issued by the SAT, 10 December 2008.
- 110.
Li and Huang (2008) 276–277.
- 111.
The SAT notice [2015] No. 76, Notice on the Issuing of Administrative Regulation of Corporate Tax Incentives, by the SAT, 12 November 2015.
- 112.
The Catalogue for the Guidance of Foreign Investment Enterprises (amended in 2015), http://www.sdpc.gov.cn/zcfb/zcfbl/201503/t20150313_667332.html.
- 113.
Guofa [2011] No. 4, Notice on the Issuance of Policies on the Further Encouragement on Software Industry and Integrated Circuit Industry, by the State Council, 28 January 2011; Caishui [2012] No. 27, Notice on Enterprise Income Tax Policy for the Further Encouragement on Software Industry and Integrated Circuit Industry, by the MoF and the SAT, 20 April 2012; Caishui [2015] No. 6, Notice on the Further Encouragement on Software Industry and Integrated Circuit Industry, by the MoF, the SAT, National Development and Reform Commission, and Ministry of Industry and Information Technology, 9 February 2015.
- 114.
Ibid.
- 115.
Official answers of the MoF and the SAT to journalists’ questions on the enterprise income tax incentives for SLEs, (15 September 2015) <http://www.chinatax.gov.cn/n810219/n810724/c1808384/content.html> accessed 10 December 2015.
- 116.
Article 92 and 93 of the RIEITL. Conditions for enterprises to be identified as SLEs: (1) for industrial enterprises, the taxable income for the year shall not exceed RMB 300,000, total employees shall not exceed 100, and total assets shall not exceed RMB 30 million; (2) for all other enterprises, the taxable income for the year shall not exceed RMB 300,000, total employees shall not exceed 80, and total assets shall not exceed RMB 10 million.
- 117.
The degree of the incentive is expanding in the sense that for SLEs whose annual income is between 200,000 and 300,000 RMB, they enjoy the same tax treatment as those enterprises whose annual income is lower than 200,000 RMB. See Caishui [2015] No. 34, Notice on Issues Related to Enterprise Income Tax Incentives for Small Low-profit Enterprises, by the MoF and the SAT, 13 March 2015; Caishui [2015] No. 99, Notice the Further Expansion of Enterprise Income Tax Incentives for Small and Low-profit Enterprises, by the MoF and the SAT, 2 September 2015.
- 118.
Caishui [2011] No. 117, Notice on issues Related to Enterprise Income Tax Incentives for Small Low-profit Enterprises, by the MoF and the SAT, 29 November 2011.
- 119.
Caishui [2010] No. 110, Notice on Value Added Tax, Business Tax, and Enterprise Income Tax Policies of the Promotion of Energy-saving Services Industries, by the MoF and the SAT, 30 December 2010. The eligibility includes the enterprise must be an independent legal entity with a registered capital of no less than one million Yuan and can provide diagnostic energy situation, energy project design, financing, renovation, operational management, personal training and other services, etc.
- 120.
Ibid.
- 121.
Wu (2014) 57–58.
- 122.
Dreyer (1976) 377.
- 123.
Article 94 of the RIEITL. See also the Law of the People’s Republic of China on Regional National Autonomy (2001 Amendment), by the Standing Committee of the NPC, 28 February 2001.
- 124.
Article 4, Constitution of the People’s Republic of China (2004 Amendment).
- 125.
Constitution guarantees that among the chairman and vice-chairman of the standing committee of the people’s congress of an autonomous region, one or more citizens of the nationality or nationalities shall exercise regional autonomy in the area concerned and the administrative head of an autonomous region shall also be a member of the nationality, or of one of the nationalities, exercising regional autonomy. Moreover, the autonomous authorities exercise the same functions and powers of local organs of State, but within the limits of their authority as prescribed by the Constitution. See Article 113 and 114, Constitution of the People’s Republic of China (2004 Amendment).
- 126.
National minorities have the right to use and develop their own languages and freedom to preserve their own customs. In autonomous regions, court hearings should be conducted in their native spoken and written languages. See Article 134, Constitution of the People’s Republic of China (2004 Amendment).
- 127.
Article 117, Constitution of the People’s Republic of China (2004 Amendment).
- 128.
Article 29 of the EIT Law.
- 129.
Article 122, Constitution of the People’s Republic of China (2004 Amendment).
- 130.
Wu (2014).
- 131.
The Qin dynasty was the first imperial dynasty of China, lasting from 221 to 206 BC. It was formed by the state of Qin who had conquered the other six states. Rossabi (2014) 59.
- 132.
Ibid.
- 133.
Dreyer (1976).
- 134.
Mackerras (1994) 150–153.
- 135.
Tax reductions or exemptions decided on by an autonomous prefecture or county shall be subject to approval by the people’s government of a province, autonomous region or municipality directly under the central government. See Article 29 of the EIT Law.
- 136.
Due to the opening process of China to the world economy, the eastern coastal region develops faster than the central and western regions. There is huge regional disparity in China. All the autonomous regions are located in the western or central part of China, thus are less developed even after the Reform and Opening in 1978.
- 137.
Halkyard and Linghui (2010) 28.
- 138.
The average GDP of western regions increased from 1.8728 trillion Yuan to 5.8257 trillion Yuan from 2001 to 2008, making the average annual growth rate 12%. See China Statistical Yearbook 2001 and 2008, cited by Xiao (2012) 87 (in Chinese).
- 139.
Caishui [2011] No. 58, Notice of Tax Policy Issues Regarding Further Implementation of the Western Development Strategy, by the MoF, the General Administration of Customs (GAC), and the SAT, July 27, 2011.
- 140.
- 141.
To be qualified for the tax incentive, the main business income of the enterprise shall be more than 70% of the enterprise’s overall annual income. The State-encouraged industries are included in Catalog of Western Region Encouraged Industries. See Article 2 of the Notice of Tax Policy Issues Regarding Further Implementation of the Western Development Strategy, by the MoF, the GAC, and the SAT, July 27, 2011.
- 142.
Article 4, ibid.
- 143.
- 144.
Zhang and Zou (2012).
- 145.
Hengqin is an island located at Zhuhai city in the Guangdong province, which is next to Macau. On 14 August 2009, the State Council approved the General Development Plan of Hengqin to explore a new model of cooperation between Guangdong, Macau, and Hong Kong; Pingtan is also an island in the Fujian province, which is the closest part of Mainland China to Taiwan. Its construction and development will promote the communication and cooperation between Mainland China and Taiwan. The National Development and Reform Commission issued the Overall Development Plan of Pingtan Comprehensive Experimental Zone in November 2011; Qianhai, located in Shenzhen SEZ, is close to Hong Kong and is also a combination point for Guangdong-Shenzhen-Hong Kong development area. In 2012, the State Council approved the proposal to further develop the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, See Guohan [2012] No. 58, Reply of the State Council on the Relevant Policies Supporting the Development and Opening-up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, by the State Council, 27 June 2012.
- 146.
It is a constitutional principle formulated by Deng Xiaoping. He suggested that there would be only one China, but distinct Chinese regions such as Hong Kong, Macao, and Taiwan could retain their own capitalist economic and political systems, while the rest of China uses the socialist system.
- 147.
Guohan [2012] No. 58, Reply of the State Council on the Relevant Policies Supporting the Development and Opening-up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, by the State Council, 27 June 2012.
- 148.
Taiwan has been separated for the mainland since 1949, but the PRC intends to implement the policy of “one country, two systems” to Taiwan as well. MacFarquhar and Fairbank (1991).
- 149.
Caishui [2014] No. 26, Notice on Enterprise Income Tax Incentives and Catalogue for Guangdong Hengqin New District, Pingtan Comprehensive Experimental Zones, and Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, by the MoF and the SAT, 7 May 2014.
- 150.
There are different forms of free trade zones, such as foreign trade zones, duty free zones, export processing zones, and special economic zones, etc. See Torres (2007).
- 151.
Shanghai FTZ was the first FTZ in China, which was established in 2013. In 2015, the central government announced the approval of the other three FTZs, which were located in the province of Guangdong, Fujian, and Tianjin municipality. Guangdong FTZ contains the area of Hengqin CEZ, and Fujian FTZ contains the area of Pingtan CEZ. See Guofa [2013] No. 38, Notice on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 18 September 2013; Guofa [2015] No. 18, Notice on the Framework Plan for the China (Guangdong) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 19, Notice on the Framework Plan for the China (Tianjin) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 20, Notice on the Framework Plan for the China (Fujian) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 21, Notice on the Further Implementation of the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 8 April 2015.
- 152.
For instance, as stated in the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, the overall objectives of the FTZ were that “the FTZ shall accelerate the transformation of government functions, actively promote the expansion of opening-up of the service industry and reform of the foreign investment management system, vigorously develop the central economy and new trade forms, accelerate the exploration of convertibility under capital accounts and full opening-up of the financial service industry, explore the establishment of a categorized regulation mode based on the status of goods, strive to form a policy support system promoting investment and innovation, pay particular attention to cultivating an internationalized and regulated business environment, strive to become a pilot free trade zone meeting international standards and featuring investment and trade facilitation, free convertibility of currencies, efficient and convenient regulation, and satisfactory legal environment, and explore new ideas and new channels for furthering opening-up and reform in China and better serving the whole country.” Guofa [2013] No. 38, Notice on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 18 September 2013.
- 153.
Wan et al. (2014).
- 154.
Ibid.
- 155.
- 156.
Before the issuing of the Frame Work Plan for the China (Shanghai) Free Trade Zone, there were discussions on granting a lower enterprise income tax rate of 15% for enterprises established in the FTZ, which was implemented in those comprehensive experimental zones. However, the Frame Work Plan tried to avoid forming an unleveled playing field (tax marsh) compared to other regions that can distort fair competition in the market. The concept of “tax marsh” was used by the present Minister of Finance Lou Jiwei in an explanation on the ideas of deepening the fiscal reform after the 18th National Congress of the CCP. See Liu (2014) Legal Forum 88–89 (in Chinese) and Sun and Guo (2014) 94 (in Chinese).
- 157.
Liu (2014) 88–89.
- 158.
Guofa [2013] No. 38, Notice on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 18 September 2013; Guofa [2015] No. 18, Notice on the Framework Plan for the China (Guangdong) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 19, Notice on the Framework Plan for the China (Tianjin) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 20, Notice on the Framework Plan for the China (Fujian) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 21, Notice on the Further Implementation of the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 8 April 2015.
- 159.
Guofa [2013] No. 38, Notice on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 18 September 2013. The other FTZs may imitate the tax incentives that have been implemented in Shanghai FTZ.
- 160.
Cheng and Shi (2012).
- 161.
Ibid.
- 162.
According to China Statistical Yearbook (2015). The overall tax revenue of China in 2014 was 119,175.31 billion Yuan, tax revenue from VAT was 30,855.36 billion Yuan, and from business tax was 17,781.73 billion Yuan. Indirect taxes have taken 40.81% of the overall tax revenue in 2014.
- 163.
Regulation on Value Added Tax (Draft), by the State Council, 18 September 1984 (expired).
- 164.
Interim Regulation of the People’s Republic of China on Value Added Tax (Interim Regulation on VAT), by the State Council, No. 134, 13 December 1993, revised by the State Council Order No. 666, 6 February 2016.
- 165.
Interim Regulation of the People’s Republic of China on Business Tax (Interim Regulation on BT), by the State Council, No. 136, 13 December 1993, revised by the State Council Order No. 540, 10 November 2008.
- 166.
Caishui [2016] No. 36, Notice on Completely Promoting the Transformation of Business Tax to Value Added Tax Pilot, by the MoF and the SAT, 23 March 2016.
- 167.
Article 3, the Notice on Completely Promoting the Transformation of Business Tax to Value Added Tax Pilot (2016); Article 11, 12 of the Interim Regulation on VAT.
- 168.
Article 4, 5, 6, and 7 of Provisional Regulations on VAT.
- 169.
Article 18, 19 of the Notice on Completely Promoting the Transformation of Business Tax to Value Added Tax Pilot (2016).
- 170.
A cascading turnover tax is imposed every time that goods are transferred in the process of production and distribution to the final consumer. It cannot be reclaimed by the purchaser and therefore the tax component of the price of goods becomes larger and larger the more stages there are between producer and consumer, with obvious distortionary effects between highly integrated enterprises and other enterprises. Schenk and Oldman (2007) 3.
- 171.
China Statistical Yearbook (2012).
- 172.
Cui (2009) 294–295.
- 173.
Report of the MoF and the SAT’s Officials’ answers to Journalists’ Questions on BT to VAT Pilot Program, 17 November 2011.
- 174.
Law (2012) 374.
- 175.
Ibid.
- 176.
Cui (2014).
- 177.
The VAT rate for small-scale taxpayers is 3%, which is lower than the corresponding BT rate.
- 178.
Article 15 (4) the Notice on Completely Promoting the Transformation of Business Tax to Value Added Tax Pilot (2016).
- 179.
Schenk and Oldman (2007) 35.
- 180.
Mirrlees et al. (2011) 33–35.
- 181.
There are several export refund rates, such as 17%, 13%, 11%, 8%, and 5% for different types of products. See Xuepeng Liu, Huimin Shi, and Michael J. Ferrantino, Tax Evasion through Trade Intermediation: Evidence from Chinese Exporters (August 12, 2014). Available at SSRN: http://ssrn.com/abstract=2494054.
- 182.
Whalley and Wang (2007).
- 183.
Yan (2011) 4–16.
- 184.
The Budget Committee of China’s National People’s Chinese Budget Committe of the NPC (2010) 143–146.
- 185.
Ebrill (2001) 83.
- 186.
- 187.
Ibid.
- 188.
Ibid.
- 189.
Schenk and Oldman (2007) 268–270.
- 190.
Ebrill (2001) 85.
- 191.
Ibid. 100.
- 192.
Cui and Wu (2012) 179–180.
- 193.
Ibid.
- 194.
Article 1, Caishui [2011] No. 100, Notice on VAT Policies for Software Products, by the MoF and the SAT, 13th October 2011.
- 195.
Article 2 Ibid. Localization transformation means redesign, improvement, conversion of the products, etc. However, purely transforming the imported software products into Chinese characters are not included.
- 196.
Article 1, Caishui [2013] No. 98, Notice on Value Added Tax and Business Tax on the Animation Industry, by the MoF and the SAT, 28 November 2013. The identification of animation software refers to Notice on VAT Policies for Software Products (Caishui [2011] No. 100). The tax incentive is valid from 1st January 2013 to 31st December 2017.
- 197.
Article 1 and 2, Caishui [2010] No. 110, Notice on Value Added Tax, Business Tax, and Corporate Income Tax Policies for the Promotion of Energy Saving Industries.
- 198.
Notice on Completely Promoting the Transformation of Business Tax to Value Added Tax Pilot (2016); Caishui [2014] No. 71, Notice on Value Added Tax and Business Tax Policies on Further Support for Small and Low Profit Enterprises.
- 199.
Ibid.
- 200.
Caishui [2011] No. 58, Notice of Tax Policy Issues Regarding Further Implementation of the Western Development Strategy, by the MoF, the GAC, and the SAT, 27 July 2011.
- 201.
Caishui [2014] No. 51, Notice on VAT and Consumption Tax Policy in Hengqin and Pingtan, by the MoF, the GAC, and the SAT, 11 June 2014.
- 202.
Guofa [2013] No. 38, Notice on the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 18 September 2013; Guofa [2015] No. 18, Notice on the Framework Plan for the China (Guangdong) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 19, Notice on the Framework Plan for the China (Tianjin) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 20, Notice on the Framework Plan for the China (Fujian) Pilot Free Trade Zone, by the State Council, 8 April 2015; Guofa [2015] No. 21, Notice on the Further Implementation of the Framework Plan for the China (Shanghai) Pilot Free Trade Zone, by the State Council, 8 April 2015.
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Xu, D. (2023). The Internal Benchmark and Chinese Tax Incentives. In: Interactions Between Chinese Tax Incentives and WTO’s Subsidy Rules Against the Background of EU State Aid. Springer, Singapore. https://doi.org/10.1007/978-981-99-1164-6_4
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