China General Interest
For those operating in China, the challenge is to ensure you are maximising the benefits available.
The four trillion yuan stimulus package introduced in November sounded impressive. While some of this may be attributed to exchange rates and the size of the economy, it still converts to US $586 billion.
The focus of this first package is infrastructure, land reform, along with social welfare projects to protect the environment and the provision of affordable housing.
This year the increased government stimulus is directed more to business measures.
Effective from 1 May temporary regulations have been issued for initial public offerings for growth enterprises to enable them to source additional equity providing profit requirements for the last two years of 10 million yuan (US$1.5 million) have been achieved and net assets of at least 20 million yuan (US$2.9 million are held.
The 2009 budget invests an additional 500 billion yuan (US$75 billion) in tax cuts. Those that New Zealand investors may be interested in are wide ranging.
Accelerated depreciation for certain assets and industries are available subject to the approval of the tax authorities. Small and medium sized enterprises can benefit from tax preferences.
High and new technology enterprises are able to be taxed at 15% and if they are established in the Pudong New Area (part of Shanghai municipality) or in the special economic zones such as Shenzhen, Hainan, Zhuhai, Xiamen, and Shantou, they can get a two-year tax holiday followed by a three year 50% tax rate.
While our Research and Development grants have been a one-year wonder, in China resident taxpayers are able to deduct 150% of qualified research expenditure. If the expense results in an intangible asset this can be amortised based on 150% of the costs.
Companies engaged in approved projects such as energy or water savings or other environment protection activities can enjoy a three-year tax exemption and then a three-year tax 50% tax reduction. There is also an additional 10% in tax savings when special environmental protection equipment is used.
While you are probably feeling this is enough there is more. Most of these will be industry specific such as the changes to the VAT rebates for some textiles and clothing export companies along with electronic and information exporting companies. Export refunds are available of consumption tax for processing goods along with a major change to a consumption based VAT regime that provides for a full import tax credit for capital goods effective from 1 January 2009.
Even if you are not able to find anything in these measures that impact on you there is no room for complacency. The rapid rate of change in China is something most governments can only observe with envy.
Remember also the transfer pricing measures that affect related party transactions and the level of debt and equity. Related party debt to equity cannot be in excess of 5:1 for financial institutions or 2:1 for other industries. Given the excess interest is not able to be deducted in the current year or deferred to the following years, getting this wrong can be costly as can missing out on any of the measures that are all designed to bolster the economy.
Joanna Doolan is a Tax Partner with Ernst & Young and Florence Wong is a Senior Manager they are both part of the Ernst & Young China Business Group. If you require any assistance or further information, please feel free to contact them: joanna.doolan@nz.ey.com / florence.wong@nz.ey.com
May 17, 2009