Marbridge Consulting reports (from China Business):

Whether a company will pay 25% or 15% business tax will be decided by a “high-tech enterprise identification” co-issued by the Ministry of Technology, the Ministry of Finance and the State Administration of Taxation. Although the details have not yet been decided, the State Administration of Taxation has confirmed that the identification process will be based on industry segmentation, rather than on specific technologies or product types, as was previously the case. That means that those companies not belonging to “high-tech”, or “encouraged” industries will not benefit from favorable taxation policy, and will pay 25% business tax instead of 15%.

2008 brings the unification of tax rates for foreign-invested and domestic firms. In the past foreign-invested firms were assessed a 15% rate, compared with 33% for domestic firms. Those would be the legal rates of tax. Firms, both foreign and domestic, have been evading taxes since China’s economy opened up.

Path to China has a brief rundown of some highlights:

1. The Tax Rate for both Chinese-owned and Foreign-owned companies are unified to 25%
2. Pudong and Five Special Economic Areas are entitled to five years’ transitional period, with the tax rate rising from 15% to 25% within 5 years( 18% 20% 22% 24% 25%).
3. The encouraged high-tech companies can enjoy a preferential 15% tax rate. For those new high-tech companies in special economic areas and Pudong, the “two exemption, three half” policy will be applied.
4. Small enterprises with thin profit can enjoy a preferential 20% tax rate

It’s the 15% tax rate for high-tech and “encouraged” industries that interesting. Marbridge notes that the classification will now be done by industry segment, rather than by specific products. For an idea of what the list was like before, check this list at Lehman, Lee and Xu’s website.

After wading through that laundry list (”Levamlodipine Besylate Tablet”, “Zone-melting silicon monocrystal”, “Intelligent air cylinder”, anyone?), it’s obvious that classification by industrial segment makes more sense. It’s tough to be classified as a high-tech enterprise when your product is so high-tech that it isn’t even on the approved list.

Defining those segments is another question. That has yet to be clarified, and firms will have to apply to three agencies (jointly or separately? unknown) to get their ticket to the 15% bracket.

Taxation has a long history of being an instrument of social policy all over the world. China understandably wants to encourage investment in and the development of high-value and strategic industries.

It remains to be seen if this will effort will result in an outpouring on investment into favored industries. Even if it does, it will be years before the success or failure of the initiative can be judged. One industry segment that is sure to benefit from investment, and whose success is guaranteed by tax policies such as these, is accounting.

Score one for the accountants.

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