Before January 1, 2006, the exemption of 3% EIT was one of the preferential policies of Sichuan Province in foreign investment promotion. It is now repealed according to decisions of Sichuan Provincial People’s Congress and Government. However, it remains unknown to many FIEs, and makes unexpected difference to financial plan, some even enormous.
The European Chamber invites you to discuss with other FIEs:
- What are regulations of EIT in other neighbor provinces?
- The preferential policy of Enterprise Income Tax has been playing a very important role in foreign investment in Go West campaign. Will the new regulation impact on FIEs’ financial plan and future investment?
- What are FIEs’ opinion and suggestion to this regulation? How to communicate with local authorities?
Event review
Agenda:
- About the new regulation
- Suggestions
- Action Plan
Discussion Points:
About the new regulation
- The regulation
According to notification of Sichuan National Tax Bureau dated on Feb. 8, 2006 (Full Chinese Text notification), Foreign Invested Enterprises in Sichuan will be imposed Local Income Tax (LIT) of 3% since Jan. 1, 2006, in addition to the 30% Company Income Tax (CIT) of national finance. That means that FIE must pay 3% LIT, even if it is exempted of the 30% CIT for the first two years of making profit and taxed with 50% reduction for the following three years.
Before January 1, 2006, the exemption of 3% LIT was one of the preferential policies of Sichuan Province in foreign investment promotion. It is now repealed according to decisions of Sichuan Provincial People’s Congress and Government.
- Similar regulation in other provinces
According to primary research, only Henan, Hunan, Yunnan and Sichuan Provinces have repealed this preferential policy of LIT to FIEs. At least, there are no change in Hubei and Chongqing, confirmed by attendees who have factories there.
- Transparency
The new regulation applied since Jan. 1 was notified to FIEs only on Feb. or March. Some companies knew it even 5 months later with big surprise, when they went to Tax Bureau to pay taxes.
People complained that it’s hard to get complete and clear information from authorities. Fragments of regulation and inaccurate instructions often given by staff of Tax Bureau, oblige FIEs to consult fiscal experts for not to pay extra taxes.
- Stability
The stability of policy was doubted, because the 3% LIT was one of the preferential policies which attracted FIEs to invest in Sichuan Province.
The sudden change makes unexpected impact to companies’ financial perspective, some even enormous. The 3% LIT might mean USD300,000 for one company and RMB1,5 million for another. The amount will be even bigger for the coming years.
- Impact to foreign investment
The reactions of companies who attended the panel discussion implicate negative consequences to foreign investment promotion in Sichuan Province.
For the companies who have been in Sichuan for years, further investment may be frozen in the future, and the production site might be moved to other provinces where there are much advantageous policies. For the companies who intend to invest in Sichuan, this will, no doubt, hold their pace.
Suggestions
- Keep the preferential policy to enterprises invested before 2006. The new regulation should apply only to new companies, at least for a period of transition.
- Consult legal expert about the legality of the new regulation: whether is it consistent with national law? Is it valid to break the agreements on taxation exemption between government and enterprises?
- Letter of contestation by enterprises who have already paid the LIT. The purpose is to make authorities aware of the protest of FIEs, and to defend companies’ interests if policy changes.
- Common voices by representatives from different foreign Chambers are needed to communicate with government, to ask for explanation and negotiation.
- Diplomatic support from foreign consulates in South West China. Consulates may exert influences by expressing their concerns to Sichuan Provincial Government.
Action Plan
- Advises needed
Legal expert’s opinion is necessary, as well as advises from headquarter of the European Chamber in Beijing, who’s experienced with lobbying and legal issue.
- Common force from foreign communities
Emergency Committee should be organized by all organizations concerned, such as regional Chambers or Associations in Sichuan, with support of all foreign consulates.
- High level conversation
Representatives of FIEs in Sichuan will seek for high level conversation with provincial authorities, such as Sichuan Department of Commerce, Sichuan Investment Promotion Bureau, and Vice Governor who’s in charge of foreign trade and investment.
There will be an open letter, quoting concerns and suggestions of FIEs, to circulate before it’s bought to authorities.