China to Clean Up Various Local Preferential Policies

March 12, 2015

Enterprises that do business in China should take inventory and assess potential impact on business.

I. Circular 62

On November 27, 2014, the State Council of the People’s Republic of China issued the Notice Regarding Cleaning-up and Regulating Various Taxes and Other Preferential Policies (Circular 62), which is intended to develop a unified and open market system with fair competition by enforcing financial disciplines in a strict manner.

For years, to attract investment and promote regional economic development, many local authorities have implemented a variety of preferential policies for investors and enterprises with regard to taxation, nontax revenue, and fiscal expenditure, among others. Some of these preferential policies have caused problems of local protectionism and unfair competition. Circular 62 was issued with the goal of effectively cleaning up and closely regulating these taxation and other preferential policies. Specifically speaking, the focus of Circular 62 includes:

(1) Unify Authorities to Make Taxation Policies

According to Circular 62, except for those taxation administration authorities prescribed in applicable laws and regulations, no local government may formulate any taxation preferential policies at its own discretion. In addition, without approval of the State Council, no department may make any specific taxation preferential policies while drafting other laws, regulations, rules, development plans, or regional policies.

(2) Regulate Administration of Nontax Revenues

Circular 62 explicitly prohibits local authorities from illegally reducing, exempting, or postponing collection of administrative charges and government funds or illegally selling land at preferential prices or granting land use for free. Moreover, the local authorities are explicitly prohibited from transferring state-owned resources, such as state-owned assets, equity interests in state-owned enterprises, and mineral resources at low prices. With respect to the social insurance administration, Circular 62 prohibits the local authorities from reducing, exempting, or postponing collection of social insurance premiums that must be borne by the enterprises in violation of applicable laws and regulations and the regulations of the State Council. Without the State Council’s approval, no enterprise is allowed to make payment at a rate lower than the published unified rates.

(3) Enforce Strict Fiscal Expenditure Administration

Circular 62 provides that those fiscal expenditure preferential policies that are illegally formulated, either in connection with tax payment by the enterprises or nontax revenues, will be abolished outright. Examples of such problematic policies include tax return after collection, disbursement of cost and expenses, financial incentives or subsidies, and reduction or exemption of land transfer price by making payment on behalf of or providing subsidies to the enterprises. Other regional preferential policies, such as attracting enterprises in other regions to settle down or pay taxes in the region in question through financial incentives or subsidies, shall be gradually regulated.

Circular 62 calls for a special cleanup action to eliminate any preferential policies that violate national laws and regulations. First, local governments at the provincial level and other pertinent departments shall review thoroughly their taxation and other preferential policies. Any preferential policies in violation of national laws and regulations shall be abolished in accordance with formal rules and regulations to be promulgated. Then, local governments (or other pertinent departments) shall report those preferential policies that in their opinion do not violate any law or regulation to the Ministry of Finance for its review and summary. The Ministry of Finance will then report to the State Council for final implementation opinions. Under Circular 62, the results of the said special cleaning-up action shall be submitted to the Ministry of Finance by March 31, 2015.

In addition to the abovementioned immediate cleanup action, Circular 62 also requires that the financial authorities at provincial, municipal, and county levels, working with other related authorities, establish and strengthen a set of long-term mechanisms, including establishing evaluation and exit mechanisms, strengthening appraisal and supervision mechanisms, setting up information disclosure and reporting systems, and enhancing accountability mechanisms.

II. Circular 415

Following the State Council’s issuance of Circular 62, the Ministry of Finance released the Notice Regarding Certain Matters Related to the Implementation of Cleaning-up and Regulating Various Tax and Other Preferential Policies (Circular 415) on December 22, 2014.

Circular 415 reiterates that all preferential policies in violation of national laws and regulations shall cease implementation starting December 1, 2014. Preferential policies that do not violate national laws and regulations and that local authorities would like to retain shall be summarized with sufficient reasons and reported to the Ministry of Finance for review and summary before further submission to the State Council for approval, otherwise those preferential policies shall be revoked as well.

In addition, Circular 415 introduced six forms for the cleanup exercise under the categories of tax revenues, nontax revenues, social insurance premiums, fiscal expenditure, fiscal system, and other preferential policies. It also restated that local governments at the provincial level shall report the results of the cleanup action to the Ministry of Finance by March 31, 2015.

III. Circular 79

On February 5, 2015, the State Administration of Taxation issued the Notice Regarding Further Regulating Tax Collection and Administration and Improving Quality of Tax Revenues (Circular 79).

Circular 79 reiterates the requirements to regulate and implement tax preferential policies properly.

Considering the foregoing, enterprises that enjoy local taxation or other preferential treatments not supported by applicable national laws and regulations should immediately consult with professional firms on any potential impact that these circulars may bring about and design and implement possible measures that may mitigate such impact.

This article was originally published by Bingham McCutchen LLP.