14/6/08

China’s New Corporate Income Tax Law

I strongly recommend this extraordinary article wrote by Steve Dickinson and Andrew Grieve, published in chinalawblog.com and entitled "Tax Benefits Under China’s New Corporate Income Tax Law: Much Unfinished Business"

"Since enactment of China's new Corporate Income Tax (CIT) code at the first of this year, my firm has been working with a number of high-tech (mostly software, computer hardware, environmental technology, and medical technology) companies to figure out how they can benefit from these new laws.

With the promulgation of the new Corporate Income Tax (CIT) code in January, 2008, China set out on a entirely new approach to taxation. The new approach involved two major changes. First, all companies will be taxed at the same rate without consideration of the nationality of their owners; the new tax law sets the tax rate at 25% for all companies. Second, the right of specific regions to offer beneficial tax rates was revoked. In principle, all regions of China must provide for national taxes according to the same system. All tax benefits in the future will serve to promote specific industries, rather than specific regions. In accordance with this policy, the new CIT Law provides a number of reduced tax rates designed to encourage certain industries, including environmental protection and energy conservation, public infrastructure, agriculture and new and high technologies. Though both the CIT law and its implementing regulations explain the basic industries in which tax benefits apply, actual implementation of the benefit system requires the promulgation of detailed rules. To date, a preliminary step at implementing rules has been issued for new and high-tech industry. These rules are not complete and are waiting for further rulemaking for implementation. For all of the other tax benefit categories, nothing whatsoever has been issued and there is no indication when this will happen. Therefore, well into the first year under the new CIT, the tax benefit system is a hollow promise, much to the frustration of both Chinese domestic and foreign investors in China.

1. Sector/Project Based Tax benefits
Article 27 of the CIT Law states that income generated from engaging in environmental protection, energy conservation and water conservation, agricultural, forestry, husbandry, and fishing projects, and the investment and management of public infrastructure projects and facilities supported specifically by the State, is exempt from corporate income tax in the first three years of operation and a 50% reduction in CIT for the subsequent three years, starting from the year the project first generates operating income. These reductions apply only to income generated by these specific projects, not to the entire income of the company. The criteria for judging whether a project comes under the categories of environmental protection, energy conservation and water conservation have not yet been released, and no indication has been given of when this will occur.
Articles 86 to 88 in the Implementing Regulations for the CIT Law go into greater detail regarding the kind of projects that will receive these tax benefits. Article 90 of the implementation regulations provides for the first RMB 5 million of income from technology transfer to be exempt from tax, with any amount over RMB 5 million benefiting from a 50% reduction, for an effective tax rate of 12.5%. It is not clear to what extent consulting and training fees associated with the transfer fall under this scheme. .

2. Corporate Tax Benefits
Article 28 of the CIT Law provides for two beneficial tax rates. The first is a CIT rate of 20% for small scale and low profit enterprises that meet certain terms and conditions. Article 92 in the implementation regulations sets these conditions out as follows:
a. The corporation must not be in an industry restricted or prohibited by the state (this refers to the categories in the catalogue for the guidance for foreign investment industries released in 2007 and the Industrial restructuring catalogue released in 2005, with a new version to be released soon)
b. For industrial corporations, annual income should not exceed RMB 300,000, there should be fewer than 100 employees and total assets should not exceed RMB 30 million.
c. For non-industrial corporations, annual income should not exceed RMB 300,000, there should be fewer than 80 employees, and total assets should not exceed RMB 10 million.
The second benefit is a 15% CIT rate for New and High-tech Enterprises. The qualification requirements for new and high-tech enterprises were released in mid April 2008, and we will explain these in Section 5 below.

3. Location Based Tax Benefits
Circular 40 released by the State Council provides that additional tax breaks will be provided for enterprises that fall within the New and High-tech enterprise category in the five national economic development zones (Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan) and in Shanghai’s Pudong district. This is a limited exception to the general rule against location based tax benefits. From the first year the company generates income, the first two years of income will be exempt from CIT, and tax will be at 50% rate (12.5%) for the next three years. After that, the normal 15% rate for New and High-tech enterprises will apply.

4. Sustainability/Environmentally based Tax Benefits
The new CIT Law lays out two areas where companies may benefit from tax reduction by using sustainable technologies or materials. The first area, in Article 33, states that revenue gathered from synergistic utilization of resources that are in line with state industrial policy may be reduced by 10% when calculating taxable income. Article 99 of the implementation regulations clarifies this as the use of materials contained in the catalogue of preferential corporate income tax treatments for synergistic utilization of resources in the production of goods not restricted or prohibited by the state (as outlined above in section 2a) and compliant with state or industry standards. This catalogue has not yet been released.
The second area is in Article 34, where a portion of the investment in technology for environmental protection, energy and water conservation or production safety can be credited against CIT payable. Article 100 of the implementation regulations defines this as 10% of the value of the investment for articles that fall under three further catalogues. None of these catalogues have been released.

5. Qualification for New and High-tech Enterprise Status
Basic rules for the New and High-Tech Enterprise system were issued in April of 2008. Under these rule, to be considered a New and High-tech Enterprise for tax purposes, a company must meet the following requirements:
1. The company must have been established in mainland China for at least one year.
2. The company possess the proprietary IP rights of core technology used in its major products or services, either through its own R&D, purchase, donation or merger within the last 3 years or with an exclusive license with a term of more than five years.
3. The company must provide a product or service that falls within the scope of fields listed in another document, the High and New Technology Fields with Key Support by the State, issued in tandem with the recognition measures. These are:
● electronic information technology
● biological and medical technology
● aviation and space technology
● new materials technology
● high-tech services
● new energy and energy conservation technology
● resource and environmental technology
● transformation of traditional sectors through new high-tech
4. Employees of the company with university degrees and above must account for at least 30% of the total staff. 10% of this 30% of employees must be engaged in R&D.
5. There is a strict minimum on R&D expenditure over the previous three years, or for companies that have been set up for less than three years, for the number of operating years, as follows:
Annual Sales --------Percentage to be spent on R&D
Less than RMB 50,000,000..........................6%
Between RMB 50m and RMB 200m..................4%
Over RMB 200,000,000..............................3%
Of this minimum, at least 60% of the R&D expenditure should be incurred within China; a portion of it can therefore be outsourced to other countries.
6. Company sales revenue from high-tech products or services must be over 60% of total annual sales revenue.
The recognition measures also indicate that another document, Work Guidance for Recognition of New and High-tech Enterprises, will lay out additional requirements during the assessment process. This document has been released as a draft for public comment. The process requires a committee be formed to decide what companies qualify. What follows is a general description of the way this committee will work. The committee itself is made up of government officials and experts in a national office dedicated to this task and to maintaining a website (www.innocom.gov.cn). Each district is also required to set up an office for the assessment process and to ensure companies stay within the requirements. Companies will be required to first conduct a self-evaluation, then register on the website (which is not yet up and running) and submit the required materials. Since much of the required company information relates to the company’s financial situation,, the company is required to be audited by a certified third party.
In addition to these requirements, and to those listed in the recognition measures above, when applying for New and High-tech Enterprise status, the government committee responsible also will require an enterprise to receive at least 70 points, allocated across four categories as follows:
1. Core IP (30 points)
IP acquired in the last 3 years ----------Points
6 or more, or 2 invention...................................30
5 or 1 invention...............................................24
4.................................................................18
3.................................................................12
1-2................................................................6
0..................................................................0
2. Commercialization (30 points)
IP commercialized in the last 3 years ----------Points
5 or more......................................................30
4.................................................................24
3.................................................................18
2.................................................................12
1..................................................................6
0..................................................................0
3. Management Competency (20 points)
Number of management practices ----------Points
5..................................................................20
4..................................................................16
3..................................................................12
2...................................................................8
1...................................................................4
0...................................................................0
Management practices:
a. R&D reporting system
b. Budget system
c. Cooperative research activities
d. Establish research institution and equipment
e. Reward system for personnel engaged in R&D
4. Growth (20 points) (Note: this is a rough calculation)
Growth in sales and capital ----------Points
50%..............................................................20
40%..............................................................16
30%..............................................................12
20%................................................................8
10%................................................................4
0%..................................................................0
This point scoring system is quite vague and could be used to limit access to the high-tech category. However, the work document has not been finalized and the web site does not exist. Despite this, some regions (Pudong) have gone ahead and created committees and have approved some high tech ventures. Other regions have not yet taken any action. It will therefore be quite some time before the system begins to work on a national basis and an even longer before business owners and investors will have a clear sense as to how the system will work in practice.

Experiencias en la compra de bienes raices en Panama

Lo que nos atrajo de este país no fue su crecimiento económico, superior a cualquier otro país de la región, o que la inversión internacional representara el 16% de PNB al atraer cada vez más a multinacionales. Tras visitarlo varias veces, invertimos en el país porque una serie de circunstancias lo hacía distinto: el canal, su potencialidad de ser el mayor centro financiero de latinoamerica, porque era el país más seguro desde Estados Unidos a Chile, por su incipiente industria turística (crece al 15-20%), las ventajas para instalarse de los jubilados extranjeros, utilizar el dólar, su seguridad jurídica, y porque su economía se basa en la exportación de servicios, a diferencia de sus vecinos.

Cuando empezamos a invertir, los precios inmobiliarios ya crecían un 20% anual, y eso nos llevó a la conclusión de que, con el tiempo, los inversores a pequeña escala perderían la oportunidad de grandes plusvalías o rentabilidades en el alquiler. La exención de impuestos por 20 años, que tanto atraía a los inversores, nos pareció un factor secundario, pero es cierto que comparado con tantos países, era un factor interesante. Como lo es el bajo precio de los notarios. Pero un factor económico de primer orden fue la posibilidad de conseguir rentabilidades financiero muy interesantes, a diferencia de países como Brasil, donde la rentabilidad raramente puede basarse en términos.

Por otro lado, Panamá tiene uno de los procedimientos de registro de la propiedad más seguros, y no ofrece un mercado de riesgo para los compradores.

Hicimos varias inversiones en Panamá. Una de ellas, en el mercado de oficinas prime, fue fruto de un estudio sobre las rentabilidades (yield) por alquiler de las oficinas, que eran muy interesantes, del orden del 10% anual. Invertimos también en apartamentos en zonas buenas ya construidos, en proyectos sobre plano, y en terrenos. Siempre en la ciudad de Panamá, pues pensamos que el comprador internacional que nos podría comprar a nosotros en el futuro probablemente preferiría invertir en un área que conocía, y no tendríamos que “venderle” la localización que hubiéramos escogido nosotros.

Nuestra inversión en el mercado de oficinos no empezó muy bien. Compramos “en gris”, es decir, que no había nada más que paredes, y había que ponerlo todo. Los presupuestos que nos ofrecían eran muy superiores a lo estimado, basados en que como era una zona prime debíamos pagar un precio superior. Realmente, el coste era muy alto, de forma que tras algún tiempo, decidimos poner las oficinas a alquilar en gris, algo que sabíamos pocas empresas arrendatarias querían. Pero, tras unos meses, dada la escasez de oficinas prime en Panama, una compañía de seguros nos las arrendaron. Por ello, una lección que aprendimos era no comprar nunca “en gris”.

Respecto a los apartamentos construidos, éstos tenían casi 10 años, lo que los hacían todavía interesantes porque la exención era aún vigente. En aquel momento, en Panamá se daba la extraña circunstancia de que la vivienda nueva era mucho más cara que la que se había construido hace unos pocos años, cuando las calidades de construcción de estas últimas en ocasiones eran superiores. Pensamos que, con el tráfico casi imposible, los panameños de cierto poder económico no querrían vivir fuera de la ciudad, y los precios de apartamentos usados subiría, como así fue. Compramos, entonces, a buen precio, el problema fue alquilarlos, pues el panameño no tiene problemas en alquilar la oficina, pero prefiere ser propietario de la vivienda donde vive. No conseguíamos una rentabilidad interesante, del 8-10%, que buscábamos, en la mayoría de los apartamentos, hasta que el precio de los apartamentos subió bastante.

Respecto a los apartamentos comprados sobre plano, elegimos comprarlos a un promotor que no decidiera posteriormente dejar de construir porque el precio de venta le resultara antieconómico. No queríamos que al cabo de un año, el promotor se deshiciera de su compromiso meramente devolviéndonos las cantidades aportados y el interés legal. Por otro lado, negociamos un contrato que no incluyera ninguna cláusula de revisión de precios al alza por el aumento de los precios de construcción, lo que lo convertía en una buena inversión anti-inflacionaria. Para evitar que el promotor (por exigencia de sus bancos) pusiera límites al número de apartamentos comprados por un solo comprador, pusimos cada apartamento a nombre de una sociedad con acciones al portador.

Establecimos un precio de venta ligeramente inferior al de la venta por el propio promotor de apartamentos en el mismo edificio o en otros similares. Ello nos daba un margen muy interesante. No obstante, el gran número de apartamentos no construidos en oferta, y que el promotor sólo quería vender sus apartamentos, hizo que el proceso de venta durase bastante. Finalmente, debido a que no había demasiados apartamentos en venta acabados de construir, y que los apartamentos estaban a punto de ser finalizamos, benefició la venta de los mismos.

Respecto a los terrenos, sólo diré que hay que estar muy bien asesorados por un abogado y un arquitecto de confianza, porque el baile de números puede ser muy importante.

En cuanto a las hipotecas, aunque los bancos panameños han sido tradicionalmente más conservadores que los europeos y los norteamericanos, actualmente en Panama se puede conseguir financiación, lo que no se puede decir claramente de Europa. La razón es que Panama no necesita de la financiación procedente de los grandes grupos financeros americanos o europeos, pues la banca privada proporciona liquidez al sistema bancario. Hay muchas especialidades en las hipotecas con bancos panameños; ejemplos de ello es que a partir de cierta cantidad hay que pagar un 1% adicional de interés que va al Estado (sin embargo, si el inmueble es muy barato, el Estado, a través de los bancos, subsidiariza las hipotecas), que no se conceden prestamos una vez ya se ha comprado el inmueble, sólo antes, que la firma de la hipoteca no se hace frente al notario, o que las hipotecas generalmente se conceden por un máximo de años que se “cortan” en partes (cada cinco años es lo habitual), al final de la cual cualquiera de las partes pueden desistir (si no hay desestimiento por parte del banco, hay un recargo del 1% de la cantidad pendiente en varios bancos).

El llamado en España “crédito al promotor” es difícil y muy exigente en Panama. Como es razonable, a un banco panameño le cuesta confiar en una empresa que no está establecida desde hace varios años en el país, por muy bien que haya hecho las cosas en el país de origen. Es importante haber sido presentados por la persona adecuada, pues este tipo de préstamos se deciden en instancias muy elevadas del banco. Si lo conceden, entre las exigencias se encuentra pagar a un controller del propio banco en la obra, no vender muchos apartamentos u oficinas a un mismo comprador, retener por el banco parte del precio de los adelantos de los compradores, y muchas más condiciones.

Salvador Trinxet