Chinese Policies on New and High- Tech. Industries

Presented by Lan Xue

On behalf of the research team including

Dr. Zhang, Yansheng, Zhang, Jianping, and Dr. Hao Jie

**The views expressed in this presentation are solely those of the presenter. It is The views expressed in this presentation are solely those of the presenter. It is not meant to represent in anyway the views of the governmental departments of not meant to represent in anyway the views of the governmental departments of PRC or its individual officials.PRC or its individual officials.

Outline

• A general overview of the major policies related to trade, tax, and high-tech;

• A general assessment of the impact of these policies with special emphasis on innovative behaviors;

• Recent policy adjustments:– China’s Import Trade Policy Adjustment

– China’s Export Trade Policy Adjustment

– China’s High-tech Products Tax Policy Adjustment

– China’s Special Economic Areas (SEA) Policy Adjustment

• Expected impacts

I. A brief review of the major policies I. A brief review of the major policies

related to trade, tax, and innovationrelated to trade, tax, and innovation • The first generation of policy were aimed at

promoting economic development through attracting FDIs (1980s):– Tax incentives and other local concessions

• To create cost advantage

– Location related (various zones)• Focused effort to improve hard and soft

infrastructure and reduction of cost

– Export orientation

• The second generation of policies were trying to attract high-tech enterprises and increase value-added (1990s-)– Location related: NHTZs– Industry related: high-tech industries– Trade-related: in favor of high-tech importation

The new generation of policies

• Shift from location-based policy to industry, product, or process-based policy;

• Shift from export-orientation to trade-neutral;

• Efforts trying to integrate innovation policy with tax policy and trade policy.

II. Assessment of the impact of the policies –with specific focus on innovative capabilities

• Changes in export structure

• Status of R&D activities in China

Changes in export structure based on STIC product classification

年份 总额 初级

产品

食品及

活动物

饮料

及烟

类

非食

用原

料

矿物燃

料、润滑

油及有关

原料

动、植

物油

脂及

蜡

工业制

成品

化学

品及

有关

产品

轻纺产品、

橡胶制品矿

冶产品及其

制品

机械及

运输设

备

杂项

制品

未分

类的

其他

商品

1980 100.0 50.3 16.5 0.4 9.4 23.6 0.3 49.7 6.2 22.1 4.7 15.7 1.1

1985 100.0 50.6 13.9 0.4 9.7 26.1 0.5 49.4 5.0 16.4 2.8 12.7 12.5

1990 100.0 25.6 10.6 0.6 5.7 8.4 0.3 74.4 6.0 20.3 9.0 20.4 18.7

1995 100.0 14.4 6.7 0.9 2.9 3.6 0.3 85.6 6.1 21.7 21.1 36.7 0.0

2000 100.0 10.2 4.9 0.3 1.8 3.2 0.0 89.8 4.9 17.1 33.1 34.6 0.1

2003 100.0 7.9 4.0 0.2 1.1 2.5 0.0 92.1 4.5 15.7 42.8 28.8 0.2

2006 100.0 5.5 2.6 0.1 0.8 1.8 0.0 94.5 4.6 18.0 47.1 24.6 0.2

Status of R&D Activity in China’s Industry

• A study by IIER(Beijing) shows that major A study by IIER(Beijing) shows that major firms excluding SMEs:firms excluding SMEs:– 6.25% of firms do R&D;6.25% of firms do R&D;– Average R&D intensity is 0.30%Average R&D intensity is 0.30%– 3536 companies with R&D intensity of 3536 companies with R&D intensity of

4% and VAT/sales>2%4% and VAT/sales>2%• 606 MNCs with lower R&D investment and patents606 MNCs with lower R&D investment and patents• 2930domestic companies2930domestic companies

General assessment

• China has been very successful in attracting FDI and encouraging exports;

• FDI has made positive impacts on the productivity growth;

• Many of the successes in trade in high-tech products are due to:– MNCs and JVs+Low VA process of high-tech products

• China has not been very successful in improving innovative capabilities of domestic firms

III. Recent Policy Adjustment-China’s Import Trade Policy Adjustment

• China is encouraging the import of high and new technology products and exempt the tariff of these type of products, as well as the products that is used for research and development.

• From Apr. 2007, taxation & drawback policy was carried out for import tariff and import VAT for the enterprises that develop and produce key technical equipment, key spare parts of the imported parts as well as the raw material that cannot be produced in China. Tax-free policy for the import of the whole unit and the set equipment was abolished.

III. Recent Policy Adjustment-China’s Export Trade Policy Adjustment

• Custom adjustment– Average tariff reductions: Average tariff reduced from

15.3% before the entering of the WTO to 9.9% of the end of 2006.

– Add export tax for high pollution and high energy consumption, resource-intensive products.

– 5% to 10% export tariff was added to 83 kinds of steel & irons from May 21st, 2007.

• Reduction and waiving off export drawback since 2005. – China began to reduce and waive off the rate of tax

refund of some high pollution and high energy consumption and resource-intensive products, and reduced the rate of tax refund of the products that would easily cause trade disputes, such as textiles.

– Meanwhile, China increased the rate of tax refund of key scientific & technical equipment, IT products and biological medical products.

• Adjustment to export drawback since 2007– Firstly, further waiving off the export drawback of 533

“2 high 1 resource” products.

– Secondly, reduce the rate of tax refund of 2268 products that would easily cause trade disputes

– Thirdly, export drawback of 20 commodities were changed into export tax free.

• The adjustment to export drawback policy has large influence as it changed 37% of the policy.

III. Recent Policy Adjustment-Processing Trade Policy Adjustment

• China encourages the transferring from processing trading to common trading, in processing trading, the nation encourages the transferring from low-tech. to hi-tech.

• From 1999, the processing trading was classified into forbidden type, restricted type and permitted type.

• From 2004 to present, the Ministry of Commerce has released 4 times of proclaims on forbidden type and restricted type with China customs and the State Environmental Protection Administration of China.

• On Apr. 5th, 2007, forbidding items in processing trade was publicized. In addition, 184 commodities with 10 digital custom numbers, with export drawback waived off and are not listed into the forbidding items of the processing trade were added.

• At present, there are altogether 1145 tax numbers commodities listed into the forbidding items of the processing trade, accounting for 9.3% of the imported & exported commodity tax number.

• On Jul 23rd, 2007, new table of contents for the restricted items of the processing trade was publicized, which included some labor-intensive industry, including plastic raw material and related products, textile and yarn, piece goods and furnishings, adding up to 1853 10-digital commodity tax numbers, accounting for 15% of the commodity coding.

III. Recent Policy Adjustment-Export Trading Policy Adjustment

• China’s trading policy has been changing from purely encouraging export to more export-neutral trading policy, aimed at reducing trading surplus, optimizing structural efficiency, enhancing international competitive power and supporting “infant” industries.

III. Recent Policy Adjustment- China’s High-Tech Products Tax Policy Adjustment

• (A) Enterprise income tax

• (B) Value added tax (VAT)

• (C.) Import & export tax policy (discussed previously)

Status of Chinese High-tech. Enterprises

• By the end of 2004, there were altogether 52231 high-tech. enterprises registered:– State-owned and collective enterprises take 7%– Cooperation limited and share holding Co. ltd. take

58.9%– Shareholding co-operative enterprises and co-

operative enterprises take 2.6%– Private enterprises take 14.8%– Hong Kong, Macaw and Taiwan enterprises as well

as foreign enterprises take 15.9%

Status quo of the Income Tax of Chinese High-tech Enterprises

• 1. Domestic-funded Company– Income tax paid by 15%– 2-year exemption from production year– Income tax paid by 10% if export production value accounts for over 70% of

the annual gross production value

• 2. Foreign-funded high-tech enterprises– Income tax paid by 15%– 2-year exemption and 3-year 50% reduction for enterprises with

over 10 years operation. – Another 3-year prolonged 50% reduction of income tax for

foreign-funded advanced technology enterprises.

Current VAT Policy of High-

tech.Enterprises

• Value-added tax for manufacturing enterprises was executed from the taxation reform in 1994.

• Under “manufacturing” VAT system, the VAT of high-tech. enterprises is higher than common industry and commercial enterprises. – Reasons: The proportion of the direct material cost that could be deducted is

continuously reduced, and the proportion of indirect cost, such as R & D cost is continuously increasing, which cannot get special value-added invoice and cannot be listed into income. Thus high-tech. enterprises with high tech. proportion shall bear heavier tax.

(A). Adjustment to Two-Taxes-Combination Policy

• On Mar. 16th, 2007, the 10th national People's Congress Council passed Enterprise Income Tax Law, which shall be executed from Jan. 1st, 2008.– 1. For high-tech. enterprises, no matter it lies in development

zone or not, and no matter domestic or foreign, shall pay the income tax by 15%.

– 2. The R & D expenses of new technology, products and technique can be deducted by 150% when counting tax. The depreciation term can be shortened or the depreciation can be sped up for the fixed property, of which the depreciation shall speed up due to technical improvement.

(B). Experiments on VAT Reform for High-tech.

Enterprises • On Jul. 1st, 2004, experiments on VAT reform was

carried out in the northeast part. And by the end of 2006, VAT on purchase of newly added fixed property of the northeast enterprises added up 12.193 billion Yuan, with drawback 9.062 billion Yuan in total.

• On Jul. 1st, 2007, experiment on the expansion of value-added drawback was carried out in some industries of 26 old industrial bases of 6 mid-part provinces. VAT reform in the middle part will take increment drawback and drawback of machinery VAT on purchase modes.

III. Recent Policy Adjustment-Special Economic Areas (SEA) Policy Adjustment

• Special Economic Areas– Economic & Technical Development Zone:

• Designated coastal and other cities aimed at promoting local industrial development and attracting FDI.

– High-tech. Development Zone• Designated areas aimed at fostering high-tech industrial

development.

– Custom Special Supervising Zone• Free trade zone

• Export processing zone

• Free trade logistics zone

• Free trade harbor

Favorable Policies of Economic & Technical Development Zone

• １ . 15% income tax reduction per year for foreign producers

• ２ .2-year exemption and 3 year half income tax from the profiting year for foreign producers running the business for over 10 years (tax rate is 7.5%)

• ３ . 5-year local tax free and 5 year half income tax for foreign producers , and local tax free for high-tech. enterprises.

• The establishment of SEZs– From 1979, the SEZs were established in Shenzhen, Zhuhai,

Shantou and Xiamen. From 1984 to 1988, 14 coastal economic & technical development zones were ratified by the State Department.

– By Sep. 2005, there are 54 SEZs at the national level.

• Performance of SEZs– By the end of 2006, 54 national SEZs had brought 74.14 billion

Yuan, with 302.19 billion Yuan industrial production value produced, contributing 15.70 billion Yuan taxes and 14.92 billion and 13.39 billion Yuan of importation and exportation respectively.

– The 54 national SEZs have attracted 22091 foreign enterprises, absorbing USD 1.47 billion, accounting for 23% of the nation.

– By the end of 2006, national SEZs have attracted 3322 high-tech. enterprises. In 2006, industrial value created by high-tech. enterprises took 47.3% of general industrial value, and the exportation took 68% of total amount.

National New & High-Tech Development Zones (NHTZ)

• In 1988, China began to establish science & technology development parks – In May 1988, Beijing Science & Technology Industrial Parks

was established, symbolizing the foundation of Chinese science & technology industrial parks .

– In 2006, there were 45000 enterprises listed in 53 national high-tech. zones, among them 32000 were approved to be high-tech. enterprises, and 5000 were foreign enterprises (including Hong Kong, Macaw and Taiwan enterprises). The total income of these 53 national high-tech. zones added up to 4231.78 billion Yuan.

   State-level Science & Technology Industrial Parks （ STIPs）built from 1998 to 2005

Custom Special Supervising Zone • Free trade zone : In 1990, Shanghai WaiGaoqiao Free

Trade Zone was set• Export processing zone: An independent zone bearing

export & processing responsibilities and grows out from the free trade zone, which was set in 2000.

• Free trade logistics zone: Established in 2004, it dedicates to international free trade logistics business.

• Free trade harbor: Shanghai Yangshan free trade harbor set in 2005 enjoys the policies of free trade zone, export processing zone and free trade logistics zone. It bears the functions of harbor work, free trade logistics and free trade processing.

• Development trend ——A free trade zone with the combined functions of varied special zones.

National Policy on Development Zones• Varied development zones of China have played an

important roles, but there are many initiatives that used the name of the development zone with different motivations.

• In Jul., 2007, cleaning and neatening work were carried out in varied development zones.

• The number of the development zones nationwide decreased from 6866 to 1568, with the reduction by 77.2%. The area for the programming decreased from 38.6 thousand sq. km. to 9949 sq. km. , with the reduction by 74.0%.

• There are 222 state-level development zones ratified by the State Department, taking 2323.42 sq.km. totally:– 54 economic & technical development zones ;– 53 science & technology industrial parks;– 15 trade free zones, 58 export processing zones;– 14 frontier economic cooperation zones;– 33 other types development zones.,

• There are 1346 provincial development zones ratified by varied provincial governments, amounting to 7625.85 sq.km. totally.

Policy Adjustment Trend for China-Special Economic Area

• In the past, the nation gathered industries, absorbed foreign capital and expanded export by location-based policies.

• Now these policies were transferred into industrial policies, which encourage innovation, environmentally friendly behaviors, and industry upgrading.

IV. Expected impacts

• Combining tax policies towards MNCs and domestic companies will create a better competitive environments;

• The combined tax and trade policy adjustment will gradually curb Chinese exports, whether it will be quick enough to be politically meaningful is yet to be seen;

• The combined tax policy on innovation is in the right direction, but it will take time to show the impacts;

• Important influence for domestic technical innovation. The encouragement of free import tax for high-tech. products is good for introducing technologies and equipment, but will restrain domestic technical innovation.

• The abolishment of tax free policy for imported equipment is good for providing a good developing environment for domestic equipment manufacturing enterprises

Thank you for your attention!