The unification of tax rates for both domestic and foreign enterprises at 25%, effective this year under China’s new Enterprise Income Tax (EIT) Law, has meant an increase in income taxes for many foreign invested enterprises (FIEs).
For industrial parks seeking to attract FIEs, changes like the EIT law and the phasing out of other tax incentives such as “two plus three” schemes – a two-year tax holiday plus three years of 50% reduced rates for new arrivals – has threatened one of the parks’ very reasons for being.
However, the well has yet to run dry. Competition among China’s array of industry zones – state-level, provincial-level, city-level and county-level – not to mention an increasing number of technical and new technology zones means there are still tax perks out there for FIEs willing to shop around.
In cities in China’s interior, tax incentives remain flexible, depending on how badly the location needs investment, according to William Dodson, general manager at Asia Base, a consultancy that advises firms on China locations. The local definition of “high-tech enterprises” is flexible too – a designation that means a firm doesn’t pay tax until its second profit-making year and then pays a 15% rate, rather than the standard 25%.
Even with the eventual loss of some tax incentives, industrial park operators remain optimistic that other factors will continue to attract new business.
“[Tax incentives] are usually a bonus rather than the sole influencer in investment decision making,” said Mary Ann Chan, spokesperson for Singapore-based Sembcorp Parks Management, which runs a park in the east coast city of Wuxi. Investors, she says, are “equally concerned” about local market opportunities, skilled labor and efficient local government.
Parks can still compete on convenience as well. Locating in an industrial park means firms avoid red tape in securing land rights, while companies seeking a quick start can move into ready-built factories if facilities are available. Better zones will have a logistics hub, a customs yard and even on-site dormitories and executive housing.
Shandong province’s Weifang Economic Development Zone, for example, assigns a clerk to accompany investors through the maze of local government approvals and paperwork, according to a marketing official at the zone, who gave his name as Zhang. As an added sweetner, the zone’s management also gives companies back 30% of any year-on-year rise in taxes paid, Zhang said.
For parks like Weifang, outside of the tier-one cities, attracting investment in less-certain times also depends on convincing companies that cheaper land and labor costs are worth lengthening their supply chains.
Solid infrastructure as well as local government transparency and marketing savvy were important in locations like Dalian. But immature infrastructure – particularly in links between rail and seaports – are a frequent headache in China’s interior. Higher logistics costs then eat into any savings on land and labor.
“Without the critical mass of infrastructure, it’s better to stay in Shanghai,” said Dodson.
Regardless of location, parks seeking out and promoting industries favored by Beijing, such as high-tech manufacturing and research and development, are well positioned.
Urumqi High-Tech Development Zone hasn’t seen the effects of the new tax policies, according to Zhao Tianpeng, project supervisor at the zone’s investment bureau. Most firms’ tax status remained at their 15% tax rate this year.
In other cities, industrial parks are giving way to business parks – properties where firms can cluster offices. High-tech and pharmaceutical firms are seeking campus-style space outside of higher-cost downtown locations, said Jileen Loo, head of business parks for Jones Lang LaSalle China. The current 17 million square meters of “international standard” business park space will double to around 38 million sq m by 2010.
Given diminishing land supplies and Beijing’s priorities, this evolution may well be the future for many industrial parks.