Hainan Free Trade Port Reconstructs Tax System: Reduces Tax Burden, Simplifies Tax System, Improperly "Tax Avoidance Paradise"

  "The tax cuts are very vigorous and there are many policy innovations. It can be said that to build a high-level free trade port, the Hainan tax system will be reconstructed."

  After seeing the tax-related policies in the "Overall Plan for the Construction of Hainan Free Trade Port" (hereinafter referred to as the "Plan"), Professor Shi Wenwen from China University of Political Science and Law commented on First Financial.

  According to the "Plan", Hainan will eventually achieve zero tariffs under the relevant conditions, which is lower than the current overall 7.5% tariff level in China; the corporate income tax rate will be reduced from 25% to 15%, and the maximum marginal tax rate for personal income tax will be reduced from 45% Up to 15%; value-added tax, consumption tax, vehicle purchase tax, urban maintenance and construction tax and education surcharge and other taxes will be reduced to sales tax, which will be collected at the retail stage of goods and services.

  In order to prevent the substantial Hainan "tax depression" from becoming a "tax haven" for some mainland enterprises, the "Plan" requires that the tax administration strengthen the identification of tax evasion risks, prevent tax base erosion and profit transfer, and avoid becoming a "tax haven ".

  "This is mainly to prevent some enterprises from setting up shell companies in Hainan, abuse tax incentives to erode the tax benefits of the mainland, and disrupt the normal tax order of our country." Shi Wenwen said.

Zero tariff establishment

  A major feature of the free trade port is the high degree of liberalization and facilitation of trade and investment, while tariffs hinder the liberalization and facilitation of trade and investment. Therefore, the international free trade ports basically adopt a zero tariff policy. Hainan Free Trade Port is no exception.

  According to the "Plan", Hainan Free Trade Port has established a system of liberalization and facilitation with "zero tariff" as the basic feature of goods trade.

  Specifically, there are two steps: before the whole island is closed, some imported commodities are exempted from import duties, import link value added tax and consumption tax. After the island-wide customs clearance operation and the deduction of the tax system, import tariffs are exempted for goods that are not allowed to be imported into the Hainan Free Trade Port.

  Shi Wenwen said that the Hainan Free Trade Port is outside the customs territory, that is, within the borders of our country, but outside the customs control points. Therefore, except for the catalogue of imported taxable commodities determined by the Hainan Free Trade Port, foreign goods entering the Free Trade Port are exempted from import tariffs. In fact, most of the goods will be exempted from customs duties, but commodities such as tobacco and alcohol that are not encouraged to consume and pollute the environment will be included in the taxation catalog.

  Ma Long, partner of PwC China Tax Policy Services, told First Financial that the list of encouraged industries in Hainan Free Trade Port may roughly refer to some of the contents of the current encouraged catalogue, such as the encouragement in the "Guidance Catalogue for Industrial Structure Adjustment" Industry, the Catalogue of Encouraging Foreign Investment Industries, etc. At the same time, combined with the characteristics and positioning of Hainan Province, it focuses on the development of tourism, modern service industries and high-tech industries.

  Not only exempt from customs duties, according to the "Plan", importing production equipment, transportation vehicles and yachts for import operations, importing production raw materials and imported goods purchased by residents of the island, and import links are also exempted from qualified enterprises by 2025 VAT and consumption tax.

  Shi Wenwen said that Hainan is equivalent to a separate customs zone, which can be understood as outside the country in terms of tariffs. Therefore, when goods from the Hainan Free Trade Port enter the mainland, it is equivalent to entry into the customs, and it is necessary to levy customs duties and import value-added tax and consumption tax according to law.

  Some market participants believe that after the closure of the entire island of Hainan, the "Plan" only mentions the exemption of import tariffs and does not mention whether to exempt import link VAT and consumption tax. It is possible that the import link VAT and consumption tax will also be exempted .

  Shi Wenzheng believes that this is unlikely. Because the import value-added tax and consumption tax are based on the principle of taxation at the place of consumption, wherever goods are consumed, taxes are levied wherever they are. And if it is not collected, the local finance may also be unable to bear the loss of income reduction.

Both corporate and personal income tax are reduced to 15%

  If Hainan Free Trade Port is to compete with the mature international free trade ports, it must maintain a low tax burden to attract enterprises and talents to settle in. At present, the standard rate of corporate income tax in my country is 25%, and the comprehensive income tax adopts seven levels of progressive tax rate, and the highest marginal tax rate is 45%. Therefore, giving enterprises and individuals low income tax rates has become a major principle of Hainan's tax reform.

  The Plan also takes two steps in this regard: In terms of corporate income tax, by 2025, the encouraged industrial enterprises registered in the Hainan Free Trade Port and operating substantively will be subject to a 15% reduction in corporate income tax. Before 2035, enterprises registered in Hainan Free Trade Port and substantively operating (except for negative list industries) will be subject to a 15% reduction in corporate income tax.

  The plan is clear. For enterprises in the tourism industry, modern service industry, and high-tech industries, the income from new overseas direct investment before 2025 will be exempted from corporate income tax.

  Ma Long believes that this is also a highlight of the preferential income tax policy, which is a breakthrough for the Chinese resident enterprises under the current corporate income tax law to tax the global income.

  With regard to personal income tax, before 2025, high-end talents and talents in short supply who work in the Hainan Free Trade Port will be exempted from the actual personal income tax burden of more than 15%. Before 2035, for individuals who have lived in the Hainan Free Trade Port for a total of 183 days within a tax year, their comprehensive income and operating income derived from the Hainan Free Trade Port will be exceeded by 3%, 10%, and 15%. Progressive tax rates impose personal income tax.

  Shi Wenwen said that corporate income tax and individual tax cuts are very strong. In terms of specific implementation, the income tax benefits are getting wider and wider. For example, the early stage of corporate income tax concessions is limited to encouraging enterprises, similar to the preferential 15% income tax preferential policies for western development, but the latter will be extended to all companies outside the negative list industry. Personal tax has also expanded from the focus on high-end and shortage of talents to ordinary residents, and expanded from comprehensive income to include operating income (the highest marginal tax rate is 35%).

  Ma Long said that the 15% tax preference for Hainan Free Trade Port should go further than the Greater Bay Area Personal Income Tax Concession introduced in 2019. The Greater Bay Area Personal Income Tax Concession is aimed at overseas high-end talents and talents in short supply. The way. The "Plan" stipulates that high-end talents and those in need who are working in Hainan Free Trade Port will be exempted from the actual personal income tax burden of more than 15%. The "Plan" does not stipulate that foreign talents must be able to enjoy the 15% tax preference, and the 15% tax preference is realized by directly "exempting" more than part of it, without the need to first post and post the post. If this preference of the "Plan" is implemented, it will become a powerful measure for Hainan to attract high-end talents and talents in short supply, and it will be attractive to relevant people at home and abroad.

  "These tax policies focus on the free and convenient trade and investment, promote the convenient and efficient flow of various elements such as funds and personnel, and form an early harvest. It will also help Hainan to attract a group of group headquarters in related industries to invest overseas." Ma Long said.

Multi-tax degeneracy is sales tax

  A major feature of the tax system of foreign free trade ports is that there are relatively few types of taxes, which are easy to comply with. There are 18 current tax types in my country. Therefore, Hainan Free Trade Port explored to simplify the tax system, reduce the indirect tax ratio, achieve a simple and scientific tax structure, fully optimize the tax system elements, significantly reduce the tax burden level, clear income attribution, and generally balanced fiscal revenue and expenditure.

  To this end, the "Plan" makes it clear that while the island-wide customs clearance operation, the current value-added tax, consumption tax, vehicle purchase tax, city maintenance and construction tax and education surcharge and other taxes and fees are degenerate and started in the retail of goods and services Relevant work on the collection of sales tax. And sales tax and other domestic tax revenues are used as local income.

  "This is a reengineering and reconstruction of the current tax system, which is of great significance. To a certain extent, there are double taxes on taxes and fees such as value-added tax, and the actual tax burden is consumers. In the future, it will be merged into sales tax, and the collection and management will be more Convenience will reduce the burden of market players. And taxation at the consumer end will help to change the government's previous emphasis on investment and consumption, and pay more attention to improving the business environment to create a fair competitive environment for the market." Shi Wenwen said.

  PwC China's indirect tax partner Li Jun analyzed the first financial and economic analysis, in order to improve the tax convenience of enterprises and create a better quality tax business environment, Hainan will degenerate taxes and other taxes. These taxes are directly related to the sales of goods or services, and are calculated based on sales. Under the current collection and management system, these taxes need to be calculated and declared separately. If combined calculations and combined declarations are based on sales, it will help to simplify the tax declaration process, reduce the burden on enterprises, and also improve the efficiency and quality of tax collection.

  Will the Mainland also adopt the same degenerate tax reform in the future?

  A number of finance and taxation experts told CBN that the current special policy of merging VAT and other sales taxes will only be used in the special area of ​​the Free Trade Port, and it is unlikely to be copied to the mainland for quite some time. However, if this reform experiment in Hainan is very successful, it will not rule out copying to the mainland.

  In addition, the "Plan" will also authorize Hainan to reduce, exempt, and temporarily levy government funds in addition to the nature of ecological compensation according to the development needs of free trade ports, and to independently establish enterprise-related administrative fee-charging projects.

Prevent becoming a "tax haven"

  The unprecedented preferential tax and fee policies will make Hainan's enterprises and individuals less taxable than the mainland in the future. How to prevent some companies from exploiting policy loopholes and causing tax base erosion and profit transfer is a problem that the relevant parties have considered in advance.

  The "Plan" requires that the tax management department evaluate and warn the tax payment according to the principle of the location of real economic activities and the place of value creation, formulate concise and easy judgment standards for the actual business place and location of residence, strengthen the identification of tax evasion risks, and prevent tax Base erosion and profit transfer to avoid becoming a "tax haven".

  In the aforementioned 15% corporate income tax preferential policy enjoyment conditions, the "Plan" also emphasizes that enterprises must be registered in Hainan Free Trade Port and operate substantially.

  Ma Long believes that the preferential policies of 15% corporate income tax and 15% personal income tax are aimed at attracting enterprises to make effective investment and substantive operations in Hainan Free Trade Port, while also increasing local employment and attracting talents, so as to have a local economy Substantial contribution. In order to avoid the phenomenon of purely registered enterprises that do not operate on the ground, or obtain tax benefits through unreal employment relationships, the "Plan" requires tax administrations to assess and warn taxpayers in accordance with the principle of the location of substantial economic activities and the place of value creation, Combating tax evasion through the criteria for determining the residence of the actual place of business and location. This is consistent with China's practice of actively participating in international tax collection and management cooperation and strengthening prevention of tax base erosion and profit transfer in recent years.

  In addition, the "Plan" also made clear that it actively participated in international tax collection and management cooperation and strengthened the sharing of tax-related information. Strengthen tax classification services and management in the tax field, and take corresponding measures against illegal and untrustworthy enterprises and individuals in accordance with laws and regulations.

  Professor Li Xuhong of Beijing National Accounting Institute told First Financial and Economics that China should actively integrate into international tax rules, strengthen tax-related information exchange, prevent tax base erosion and profit transfer, and promote Hainan Free Trade Port to become stronger and stronger in core business and avoid becoming a world The area of ​​tax arbitrage in each country.

  An author of the National Development and Reform Commission, Any Lifeng, wrote that during the construction of the Hainan Free Trade Port, it is normal for certain industries and fields to present certain risks, but no major risks can occur, nor can they be caught in the "disruption, confusion, and management." The dead circle. The ability to "pipe" is proportional to the space to "put". Before implementing major policies, we must carry out risk assessments and stress tests, promptly check for regulatory loopholes, and tighten the system "fence".

  The establishment of Hainan’s special taxation system was not accomplished overnight, but in accordance with the different stages of the construction of Hainan Free Trade Port, the arrangement of zero tariff, low tax rate and simplified taxation system was implemented step by step to form an internationally competitive taxation system.

  He Lifeng said that in the process of reform, it is necessary to grasp the relationship between reform, development, and stability, and adhere to the principle of "first set up, then break, not stand still". Before the introduction of new laws, regulations and system rules, the original ones should continue to be implemented to avoid gaps and ensure orderly reform and smooth and orderly work.

  Author: Chen Yi-Journal