1 June 2003
Dongguan Raises Income Tax for Processing Enterprises
Dongguan recently issued provisional measures on income tax for enterprises engaged in processing and assembling with supplied materials, and compensation trade. Although the government assured there would be no change of policies towards foreign businesses, the move sparked off controversy in the trade in Dongguan. Some enterprises complained that under the new rule the tax amount payable would be four to five times higher than before, and some factory owners suspected there would be policy change regarding processing activities and compensation trade. The head of Dongguan's local taxation bureau points out that the new system is aimed at standardising taxation measures and plugging loopholes.
A major change in the new taxation measures is to assess an enterprise's income tax according to its cost or income instead of its processing fee on a monthly basis in the past. However, this change triggers off controversy among enterprises engaged in processing and compensation trade in Dongguan. Some Hong Kong companies claim that the new taxation system has greatly affected the manufacturing sector. Previously, tax was imposed according to an enterprise's total net profit. But the new system requires an enterprise to pay tax according to its total cost and expenditure, resulting in a tax amount four or five times more than before. Furthermore, the new system also imposes tax on an enterprise's R&D investment, which may dampen its enthusiasm in innovation.
The local taxation bureau of Dongguan admits that under the new measures enterprises engaged in processing and compensation trade in Dongguan have to pay 0.8 to one time more tax than before, while some enterprises may even have to pay tax four to five times higher.
According to the Dongguan local taxation bureau, there is no policy change for enterprises engaged in processing and compensation trade in the city. Dongguan's foreign exchange income, which has been ranking third in China in the past three years consecutively, mainly comes from enterprises engaged in processing and compensation trade. However, tax levied on these enterprises in the past was relatively low, not proportionate to their scale of investment. For example, the 8,000 processing and compensation trade enterprises in Dongguan paid a total of Rmb150 million in corporate income tax in 2001, with each enterprise paying merely an average of Rmb1,500 a month, which is lower than that paid by some large-sized individual businesses.