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The logic of local investment promotion must change!

On August 1, 2024, my country's first administrative regulation on fair competition review, the "Regulations on Fair Competition Review" (hereinafter referred to as the "Regulations"), was officially implemented. It stipulates that without legal basis or approval by the State Council, "tax incentives shall not be granted to specific operators." So far, tax incentives, which used to be an important means of attracting investment, may be phased out.

Prior to this, on July 29, Vice Premier Zhang Guoqing wrote an article in the People's Daily pointing out that it is necessary to standardize local laws and regulations on investment promotion, clarify and strictly implement the implementation boundaries of preferential policies in terms of financial rewards and subsidies, tax refunds, and land transfer, and strictly prohibit illegal and irregular policy preferences. We must promote the transformation of investment promotion in various places from competing for preferential policies to create "policy depressions" to competing for business environments to create "reform highlands", and prevent vicious internal competition.

"The regulations are mainly aimed at preventing government departments from introducing policies and measures that exclude or restrict competition. Focusing on the word 'prevention', they play a special role in the entire anti-monopoly legal system," said Peng Xinmin, director of the Regulations Department of the State Administration for Market Regulation.

It is understood that in order to maximize the prevention effect, the Regulations have made a series of institutional arrangements.

Meng Yang, deputy director of the State Administration for Market Regulation, said that the "Regulations" focus on the overall work of building a unified national market, clarify the behavioral rules for the introduction of relevant policies and measures, draw red lines and bottom lines, and prevent the introduction of policies and measures that contain content that affects fair competition in the market from the source.

Cleaning up tax holes

"At present, some local protectionism and market segmentation behaviors have not been completely banned, which hinder the free flow of commodity factors and reduce the efficiency of resource allocation and economic operation. The Regulations are conducive to breaking down various closed small markets and self-circulation, and forming a large domestic circulation with mutual promotion of supply and demand, simultaneous progress of production and sales, and smooth and efficient operation." Meng Yang said.

A grassroots taxation department staff member recalled to the China Times reporter that in 2017, a large number of film and television companies with the name "Horgos" suddenly emerged in large numbers, "contracting" the opening and ending credits of almost all movies and TV series. This small border town bordering Kazakhstan quickly became known to people and became the hottest city at the time.

That year, Horgos registered 14,472 new market entities of various types with a registered capital of 201.5 billion yuan, up 341.6% and 288% year-on-year respectively. Among them, film and television and cultural enterprises grew rapidly. In April 2017, Horgos had more than 600 film and television companies. By April 2018, the number had grown to more than 1,600, an increase of more than 1,000 in one year.

What attracts many film and television companies to settle down is the rare tax preferential policy.

It is understood that in order to develop Xinjiang's economy and trade exchanges with foreign countries, my country has implemented a preferential policy of "five reductions and five exemptions" for corporate income tax in Horgos, which exempts corporate income tax for five years from the tax year in which the first production and operation income is obtained. After the tax exemption period expires, the local share of corporate income tax will be exempted for another five years. The local share of corporate income tax will be subsidized to enterprises in the form of rewards by the Development Zone Finance Bureau.

The tax exemption policy plus cash rewards means that if you register a company in Horgos, you will not only pay much less tax, but you can also get additional financial rewards, which is impossible to enjoy in other places.

However, Horgos's tax preferential policies did not boost the local economy. Instead, they transferred a large amount of profits through the preferential policies, resulting in serious tax loss.

At that time, most of the companies registered in Horgos were "shell companies". These companies did not carry out any business or production activities in the local area, and had no employees or office space. One registered address could even register thousands of companies. After completing the registration, the companies achieved tax avoidance by transferring huge profits.

An employee of an intermediary company once told our reporter that domestic companies do not need to invest in setting up factories in Horgos. They only need to register the company or set up a settlement center there. Companies that meet the industry preferential catalogue can enjoy tax incentives.

This type of investment promotion where companies are only registered but not invested is called "registration economy" locally.

According to statistics from the local tax department, every year at least 200 companies transfer more than 20 million yuan in profits to their subsidiaries registered in Horgos. This means that in just one year, Horgos alone loses 4 billion yuan in tax revenue.

The above-mentioned tax department staff told the reporter of China Times that it is not just Horgos. In order to attract investment, many places have put up the sign of "tax depression" and attracted more enterprises to settle down by means of super preferential policies. However, such investment competition with fiscal revenue as a bargaining chip has affected the effective allocation of resources and the innovative vitality of market players, and has also made the competition between regions more and more fierce. Many regions with tight finances have to make a desperate bet.

Fu Hongyan, Party Secretary and Chairman of Shanghai Science and Technology Innovation Group, once lamented to the media: "Some guidance funds put investment attraction first, but if they do not consider local regional advantages, resource endowments, and industrial foundations, they will deviate from the essence of investment, and will eventually cause regional divisions and hinder the establishment of a unified national market."

This soon aroused the vigilance of relevant departments. In 2018, Horgos was the representative of the country, which began to tighten the "tax haven" policy. By August 2024, this "tax-based investment promotion" model was completely cut off by the policy.

Build a unified national market

On July 30, the Political Bureau of the CPC Central Committee proposed to strengthen industry self-discipline and prevent "involutionary" vicious competition.

In response to reporters' questions, Xiao Weiming, deputy secretary-general of the National Development and Reform Commission, said that in recent years, the NDRC has followed the decisions and arrangements of the Party Central Committee and the State Council, especially the relevant requirements of the "Opinions of the CPC Central Committee and the State Council on Accelerating the Construction of a Unified National Market", and has worked with relevant departments and localities to adhere to the basic principles of breaking and establishing at the same time, establishing first and then breaking, unified rules, facilities and supervision, and promoted a significant increase in consensus among all sectors of society. The results are gradually emerging.

On the one hand, we need to improve basic systems such as property rights protection, market access, fair competition, and social credit. The formal implementation of the Regulations is a very important basic legal system. In addition, the negative list of market access has been reduced from 151 items in 2018 to the current 117 items, and there is room for further reduction.

On the other hand, we will make great efforts to break down the various barriers that restrict the construction of a unified national market.

The National Development and Reform Commission has established a system for rectifying problems of improper interference in the construction of a unified national market and for interviews and notifications on typical cases. It has carried out problem verification and rectification, kept a close eye on prominent issues such as local protectionism and market segmentation that business entities have strongly reflected, insisted on investigating clues and carrying out rectification, and corrected a number of prominent problems in the fields of government procurement, new energy vehicles, energy resources, pumped storage, etc. It has also promoted the experience of some regions in establishing a unified provincial bidding document standard text and publishing a negative list for the preparation of bidding documents.

"In the next step, we will resolutely follow the deployment requirements of the Third Plenary Session of the 20th CPC Central Committee, and work with all relevant parties to further consolidate the above-mentioned achievements, speed up the improvement of basic systems conducive to the construction of a unified national market, promote the construction of a unified market in key areas such as transportation, commercial logistics, and energy markets, continue to correct outstanding problems in key areas, and strive to eliminate local protectionism and market segmentation. The new achievements in the construction of a unified national market will provide strong support for the construction of a high-level socialist market economic system." Xiao Weiming said.

Li Yongyan, deputy representative of the Ministry of Commerce for international trade negotiations, also told reporters including the China Times that the Ministry of Commerce will thoroughly study and implement the spirit of the meeting, promote the construction of a unified national market, steadily expand institutional opening-up, deepen foreign trade system reform, deepen foreign investment and outbound investment management system reform, optimize the regional opening-up layout, and improve the high-quality joint construction of the "Belt and Road" mechanism, so as to make new contributions to the promotion of Chinese-style modernization with the actual results of business reform and development.

Editor-in-charge: Xu Yunqian Editor-in-chief: Gong Peijia