This content is from: Local Insights


President Jiang Zemin's recent call for restraint of the People's Liberation Army's widespread business activities is only part of a greater campaign to separate government and business in China. In the areas of tax and finance, two events highlight this tendency:

  • l the Ministry of Finance and the State Administration of Taxation have reportedly issued a circular prohibiting the granting of exemptions on enterprise income tax by local governments without central level approval; and
  • l in Beijing, the Director of the State Council's Legal Affairs Office pointed out that government bodies are not allowed to assume the role of a guarantor in business activities.

The two announcements should hardly come as a surprise because they only reiterate the letter of the law. Local governments never had the authority to grant tax concessions on taxes raised on the national level, such as the further defined reductions from the 30% national income tax for projects in special locations or special industries.

Article 8 of the Security Law clearly states that state organs must not act as guarantors, except with the approval of the State Council where they act as on-lenders for loans from foreign governments or international economic organizations. Another exception is a convertibility guarantee undertaken by the state for build-operate-transfer (BOT) projects (Item 3 of the BOT Circular issued by the State Planning Commission and related ministries in 1995).

In practice, however, to attract foreign investors local governments frequently hand out rebates beyond the scope of their administrative powers. For similar reasons, to secure projects which otherwise would not find adequate funding, government entities, in particular at provincial or local level, give guarantees. The above moves underlines the determination of the Chinese central government to regain control by drawing a clear line between government and business. If these efforts are successful, the workings of the Chinese administration could eventually become more transparent and predictable.

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