The State Administration of Taxation stressed that this year, it will strictly deal with tax-related problems in local illegal investment promotion.
Tax incentives and financial incentives will be fully refunded
On June 6, 2024, Premier Li Qiang signed Order No. 783 of the State Council, promulgating the Regulations on Fair Competition Review (hereinafter referred to as the "Regulations"), which will come into force on August 1, 2024. One of the paragraphs on the policy of tax refund is eye-catching, and the original text is as follows: "(6) Regulate the way of revenue sharing. Tax revenues should be clearly divided between governments at all levels below the provincial level, and the main types of taxes should be shared proportionally, and the sharing ratio of each tax type should be reasonably determined in combination with factors such as the distribution of the tax base, the scale of revenue, and the degree of equilibrium between regions. Non-tax revenue can be shared in the form of total share, classified share, incremental share, etc., and gradually standardized. In principle, the attribution and sharing ratio of the same tax revenue in the province between provinces and cities, between provinces and counties directly under the jurisdiction of provinces, between cities and under their jurisdictions, and between cities and counties under their jurisdiction should be gradually unified. Unless otherwise stipulated by the state, the policy of full retention or incremental return of fiscal revenue to various regions will be gradually abolished, and standardized transfer payment arrangements will be adopted that really need to be supported. Gradually standardize the income relationship between cities divided into districts and their jurisdictions. Reasonably prepare revenue budgets at all levels in combination with the actual tax sources, collect taxes and fees in accordance with laws and regulations, strictly implement the policy of tax refunds, tax reductions and fee reductions, and strictly prohibit false collection of idling, collection of "excessive taxes and fees", and arbitrary fees, and shall not conduct assessment and ranking of tax revenue indicators in violation of regulations. Gradually clean up subsidies or rebates that are linked to improper market intervention and tax revenues. ”
In addition to the "Regulations", a number of provinces have successively issued documents requiring local governments to gradually clean up improper market intervention, subsidies or refund policies linked to tax revenues. Some enterprises have responded positively to the return of non-compliant financial incentives and subsidies. At the same time, exposing the problem of local governments formulating preferential tax policies in violation of regulations in the process of attracting investment has become a major focus of this year's national audit work. The State Administration of Taxation stressed that this year, it will strictly deal with tax-related problems in local illegal investment promotion.
"Tax returns" have played an important role in attracting local investment
2.1 Investment promotion is a way for local governments to carry out industrial structure competition
The official investment attraction work in mainland China started in 1978. After the convening of the Third Plenary Session of the 11 th CPC Central Committee, the mainland government established opening up to the outside world as a basic national policy, and its purpose was to actively develop foreign economic and technological cooperation, exchanges, and trade exchanges, absorb and utilize foreign funds and advanced technology, develop productive forces, and accelerate the process of socialist modernization on the mainland. Attracting foreign investment is an important part of the mainland's policy of opening up to the outside world. Since then, the work of attracting investment has been put on the important agenda.
The "investment promotion" policy was initially implemented after the reform and opening up, mainly in coastal special economic zones, aiming to attract foreign investment through supra-national treatment. In the 90s, "investment promotion" gradually shifted to domestic capital, which became one of the key measures of local governments to promote industrial upgrading and regional competition. With the maturity of the original capital accumulation in the coastal areas and the gradual upgrading and transformation of the industrial structure from labor-intensive industries to capital- and technology-intensive industries, local governments in inland areas have launched investment promotion policies with "tax competition" and "land competition" as the basic policies, hoping to attract enterprises to settle in, improve local employment and tax revenue, and promote the steady development of the regional economy.
2.2 Preferential tax policies are one of the important means for local governments to attract investment
In the past few years, in order to attract investment and promote economic, fiscal and tax growth, local governments or administrative agencies often promise various preferential policies, tax incentives, coordination assistance and other conditions when entering into investment promotion agreements with investment enterprises, so as to strive for the implementation of projects.
In the past, preferential tax policies have played an important role in the process of attracting investment from local governments. According to the quantitative analysis and research results of "Land Finance, Enterprise Tax Subsidies and Investment Promotion", providing tax subsidies can help local governments attract more enterprise investment; At the same time, local tax authorities can actively guide the upgrading of the local industrial structure by differentiating preferential tax policies for different types of enterprises.
2.3 Clean up the background of the tax incentive and subsidy policy
However, tax rebates and incentives have their advantages, as well as their drawbacks.
(1) Unfair competition: Some places attract enterprises to settle in through preferential policies such as non-standard taxes and fees, although they can increase local investment and employment in the short term, but in the long run, this practice seriously distorts the fair competition environment of the market. Enterprises may choose a region because of tax incentives, not because of their real market attractiveness or competitiveness, but because of tax incentives, resulting in unfair competition among enterprises. At the same time, there are also some preferential policies with a certain degree of local protectionism, which is not conducive to the clearance of low-efficiency enterprises and industrial upgrading from a national perspective.
(2) Policy fulfillment risk: Due to the low transparency of policy implementation, the commitment of preferential tax policies may sometimes lack legal basis or enforcement strength, resulting in enterprises finding that tax incentives cannot be fulfilled as scheduled after investment, thus facing legal risks and economic losses. This situation not only affects the investment decisions of enterprises, but also affects the image and credibility of local governments. For example, in January 2024, Jiangsu Boqian New Materials faced the need to return the two incentive funds totaling 24 million yuan obtained by the company in 2023 from the Finance Bureau of Suqian High-tech Development Zone, and finally the company's net profit in 2023 was -32 million yuan.
(3) It may give rise to "migratory bird" enterprises and the industrial chain of fraudulent compensation: enterprises enjoy tax incentives, and the cost is significantly reduced during the financial subsidy policy, but this preferential treatment is usually time-limited. Once the offer expires, some businesses may look for a new place to continue enjoying similar policies, leading to migration. At the same time, local financial subsidies to enterprises will give rise to fraud and supplement the industrial chain, which will not achieve the desired effect, and may even be counterproductive.
In our view, the above-mentioned shortcomings are the reason why the state is gradually cleaning up the improper intervention in the market and the subsidy or rebate policies linked to tax revenues. In this context, many places have begun to reduce their dependence on various preferential tax policies, which is equivalent to a type of tool for attracting investment.
So, where will local governments attract investment in the future? What other "tools" are in the investment promotion toolbox? In particular, what are the advantages of the capital investment promotion method that has attracted attention in the past two years, and can it complement the existing investment promotion tool system and promote economic growth more efficiently?
Post-tax rebate policy era
Rising capital investment
Since 2024, many places have begun to carry out special clean-up of a series of policies such as tax incentives, tax refunds, tax park tax refunds, and tax contribution incentives, and issued documents to abolish them. Previously, 55 regions have cleaned up and abolished the preferential tax refund policies issued in violation of regulations.
Table: Many places have begun to clean up illegal tax refund policies
Data source: Rongzhong Research
3.1 Cleaning up preferential tax policies will affect the city's ability to attract investment
We believe that the liquidation of preferential tax policies will lead to a decrease in the attractiveness of local governments, an increase in the importance of policy transparency and stability, and a further differentiation of urban investment attraction capabilities.
1. The attractiveness of investment has declined
As policies are tightened, companies will consider the stability and legitimacy of tax policies more when choosing where to invest. This will lead to greater competitive pressure on some cities to attract investment, especially in areas that rely on tax rebates to attract investment.
2. The complexity of corporate investment decisions has increased, and the importance of policy transparency and stability has increased
When faced with policy changes, companies may need to re-examine their business models and investment plans, which increases the complexity of investment decisions. At the same time, enterprises will pay more attention to the transparency and compliance of local policies to avoid financial risks caused by policy changes.
3. The city's ability to attract investment is further differentiated
Economically developed regions and strong industrial bases will be more attractive. These regions themselves have good infrastructure, high-quality public services and a well-established industrial chain, and the relative advantages of these cities will be more prominent after the tax refund policy is cleaned up. In economically underdeveloped regions, the original means of relying on high tax rebates to attract investment will become ineffective, and it will be more difficult to compete with developed regions.
At the same time, the impact of tax incentives on different regions and industries varies. For example, some traditional manufacturing and bulk commodity trading industries often rely on tax rebates to reduce costs because of their own heavy tax burdens. The clean-up of the tax rebate policy will lead to higher operating costs for these industries, and the regions with a higher proportion of these industries will face greater challenges.
3.2 Capital investment is more in line with the long-term trend of the mainland
It can be seen that the clean-up tax refund policy will have a certain negative impact on the investment attraction ability of most cities, but the demand for urban investment attraction is persistent, and different cities still continue to use various policy tools to compete, such as leveraging national tax policies, optimizing the business environment, establishing market-oriented investment promotion companies, capital investment, etc. Especially in the past two years, local governments have been enthusiastic about capital investment promotion. This paper attempts to compare and analyze various investment promotion tools to explore whether capital investment can become the mainstream mode of urban investment.
- Preferential tax policies: Although some local tax incentives have been abolished, national policies and reasonable regional incentives still exist and will continue to support high-tech industries and strategic emerging industries.
- Optimize the business environment: In the process of attracting investment, small and medium-sized cities need to transform from focusing only on hardware supporting facilities, and need to provide high-quality soft services at the same time. Local governments can create a good business environment by establishing and improving the enterprise service system, providing one-stop services, simplifying the administrative approval process, and creating a good business environment.
- Market-oriented investment promotion companies: Some areas have begun to set up market-oriented investment promotion companies to realize the two-wheel drive of government-led investment promotion and market-oriented investment promotion.
- Capital investment: Small and medium-sized cities can replace the traditional tax return policy by establishing equity investment industrial companies or industrial guidance funds. For example, Chongqing's park reform proposes to "promote the restructuring of the operating company in the park development zone and accelerate the transformation into an industrial investment company and a capital operation company", as well as the industry-investment integration model adopted by Hefei Industry Investment Group.
3.3 Evaluation of government investment promotion tools
This paper attempts to compare different investment promotion policies from the dimensions of immediacy of policy preferences, scope of enterprises, degree of marketization, difficulty of implementation and supervision, pressure on local finance, and long-term economic benefits, so as to judge the focus and direction of local government investment promotion policies in the future.
(1) Immediate policy preference: For enterprises, preferential tax policies generally need to be invested first, and preferential funds can only be obtained after a period of operation, and the immediacy is low; Optimizing the business environment is a long-term process, and it is difficult for enterprises to see the effect in the short term, and the immediacy is low; Capital investment will often sign an agreement to invest funds before the investment of the enterprise project is landed, and the time for the enterprise to obtain funds will be faster and the immediacy will be high; It is difficult for market-oriented investment companies to directly provide preferential policies, which requires coordination between all parties and has low immediacy.
(2) Scope of applicable enterprises: Optimizing the business environment is beneficial to all types of local enterprises and has a wide range of applications; Preferential tax policies, capital investment and market-oriented investment promotion companies will be screened according to the current development strategy, and only companies with a specific scope can get funds, and the scope of application is medium.
(3) Degree of marketization: preferential tax policies are directly formulated and implemented by the government, and the degree of marketization is low; The optimization of the business environment is mainly promoted by the government in the early stage, but it is possible to introduce market-related entities in the later stage, and the degree of marketization is moderate. Although both capital investment and market-oriented investment companies are led by the government, they need to be closely integrated with the market mechanism and have a high degree of marketization.
(4) Difficulty in implementation and supervision: preferential tax policies are directly formulated and implemented by the government, involving relatively few subjects, but there are also some fraudulent enterprises, and the difficulty of implementation and supervision is medium; However, capital investment needs to involve the establishment of a guidance fund or investment company in the early stage, and a market-oriented investment promotion company also needs to establish another entity, and the difficulty of implementing supervision is also medium; Optimizing the revenue environment involves multiple departments and links, and implementation and supervision are the most complex and difficult.
(5) Pressure on local finance: preferential tax expenditure funds will directly reduce government tax revenue, and the pressure on local finance is moderate; Optimising the business environment may involve a large amount of investment in infrastructure, holding related activities and enhancing services, and it is necessary to increase investment in all aspects, which will put high pressure on local finances. Market-oriented investment companies will have an indirect impact on government revenue, and the pressure on local finances is relatively low; Capital investment uses capital leverage to leverage social capital through the introduction of state-owned assets, but the amount of such expenditure is generally high, which forms a moderate pressure on the finance.
(6) Long-term economic benefits: preferential tax policies have obvious effects in the short term, but the long-term effects are limited, which can easily lead to enterprises relying on policy dividends and low long-term economic benefits; Optimizing the business environment can improve the overall business environment, promote the long-term development of enterprises, and achieve significant long-term economic benefits. Market-oriented investment promotion companies and capital investment promotion companies rely on the professional capabilities of investment promotion companies and capital to attract enterprises to land, which can empower them in the short and medium term, and the long-term benefits need to look at the actual development of enterprises in the local area, and the long-term economic benefits are at a medium level.
On the basis of the above analysis, this paper uses the following scoring criteria to compare and score various investment promotion tools in multiple dimensions. The comprehensive scoring criteria are: except for the items of "difficulty of implementation and supervision" and "pressure on local finance", the rest of the items are 1 point for low, 2 points for medium, and 3 points for high; For the items "difficulty of implementation and supervision" and "pressure on local finance", 3 points are recorded for the lowest, 2 points are scored for the medium, and 1 point is recorded for the high.
Table: Dimensional comparison score table between different investment promotion policies
Data source: Rongzhong Research
It can be seen that the capital investment promotion has performed well in terms of immediacy, scope of applicable enterprises, degree of marketization, difficulty of implementation and supervision, pressure on local finance, and long-term economic benefits, and the overall score is the highest. There is no doubt that the advantages of capital investment outweigh the disadvantages, which can be seen from the enthusiasm of local governments in the past two years. At the same time, relying on national-level policies, optimizing the business environment, differentiated development and other ways have been a long time, taking into account the current macro environment, the transformation of government functions, industrial upgrading and other factors, we believe that local government capital investment, as a relatively new way to attract investment, is in line with the development trend of the mainland, and will become one of the main investment promotion tools in the future for a considerable period of time:
(1) From the perspective of the macro environment, the capital investment policy can not only be in line with the long-term development strategy of the mainland, but also meet the short-term demand for boosting the economy. In the short term, under the increasing downward pressure on the economy, capital investment has become an important means for local governments to stabilize the economy; In the long run, capital investment is in line with the policy direction, and it is actually one of the ways to encourage it at the national level. Considering the current international situation, US dollar capital has reduced its investment in China, and through the form of capital investment, local government capital can partially fill this gap and turn it into a driving force for economic development.
(2) From the perspective of government functions, capital investment is in line with the trend of the gradual transformation of government functions to service-oriented. Capital investment is not only an economic means, but also a way to optimize government services and improve governance capabilities, and the capital investment will force the government to better attract and retain enterprises by providing a high-quality investment environment and efficient services.
(3) From the perspective of industrial upgrading, capital investment can accelerate China's industrial upgrading by introducing local government capital in a targeted manner and further driving social capital. China is promoting the development of manufacturing industry in the direction of high-end and intelligent, which is a long-term process that requires a lot of capital and technical support, and state-owned assets have reason to play an important role in it. For local governments, if they successfully introduce advanced technology and high-end industries through capital investment in the process of industrial upgrading, they will be able to enhance their position in the national and even global industrial chains.
Whether it is the macro environment, the switch of government functions or industrial upgrading, it will be a long-term process, and capital investment can play an active role in it, so we believe that capital investment will play an increasingly important role as one of the main investment tools of local governments for a long time.
3.4 The process of local government selection of projects
It can be seen that the capital investment model can allow local governments to give full play to their advantages more actively and flexibly. Each region has its own unique advantages, and before starting to attract investment, local governments need to think clearly about what types of projects they need to attract, do their own industrial strategic planning, and then select the right companies and projects in the planned market segments.
Industrial Strategic Planning:
(1) Macro environment analysis and self-endowment research: On the basis of grasping the changes of macro factors such as politics, economy, society, and technology, local governments need to fully investigate their own industrial scale, technical level, and industrial chain composition, as well as their own natural resources, human resources, and infrastructure.
(2) Industry selection and positioning: Next, the government needs to determine the key industrial areas for development by comparing the development potential and competitive advantages of different industries, and clarify the positioning of industries in the region and even the country.
(3) Construction and development of the industrial chain: After the selection and positioning of the industry, the government can clarify the key links and weak links of the industrial chain, and formulate corresponding measures to supplement and strengthen the chain. At the same time, it is planned to build industrial parks or characteristic industrial bases to promote industrial agglomeration and coordinated development.
After identifying the dominant industries for development, the next step should be to subdivide the upstream and downstream businesses of the industrial chain, so as to select the merchant groups that are attractive to the government's own conditions. At the same time, through multi-dimensional business information data, we can fully understand the situation of the enterprise, and take the appropriate companies as the main target objects for attracting investment.
Key Project Screening:
(1) Consider the perspective of the enterprise's own competitiveness: the scale of the enterprise, the life cycle of the industry/product, the market size, the development momentum, the technology trend, the supply and demand, the capital operation capacity, etc.
(2) Consider the potential benefits of the government: the industrial policy category to which the project belongs, the unit output value, the unit tax contribution, the energy consumption per unit of added value, environmental protection, safety production, etc.
3.5 Different investment methods of capital investment
After choosing the right project, you also need to choose the right investment method to stand out in the investment competition. Different investment models may lead to different certainty of project implementation, investment risks, team capacity requirements, etc., and local governments need to make specific decisions based on their own and project conditions.
1. Return of the Sub-Fund
After the government sets up a guidance fund to invest in a sub-fund, the sub-fund invests a certain amount in the local area according to the requirements of the guidance fund. The return on investment is not the focus of the government, but the proper meaning is to promote investment, optimize the industry, and drive the local economic development. Due to the different proportions of the amount of reinvestment, the assessment period of reinvestment, and the source of funds of the sub-funds, the reinvestment mode of each fund is different. Usually, state-owned LPs will require the return of investment to be linked to the progress of capital contribution, management fees, performance, forced exit, etc., so as to restrain the GP. If the return investment does not meet the standard, the local government LP has the right to stop the capital contribution, not pay the management fee, or return the carry or even force the withdrawal from the sub-fund.
At the same time, state-owned capital is more sensitive to risks and is not suitable for direct participation in early-stage investments with a high investment failure rate, while the government can allow the sub-fund to play a buffering role by guiding the fund to participate in the sub-fund and leverage social capital, reducing its own risk and making it more suitable for early-stage investment and industrial cultivation.
2. Direct investment
Some state-owned assets directly invest in the project themselves. For example, in 2020, the Hefei municipal government made a 7 billion yuan equity investment in NIO. Under the direct investment method, the government has a stronger influence on the invested enterprises, and when attracting mature enterprises and chain owners in the city's "strengthening the chain and extending the chain" plan, it can also attract upstream and downstream enterprises in the industrial chain to settle down in the local area, so as to build a more complete and efficient industrial ecosystem. In addition, direct investment in high-quality projects can yield higher returns.
Direct investment puts forward higher requirements for the industry awareness and investment ability of the government fund management team, and state-owned assets will be more cautious from the perspective of compliance and risk, and corresponding reasonable exemption clauses are needed to make direct investment funds play a greater role. However, due to risk considerations, state-owned direct investment funds are generally more willing to participate in later rounds of financing.
3. Private placement investment
Private placement investment refers to the government's participation in private placement and investing funds in listed companies to obtain stocks, thereby driving the implementation of fund-raising projects, guiding market resources to tilt towards locally-supported industries, promoting local industrial upgrading, and indirectly achieving the effect of attracting investment. More than 4,000 listed companies in the capital market are the most mature entities in China with a certain size. Through the direct financing of private placement listed companies, local industrial funds can negotiate with listed companies to return investment and other conditions to achieve the implementation of projects while participating in mature enterprises. But in the same way, when participating in private placement projects, government funds need to solve problems such as long internal processes and high compliance requirements.
For example, Shangli County, Pingxiang City, Jiangxi Province, successfully leveraged Jiahe to invest 3 billion yuan in Shangli County by participating in the private placement of Jiahe Intelligence, a listed company, and set up a wholly-owned subsidiary in Shangli County to build an intelligent electronic product production project.
4. M&A investment
M&A investment refers to the mode in which government funds directly merge and acquire enterprises, and then drive enterprises to land in the local area after gaining the right to speak within the enterprise, and most of the current mergers and acquisitions are listed companies. However, M&A investment requires local governments to be familiar with the operation of the capital market and may have to participate in the daily operation and management of the target company, which puts forward higher requirements for the acquirer.