CHINA: Hainan boosts supervision of free-trade port to prevent island becoming ‘tax haven’.

As published on scmp.com, Monday 21 June, 2021.

Hainan is tightening supervision of its business environment to ensure the tropical island does not become a tax haven, after Beijing outlined plans to turn it into a free-trade port that might one day rival Hong Kong and Singapore.

China’s central government unveiled a blueprint to transform the 35,000 sq km island by establishing it as a duty-free shopping hub, relaxing visa requirements and loosening restrictions on capital flows and data by 2035.

To attract talent and financing, the island province of 9.5 million people reduced its income tax rate for selected individuals and companies to 15 per cent, far lower than the mainland and closer to the average 17 per cent level in Hong Kong.

But on Monday, provincial governor Feng Fei said Hainan would tighten supervision of business registration and operations to ensure entities could not take “undue advantage of loopholes”.

“We will not let Hainan free-trade port become a tax haven,” he told a media briefing organised by the State Council Information Office.

Since Hainan was announced as a free-trade port last June, business registrations on the island have skyrocketed.

Last year, the number of foreign-funded companies that registered in the province rose 197.3 per cent to 1,005, the highest number since 1988, while foreign direct investment doubled to US$3 billion.

“For the enterprises that attract investment, we need to clarify the preferential tax policies and thresholds,” Feng said. “We will not let a single shell company in.”

But he added the island’s tax system, which is separate from the mainland, will remain “very competitive”.

Monday’s announcement follows a proposal by the Group of 7 (G7) in early June to set a minimum global corporate tax rate of at least 15 per cent. The initiative aims to clamp down on tax evasion and prevent countries competing by offering lower taxes to attract multinationals.

China, which has a nominal corporate tax rate of 25 per cent and grants a 15 per cent rate to some hi-tech companies, has not released an official position on the reform.

Rich nations are concerned that Beijing may seek exemptions for certain sectors as the negotiations go into the next phase, but Chinese analysts say the initiative has few potential risks for the country because it is already a magnet for global investors.

In recent years China has cut tax breaks, relying on its well-established supply chain ecosystem and huge domestic market to attract overseas investment.

The deal between the United States and its G7 partners Britain, France, Japan, Italy, Germany and Canada will go to finance ministers from the Group of 20 nations, including China, for support in July.