While China’s first-tier cities like Shanghai look worldwide for inbound investment, its less developed cities mainly draw investment from businesses operating in them. Intense competition, using unusually favorable tax rebates and other subsidies, has been on show for a long time, wrote Lin Jianyong, an assistant researcher at the Institute for Economic Research, Shanghai Academy of Social Sciences, for news portal yicai.com.
This practice has had some negative impacts, he noted. For one thing, pointed out a document released by the State Council (China’s cabinet) in 2014, such excessive preferences have disrupted market order, affected the effects of the State’s macro-economic adjustment policies, and even possibly triggered international trade frictions.
For another, such policies are case-specific with a window attached to them. Once the policies expire or even within that window, some businesses are tempted to move to another place with equally or more favorable policies. In this case, the original places could resort to blocking and delaying their movement, which adversely affects the World Bank’s business environment rating, Lin said.
Shanghai is building a world-class business environment. As part of a fair environment, Lin proposed, the city could manage its local tax arrangement to curb adverse competition among its districts in drawing investment.
Specifically, if a business moves from one district to another, the portion of taxes that the district-level government can enjoy should stay with the original district within the first five years after relocation, and that portion should be divided equally between the original district and the receiving district for the second five years. If the business moves again, the same rule applies, without affecting the district's tax income.
The effects of the policy when implemented for some time can be assessed, before being fed back to the central government for reference, he said, which can then be rolled out nationally.
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