This is the second article in a series dedicated to comparing the costs and ease of doing business in Vietnam and China from the standpoint of a foreign investor.
Jan. 22 – Many foreign investors operating in China today are looking at Vietnam as a sort of additional “province” or alternative hub to integrate into their current Chinese or Asian supply chain. This is particularly true in sectors where China and Vietnam often compete, such as leather goods, shoes, textiles, furniture and light electronics. This list is set to expand as Vietnam is upgrading its industrial base to high-end and high-tech manufacturing investments. Small-sized companies, however, are often discouraged by the idea that expanding into another country would mean massively increasing overheads or that the returns would not be worthwhile when considering the initial investment.
After comparing the costs of registering and maintaining representative offices in the first article, this piece now looks at the current regulations on corporate income tax as they apply to foreign investors to check whether Vietnam offers any additional advantages over its neighboring country to the north.
China Corporate Income Tax: Past and Present
Let’s start with a look at China’s previous CIT law, just as a comparison exercise that might help us to understand the evolution behind FDI regulations for both China and Vietnam. The “Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises” which was valid from July 1991 until it was replaced in March 2007, was a completely different regime that distinguished foreign-invested from domestic-invested companies and where the former had many preferential tax advantages. The main aspects of the 1991 Income Tax Law were:
- Article 5: Standard national rate at 30 percent, plus an additional local rate at 3 percent.
- Article 7: Reduced tax rate at 15 percent for FDI engaged in production or business operations and established in special economic zones (i.e. Shenzhen, Xiamen, Shantou, Zhuhai and Hainan).
- Article 7: Reduced tax rate of 24 percent for FDI engaged in production established in coastal economic open zones, or in the old urban districts of cities where special economic zones or economic and technological development zones are located (i.e. Guangzhou and Tianjin).
- Article 8: Exemption for the first two years of profit making activities for FDI involved in manufacturing scheduled to operate for a period of not less than 10 years. Additional 50 percent reduction from the third to fifth years of operation.
- Article 10: A 40 percent refund on CIT paid on profits of foreign investments in China reinvested in the country.
In short, from the early 1990s until March 2007, most of the newly-established foreign invested manufacturing companies in Mainland China would enjoy two years’ tax exemption and the ensuing three years would see 50 percent reduced rates. In addition, the CIT rate would depend on the location where the investment was located. This could vary from 15 percent in Shenzhen and Zhuhai, to 24 percent in Guangzhou or Qingdao, or 30 percent in Xi’an or Changsha.
However, from January 2008, China adopted the “Law of the People’s Republic of China on Enterprise Income Tax” which set the CIT rate applicable to both foreign-invested and domestic-invested companies operating in China at 25 percent.
This has been an epochal reform from the previous regulation which provided preferential advantages for foreign-invested enterprises. Under the 2008 CIT Law, the corporate income tax is now the same no matter the location, the scope of the investment, nor whether the investment is domestic or foreign invested.
