Tax-sharing to spark relocations

The relocation of enterprises within the Beijing-Tianjin-Hebei area will be facilitated by a tax-sharing arrangement intended to pacify governments that fear losing revenue when companies leave their jurisdictions.

The plan, announced by the Ministry of Finance on Wednesday, will compensate governments by providing a three-year transitional period, during which the original government can get 50 percent of value-added, corporate income and business tax payments.

But not all relocated enterprises in the megalopolis will be covered. Only those subordinate to local governments' plans, and major companies that have paid an annual average of 20 million yuan ($3.2 million) in the three years prior to the relocation, will be included.

If a relocated enterprise fails to generate annual tax revenue of 20 million yuan after three years, the 50-50 sharing arrangement will be extended for two years.

The plan only covers companies that are ordered to move. Those that relocate voluntarily will be taxed according to the laws.

The arrangement is an apparent effort to minimize resistance from local governments that worry about the erosion of their tax base as major enterprises in their jurisdiction move out. It is also part of the broader strategy to integrate the Beijing-Tianjin-Hebei area, with enterprises that no longer fit a region's position able to move elsewhere. For example, companies deemed unsuited to remain in Beijing could relocate to Hebei.

The three regions will jointly develop the 13th Five-Year Plan (2016-20), a sign of increasing policy coordination, the Economic Information Daily reported.

The "rule-based" tax sharing is a departure from the past, where local governments negotiated such arrangements on their own, according to Shi Zhengwen, a fiscal and tax law professor at the China University of Political Science and Law.

A notable example of the difficulty of such a move involved Beijing's State-owned steel giant Shougang Group. It took years to persuade the Beijing government and Shougang employees that operations should move to Hebei. It then took a long time to settle a dispute between Beijing and Hebei over the division of Shougang's tax payments.

Shougang's tax payments accounted for 5 percent of Beijing's tax revenue and about half of the district's where it was located in 2005.

Although the Ministry of Finance's arrangement may resolve the problem, experts still suggest the government should leave relocation decisions up to companies.

"The government should respect the rules of the market. There were lots of unexpected problems involved in government-driven relocation cases. The government should guide relocation through industrial policies and infrastructure construction," Shi said.