|
|
 |
 |
 |
|
China Waves Biggest Axe Yet on Tax Rebates for Taiwanese Suppliers
2007/10/31
Taiwanese manufacturers operating in mainland China have been fretting recently over an unprecedented massive cut on export tax rebates that the mainland authorities put into effect July 1 this year.
Their worries are justified because a large number of them have long depended on the rebates as a major source of operating profits. On Sept. 11, over 1,200 Taiwanese businesspeople met in a Shanghai building to discuss the issue. "The July 1 tax reform will drive at least half of Taiwanese manufacturers on the mainland out of business," concluded F.R. Liu, general manager of the Taiwan-headquartered investment consultancy Friendly Business Group, which advises Taiwanese firms in China.
 | | Mainland China`s July 1 cut on export rebate tax has unnerved Taiwanese manufacturers operating in the mainland. The picture shows workers at a Taiwanese factory tuning machines. |
The latest cut to the tax rebates is not the first but it is the most extensive, affecting the largest number of products, as well as being the steepest ever in scale.
A total of 2,831 export items are impacted or 37% of the mainland`s total export items, with 533 no longer enjoying rebates due to their causing high pollution, consuming ample energy and resources during manufacturing. The remaining some 2,200 items, including apparel and footwear, saw their rebates cut sharply due to potential for triggering trade friction between China and the United States.
In the past, the Chinese government, to encourage exports, refunded 17% of value-added tax collected in advance from exporters after shipping goods. Since 2004, the mainland has reduced tax rebate rates 11 times, with the latest cuts ranging from 5 to 11% on the some 2,200 items from 13%. Worst yet, exporters in the mainland are required as per the new policy to actually deposit an equivalent of 50% of the tariffs on imported materials in bank accounts assigned by the mainland`s General Administration of Customs. The office refunds such deposits to exporters after goods are shipped; whereas in the past the Chinese customs turned a blind eye even if the exporters did not deposit funds into such accounts. The lax enforcement gave Taiwanese exporters in China more room to manipulate cash flow.
Becoming Eco-sensitive and Energy-efficient
Some industry watchers point out that the massive-scale export tax adjustment will somehow slow down mainland China`s escalating trade surplus, reflecting as well the mainland`s growing awareness of environmental protection and energy conservation.
According to the General Administration of Customs, the mainland registered a trade surplus of US$24.2 billion in July this year alone, higher than the expected US$22.5 billion despite slightly slipping from a month earlier.
Beside the heavy, extensive cuts, the short grace given also has racked Taiwanese investors` nerves. The mainland`s central government began implementing the latest cuts barely two weeks since its announcement on June 18, catching the Taiwanese manufacturers off guard and leaving them failing to cope.
A similar cut made September last year came with a three-month grace period. Senior officials of a mainland Chinese export association thinks that the short grace this time is to prevent driving the mainland exporters to desperate measures before the axe came down, as happened with many exporters last year during the three-month grace.
Even Worse Than Time-deposit Rates
Taiwanese manufacturers estimate the deep cuts will take four to five percentage points from gross margins on average, with glass, tire, bicycle, textile and footwear manufacturers bearing the brunt. Textile exporters in the mainland estimate their profit will shrink to only 3% from 5%, much lower than China`s average time-deposit interest of 3.87%.
For footwear and metal-processing manufacturers, the rebate rate is cut to only 5%, reducing a substantial eight percentage points from 13%. Many of them have been badly hit by the new tax rebate policy because they had quoted pre-rebate-cut prices on products for third-quarter deliveries. "The more they export, the more money is lost," comments Friendly Business`s Liu.
Ming Oyang, chairman of Globe Union, Taiwan`s No.1 supplier of bathroom hardware, points out that reducing tax rebate rates indeed has immediate impact, but mainland China`s government still leaves exporters in China ample maneuver room in the sense that the mainland still maintains a moderate foreign exchange policy.
"Our countermeasures to the latest rebate reduction include passing on costs, building own-brand, paring down costs, improving quality, and moving into processing zones," Oyang says.
A well-known Taiwanese shoemaker says some of its Taiwanese peers in the mainland have tentatively shelved expansion plans and some have decided to move production of low-end shoes to factories in Vietnam and Indonesia.
To cope with the mainland`s new rebate policy, Taiwanese fiber yarn manufacturer Wisher Industrial Co., Ltd. will increase production of baby carriages and luggage cases while apparel maker Makalot Industrial Co., Ltd. is revising pricing quotations.
Justifying Raising Prices on Bicycles
Giant Bicycles Chairman King Liu points out that the latest rebate cut policy has different degrees of influence on his company`s bicycles. Without knowing exact figures resulting from the cuts, he says the new policy is acceptable in terms of timing because the rebate cuts justify raising prices on new bicycle models for next year. Giant is the world`s leading bicycle maker.
J.D. Hsu, a Taiwanese merchant and a former chairman of a Taiwanese manufacturers` association in Fuzhou of the mainland`s Fujian Province, estimates that his textile factory in Fuzhou will lose half its earnings due to the latest rebate-cut policy, which lowers rebate rate for textile manufacturers to only 2%. He notes that textile manufacturers were already struggling in China before the new policy was enacted on July 1, generating gross margins of only 6-7% and net income of only 3-4% in the face of anti-dumping measures imposed by the European Union on made-in-China textile products.
Hsu adds that to cope with such drastic rate cuts he plans to scale down exports from the current 100% and shift an estimated 50% of its output to the mainland`s domestic market by the end of this year.
Some Taiwanese investors are considering moving factories from China to low-cost Southeastern Asian nations like Vietnam. Those without relocation plans are suggested to ready themselves with strategies addressing environmental protection and employee training. The priority is to upgrade employee quality so per-worker output may be raised, a measure which is believed to help control costs.
J.C., Wu, a former chairman of Taiwanese manufacturers` association in Guangzhou who now runs a footwear factory in the mainland, points out that the latest cuts will definitely hurt the mainland`s Taiwanese manufacturers, with the degree of damage depending on how much they rely on imported materials. "The new policy will deal heavier blows to low-cost exporters than high-cost ones, meaning exporters depending on costly imported materials will receive more refunds than those using mainland-produced low-cost materials," he explains.
Most Exporters Must Move Offshore
Wu points out that each industry in the mainland has around 20% of enterprises capable of convincing customers to absorb the additional costs incurred by the new policy. But the remaining 80% would eventually consider relocating to low-cost nations like Vietnam or Indonesia, or simply go under.
Wu stresses that the latest tax rebate policy does not discriminate Taiwanese enterprises, but impacts all exporters in China. Accordingly, native Chinese exporters will be harder hit than Taiwanese exporters.
S.H. Kuo, a furniture manufacturer and chairman of Taiwanese manufacturers` association in Dongguan of Guangdong Province, points out that for his company the latest policy cut only 1% of its rebate rate although the average rate cut for this industry is 2%. He ascribes the minimal rate cut for his company mostly to his company`s 50% dependence on imported materials.
Kuo suggests that Taiwanese manufacturers should use less of mainland-produced materials so as to ease the impact from the latest rebate policy.
New Cuts Truly Hurt
Although Beijing claimed that the new tax-rebate policy would only singe the mainland exporters` feathers, the exporters began crying out in pain barely two weeks after the implementation-telling the mainland authorities through various channels that the policy is disastrous. Even some official organizations feel the policy may be too upsetting.
The China Insurance Regulatory Commission says that 502 exporters in the Jiangning District of Nanjing City will lose at least RMB100 million (US$13 million at US$1:RMB7.5) throughout this year in the wake of the new policy.
In contrast, the new tax-rebate policy is expected to be a blessing in disguise for manufacturers in Taiwan despite being generally seen as bane to most of Taiwanese manufacturers in the mainland.
The new policy plus the appreciating Chinese yuan have made Taiwan-made polyester fiber comparatively competitive to counterparts made in the mainland. Many Taiwanese fiber makers have received tons of orders from mainland Chinese manufacturers preparing for the lucrative business opportunities generated by the Beijing Olympic Games.
Taiwanese manufacturers note that they have hiked NT$5 per kilogram for the fiber so far this year and forecast demand will continue climbing into this quarter.
China`s new tax-rebate policy has driven American door-lock suppliers away from mainland Chinese manufacturers to Tong Lung Metal Industry Co., Ltd. of Taiwan, which is recognized as Asia`s top lock supplier. Flooding orders pushed the lock maker`s revenue for August up to a record NT$422 million (US$12.7 million). Throughout the first eight months this year, the company`s revenue totaled NT$2.55 billion (US$77 million), increasing 15.9% year-on-year.
To cope with the rushing orders, Tong Lung has boosted output capacity at its Filipino factory and plans to build an electroplating factory in the Philippines.
New Business Tax to Follow
Some Taiwanese industry watchers think that Taiwanese manufacturers in China may survive through the hardship from the new tax-rebate policy, their futures are still in limbo because the Chinese government will begin enacting a new business income tax code next year.
The new regulation will levy a 25% income tax on businesses in China, plus an additional 20% on those remitting earnings overseas. After paying taxes in China, Taiwanese manufacturers are obliged to pay the Taiwan government a 25% business income tax because currently there is no tax agreement between Taiwan and China.
To skirt such heavy taxation, many Taiwanese manufacturers have set up holding companies in Hong Kong to enjoy a 5% tax shelter included in the Closer Economic Partnership Agreement (CEPA) that mainland China and Hong Kong signed a few years ago. However, such companies will be excluded from the tax shelter next year if they do not pay tax and do not keep offices and employees in Hong Kong.
Many Taiwanese publicly-held companies have set up holding companies in Hong Kong. Once denied the tax shelter, they will be taxed at the rate of 20%. And if they are reluctant to remit earnings made overseas back to Taiwan parent companies due to more taxation, they will definitely compromise their parent companies` earnings per share.
In the 1990s, China feverishly built special economic zones and offered lucrative tax incentives to lure Taiwanese investors. After 17 years, China has started removing or reducing these preferential conditions to discourage industries that are eco-unfriendly and trigger potential trade disputes. Taiwanese manufacturers in China liken today`s Chinese manufacturing environment to that in Taiwan 17 years ago. They say the mainland`s rapidly changing tax policies is driving Taiwanese manufacturers to Vietnam, making them industrial nomads pursuing "cost and tax oasis."
(by Ken Liu)
|
|
| Advertisement |
 |
|
 |
|
|
