On 9th December, 2014, the State Council issued The Notice to Eliminate and Normalize Preferential Treatments as Tax Policies (the “Notice”). The Notice confirmed that any policy violating laws or regulations or affecting fair competition shall be scrutinized and cleaned up, which includes treatments on tax and other levies or refunds from local tax revenue.
In practice, it is perhaps not rare that local governments generally offer incentives to given foreign investment. Such incentives may take the form of favorable tax rates, levy reduction and exemption, fiscal subsidies or payback, preferential land premium or bidding conveniences.
Nevertheless, few companies realize anti-monopoly risks of such preferential treatments. According to Anti-Monopoly Law of PRC, administrative authorities or agencies may not abuse their administrative power to eliminate or restrict competition.
Local preferential treatments for foreign investments are generally set by local governments through agreements and memorandums. Despite the rarity of apparent tax-related preferentiality, favorable treatments may be offered by a return of paid taxes from local fiscal income of local governments. Without legal basis, such financial expenses are highly likely to be determined as abuse of administrative power. Moreover, such treatments available to given foreign investments generally reduce the cost of foreign investment operations and further generate competitive advantages for such foreign investments. With a high possibility of being deemed as eliminating or restricting competition, such preferential treatments would likely be rescinded as directed by an anti-monopoly authority. Besides, competitors may also start anti-monopoly administrative proceedings against the local government, demanding revocation of such preferential treatments.
Anti-monopoly risks of local preferential treatments for foreign investments are far from novel. In fact, PRC anti-monopoly authorities are going to focus their anti-monopoly investigation on abuse of administrative power, elimination of competition and local protectionism in 2015. To this end, foreign investors shall evaluate the legal risks in advance to tackle the potential hazards.