Exploring opportunities under
the innovative tax system of Hainan Free Trade Port

Author: Sophia Li, PWC

On 1 June 2020, the CPC Central Committee and the State Council released the (the “Plan”). The Plan provides 39 specific policies from 11 aspects including free and convenient flow of trade, investment, and cross-border capital, etc. It also sets forth two stages of development goals by the year 2025 and 2035 respectively, with an aim to build Hainan into a high-level free trade port with international influence. Among them, the tax system includes five goals, namely: zero tariff, low tax rates, streamlined tax structure, strengthened law enforcement, and implementation in stages. Tax policies formulated under these five goals will run through the two milestones of 2025 and 2035, with each having its own focus.
 

In this article, we analyse the highlights in the tax system of the Plan and share with you our observations.
 

2020年6月1日，中共中央、国务院发布了《海南自由贸易港建设总体方案》（以下简称“方案”），《方案》提出贸易自由便利、投资自由便利、跨境资金流动自由便利等11个方面共39条具体政策，并设立了2025年、2035年两大阶段性目标，旨在把海南岛打造成具有较强国际影响力的高水平自由贸易港。其中，税收制度的5个目标分别为：零关税、低税率、简税制、强法治、分阶段。针对这5个目标制定的税收政策贯穿于2025年和2035年两大阶段性目标，体现各有侧重。
 

在本文中，我们将介绍《方案》中有关税收制度的亮点，并与您分享我们的观察。
 

Zero tariff

零关税

The Plan aims to build Hainan FTP into a “zero tariff” special customs supervision area, with international competitiveness and influence. Zero tariff will effectively reduce trading costs, while at the same time the difficulty of controlling trading risks will increase relatively. Therefore, the Plan proposes a system design with “opening the front line, controlling the second line, and freedom in the island”. For further illustration please see the diagram in the next page.
 

According to the Plan, at the front line, customs will focus on "non-tariff" supervision involving port public health and safety, national border bio-safety, food safety, and product quality and safety control. It is expected that the corresponding declaration procedures will be simplified to allow free, safe and convenient flow of overseas goods entering Hainan FTP.
 

After entering the island, the "zero-tariff" goods will be exempted from routine customs supervision, which is different from the traditional customs supervision measures for bonded goods under processing trade. Enterprises can save procedural and administrative costs, which fully embodies the system design concept of promoting free, orderly, safe and convenient cross-border flow of various production elements.
 

It is worth noticing that, for goods that are produced by enterprises engaging in the encouraged industries and which do not contain imported materials, or where there are imported materials the added value of the processing in Hainan FTP is more than 30% (inclusive) of the value of the goods, import duties would be exempted when they enter the mainland through the second line (import VAT and Consumption Tax would be collected in accordance with the regulations). In other words, the imported materials meeting the above conditions can achieve a "zero-tariff" effect when imported from overseas to the mainland, which should be welcomed by enterprises in the encouraged industries.
 

As introduced above, the launch of independent customs operations throughout Hainan Island with “zero-tariff” is unprecedented in Mainland, which will greatly promote the convenience and free flow of international trade.
 

《方案》提出将海南建设成为具有国际竞争力和影响力的“零关税”的特殊海关监管区域，“零关税”将有效降低贸易成本，同时贸易风险防控的难度也相应增加，因此《方案》提出了“一线放开、二线管住、岛内自由”的制度设计。
 

按照《方案》的制度设计，一线口岸，海关将侧重于涉及公共卫生安全、国门生物安全、食品安全、产品质量安全等“非关税”类监管，预期相应申报手续也将简化，境外货物进入自由贸易港将更加自由、安全、便利。
 

货物进入岛内后，“零关税”的货物将免于海关监管，这一点将有别于传统加工贸易“保税”货物的海关监管模式，企业能相应节省手续及管理成本，也充分体现了促进生产要素跨境自由有序安全便捷流动的制度设计理念。
 

值得注意的是，鼓励类产业企业生产的不含进口料件或者含进口料件在海南自由贸易港加工增值超过30%（含）的货物，经“二线”进入内地免征进口关税，照章征收进口环节增值税、消费税。即符合上述条件的进口料件有望实现从境外至最终进口到内地实现“零关税”安排，该安排将吸引鼓励类产业企业投资。
 

海南岛全岛封关运作实行“零关税”的安排可谓前所未有的“创举”，将极大促进国际贸易的便利化、自由化。
 

Low tax rates

低税率

The Plan proposes preferential Corporate Income Tax (CIT) rates for enterprises with operational substance and preferential Individual Income Tax (IIT) rates for qualified individuals in Hainan FTP, respectively as follows:
 

The CIT incentives have the following highlighted features:

•Enterprises in the encouraged industries are entitled to a reduced CIT rate of 15%, and by 2035, enterprises in all industries except for negative-listed industries will be entitled to the reduced CIT rate. It is expected that the list of encouraged industries in Hainan FTP may follow the current encouraged industry catalogues, such as the and the , as well as taking into account of the features and positioning of Hainan Province, focusing on the development of tourism, modern services, and high-tech industries.
 

•The Plan proposes that enterprises in tourism, modern service and high-tech industries are exempted from CIT on income generated by new overseas direct investment before 2025. According to the prevailing CIT regulations, China tax resident enterprises (TRE) are taxed on their worldwide income, and foreign tax credit is available on profits repatriation from overseas investments. The Plan grants exemption to CIT on income generated by new overseas direct investment before 2025, which is a breakthrough to the current CIT regulations, and would encourage enterprises engaging in tourism, modern service and high-tech industries to go abroad.
 

As for IIT incentives, the Plan directly reduces the tax rates for qualified individuals for the first time from two aspects:

•By 2025, qualified talents working in Hainan FTP are exempted from IIT on the portion of IIT which exceeds an effective tax rate of 15%. The IIT incentive in Hainan FTP should be better than the IIT rebate policy introduced for the Guangdong-Hong Kong-Macau Greater Bay Area (the GBA) in 2019:
 

1.The IIT rebate policy in the GBA is only available to overseas qualified talents, while the 15% IIT rate in Hainan FTP seems to be available to all high-end talents and talents in short supply working in Hainan FTP, without restricting it for foreign qualified talents;
 

2.The IIT rebate policy in the GBA achieves 15% tax rate through tax rebates, while the 15% tax rate in Hainan FTP seems to be achieved by a direct exemption of IIT on the portion of IIT which exceeds an effective tax of 15%. It is expected that the tax incentives of Hainan FTP will greatly improve the effectiveness of enjoying the tax benefits by qualified talents.
 

By 2035, Individuals who have resided in Hainan FTP for 183 days or more during a tax year will be taxed at progressive IIT rates of 3%, 10% and 15% on their comprehensive income and business income derived from Hainan FTP. Under the current IIT regime, progressive rates of 3% to 45% and 5% to 35% are applicable to comprehensive income and business income, respectively. The 3 marginal tax brackets proposed by the Plan would be a major breakthrough in the current IIT regime and require a comprehensive revision to current tax rate tables. In practice, it is yet to be further clarified how to determine the number of days residing in the Hainan FTP and how to determine the source of the income.
 

《方案》对在海南自由贸易港实质经营的企业和符合条件的个人，分别实行企业所得税优惠税率和个人所得税优惠税率。具体政策如下：
 

企业所得税优惠主要有以下两个亮点：

鼓励类产业减按15%征收企业所得税，并于2035年前进一步推进到除负面清单以外的全行业都可享受15%企业所得税率。我们预计海南自由贸易港的鼓励类行业清单可能大致会参考现行的鼓励类目录的一些内容，例如《产业结构调整指导目录》中的鼓励类产业，《鼓励外商投资产业目录》等，同时再结合海南省的特点和定位，着重发展旅游业、现代服务业和高新技术产业等。
 

《方案》对旅游业、现代服务业、高新技术产业企业，其2025年前新增境外直接投资取得的所得，免征企业所得税。现行的企业所得税法下，中国居民企业需就全球收入征税，其投资境外的利润汇回国内可适用境外税收抵免。《方案》突破了这一制度，鼓励旅游业、现代服务业和高新技术产业“走出去”，2025年前它们新增的由境外直接投资取得的利润将免征企业所得税。
 

个人所得税方面，《方案》从两个方面首次直接对部分个人降低个人所得税税率：

2025年前，《方案》对在海南自由贸易港工作的高端人才和紧缺人才，其个人所得税实际税负超过15%的部分，予以免征。从《方案》的行文来看，海南自贸港的15%个税优惠应该比2019年出台的粤港澳大湾区个人所得税优惠更进一步：
 

1）粤港澳大湾区个人所得税优惠是面向境外的高端人才和紧缺人才，而《方案》是面向在海南自由贸易港工作的高端人才和紧缺人才，并没有规定必须是境外人才。
 

2）粤港澳大湾区个人所得税优惠是采取“先征后补贴”的方式，而《方案》中15%个税优惠的实现方式是对实际税负超过15%的部分，直接予以免征，而不需通过先征后补帖的方式。如果《方案》的这一优惠落地，将大大提高合资格人士享受税收优惠的效率。
 

2035年前，《方案》对一个纳税年度内在海南自由贸易港累计居住满183天的个人，来源于海南自由贸易港范围内的综合所得和经营所得按照3%、10%、15%三档超额累进税率征收个人所得税。这是目前个人所得税税法下对综合所得适用3%到45%的超额累进税率及经营所得适用5%到35%超额累进税率的一大突破，需要全面修改相关税率表。将来实操中要如何判定在海南自由贸易港的居住天数以及判定所得来源，是需要进一步明确的问题。
 

Streamlined tax structure

简税制

The Plan proposes to explore ways to streamline the tax structure that is in line with China’s tax reform. Reform in the categories of taxes should be conducted to reduce the proportion of indirect taxes and make the structure of tax categories simpler and more scientific, optimise the tax system elements, reduce overall tax burden, with clear attribution of tax revenues and more balanced fiscal position.
 

《方案》提出将结合我国税制改革方向，在海南自由贸易港探索推进简化税制。改革税种制度，降低间接税比例，实现税种结构简单科学、税制要素充分优化、税负水平明显降低、收入归属清晰、财政收支大体均衡。
 

Strengthened law enforcement

强法治

The Plan proposes reduced CIT rate of 15%, IIT rate of 15%, and 3 marginal tax brackets of progressive IIT rates of 3%, 10% and 15% to encourage enterprises to make real investments and operate in Hainan FTP, so as to increase local employment, attract talents, and make substantial contributions to the local economy. In order to prevent enterprises/individuals from abusing the tax incentives through setting up shell companies or false employment arrangements, the Plan sets forth several prerequisite, such as enterprises to “register and conduct substantial economic activities in Hainan FTP”, individuals to "work in Hainan Free Trade Port", or “reside 183 days or more in Hainan FTP within a tax year", etc. The Plan also requires local tax authority to assess the eligibility based on the places where substantial activities and value-creation activities take place, and publish early warnings; develop methods to determine substantial place of business and place of residence to combat tax evasions. Hainan will also enhance the international exchange of tax-related information to minimise Hainan being seen as a "tax heaven".
 

《方案》提出的15%企业所得税优惠，15%个人所得税优惠，以及3%、10%、15%三档个人所得税超额累进税率政策，旨在吸引企业在海南自由贸易港当地进行切实的投资并进行实质性运营，增加当地的就业，吸引人才，对当地经济有实质性的贡献。为了避免没有实地经营的纯注册型企业，或者通过不真实的雇佣关系以获得税收优惠的现象，《方案》设定了“注册在海南自由贸易港并实质性运营”，“在海南自由贸易港工作”，“一个纳税年度内在海南自由贸易港累计居住满183天”等前提，并要求税收管理部门按照实质经济活动所在地和价值创造地原则对纳税行为进行评估和预警，通过实质经营地、所在地居住判定标准，加强打击偷漏税行为，并在国际税收层面加强涉税情报信息共享，避免海南自贸港成为“避税天堂”。
 

Other tax-related regulations

其他与税收相关的规定

In order to promote the shipping and air transportation industry in Hainan, the Plan proposes the following tax policies:
 

•Under the premises of effective supervision and risk control, domestically built ships registered at “Yangpu-Port-of-China” and engaged in international shipping are deemed as export and entitled to export tax refund.
 

•Domestic ships engaging in “domestic and foreign trade goods on board” （内外贸同船运输）which transit at Yangpu Port are allowed to refuel with bonded oil required for the voyage; export tax refunds are available if the ships refuel with locally produced fuel oil for the voyage.
 

•For container cargoes departing from China that meet relevant conditions and transit at Yangpu Port, a tax refund policy for port of departure will apply on a trial basis.
 

•Allow both inbound and outbound flights to refuel with bonded aviation oil.
 

In addition, the Plan stipulates the import and sale of foreign exhibits at national-level exhibitions of China International Consumer Goods Expo will be exempted from tax.
 

为促进海南的船舶运输业和航空运输业，《方案》提出了以下税收规定：
 

在确保有效监管和风险可控的前提下，境内建造的船舶在“中国洋浦港”登记并从事国际运输的，视同出口并给予出口退税。
 

对以洋浦港作为中转港从事内外贸同船运输的境内船舶，允许其加注本航次所需的保税油；对其加注本航次所需的本地生产燃料油，实行出口退税政策。
 

对符合条件并经洋浦港中转离境的集装箱货物，试行启运港退税政策。
 

允许海南进出岛航班加注保税航油。
 

此外，《方案》规定，举办中国国际消费品博览会，国家级展会境外展品在展期内进口和销售享受免税政策。
 

The takeaway

注意要点

Many of the tax policies included in the Plan are innovative and unprecedented, especially the zero tariff, the low tax rates of CIT and IIT, the exemption of CIT on income from new overseas investment in certain industries, the streamline of indirect taxes into Sales Tax in the retailing stage, the allocation of Sales Tax and taxes other than income taxes as local tax revenue, etc. To implement these policies requires monumental reforms of the current tax and fiscal system, which shows the Chinese government’s determination in developing Hainan FTP.
 

The Plan serves as a high-level guideline which provides a general direction for future development of tax policies, while uncertainties regarding the detailed implementation remain to be further clarified. Enterprises interested in investing or relocating to Hainan should analyse the business opportunities in the Plan, pay attention to any follow-up tax policies, adjust the business model, group structure and employment arrangements, etc. according to their own situation, in order to better enjoy the benefits. At the same time, we hope that the MOF and STA should consult with businesses and tax experts for specific implementation details before releasing detailed implementation regulations, so that taxpayers can effectively enjoy these incentives and benefits.
 

海南自由贸易港《方案》所包含的许多税收创新举措具有空前的突破性，特别是零关税、企业所得税的低税率优惠和对部分行业境外投资所得免税、个人所得税的低税率、简并流转税和部分财行税为零售环节的销售税、将所得税以外的其他国内税种收入和销售税作为地方收入等方面。要落实这些政策需要对现行税收制度和财政体制做出很大的改革，体现了中国进一步深化改革，建设海南自贸港的决心。
 

《方案》是一个指导性的文件，其中的税收政策提供了未来发展的大方向，但政策的细节和落地还存在很多不确定性。我们建议有意投资海南或者迁址海南的企业分析整个《方案》所带来的商业契机，持续留意后续税收政策的出台，结合自身情况和具体政策，调整运营模式，集团架构、人员安排等方面，以最大程度享受海南自由贸易港的政策红利。同时，我们也建议财税部门在落实这些税收政策前，能与企业和财税专家探讨沟通具体的落实安排和措施，使得这些政策最终能落到实处，让纳税人能切实享受到这些优惠和便利。