Wei Jianguo: Hainan FTP Complements with Hong Kong and Singapore

On June 1, the Central Committee of the Communist Party of China and the State Council released a Master Plan for the Construction of Hainan Free Trade Port (hereinafter referred to as the “Plan”), depicting the blueprint for China’s further opening-up.

In an exclusive interview with the 21st Century Business Herald, Wei Jianguo, Vice-Chairman of the China Center for International Economic Exchanges(CCIEE) and former Vice-Minister of Commerce, pointed out that the Plan demonstrates China’s determination to further opening-up and will boost confidence in globalization.

He believes that Hainan Free Trade Port (FTP) will accelerate the establishment of the industrial chain cluster in the Asia-Pacific region. Unlike Singapore and Hong Kong, the Hainan FTP will be built according to its characteristics and has a differentiated industrial positioning and thus, it will not replace Singapore and Hong Kong. On the contrary, it will provide them with more opportunities.

The new tax system in Hainan FTP will be characterized by zero tariffs, low tax rate and simplification. Wei Jianguo pointed out that zero tariffs will greatly promote the development of Hainan’s manufacturing industry. Consumers will be able to spend up to 100,000 yuan in duty-free shops on the island, which is bound to stimulate tourism consumption. In the next 5 to10 years, Hainan will become the best shopping paradise in the world.

Furthermore, Hainan announced a competitive tax rate arrangement: corporate income tax is only 15%, and personal income taxes are levied between 3% and 15%. Wei Jianguo believes that the tax rate in Hainan is lower than most of the free ports in the world, which will attract a large number of industries and talents. The island is expected to become a headquarter hub for multinational companies.

Question: What are the implications of the Plan?

Wei Jianguo: The Plan has greatly exceeded our expectations and has two highlights: the time and background of the announcement; and the unprecedented high standard and wide scope of the Plan.

The current pandemic has had a significant impact on the world economy: global trade and investment are extremely depressed, the global industrial chain and supply chain are broken and the world economy is in recession. Moreover, economic globalization is encountering difficulties and many countries are trying to bring the industrial chain back home. Trade and investment unilateralism and protectionism are on the rise. China’s announcement of the Plan demonstrates its determination to expand opening-up, which is a very important message for the rest of the world. It has boosted the confidence of global multinational companies and brought hope and vitality to the global economy.

Furthermore, the Plan has made a series of competitive institutional arrangements in many fields such as trade in goods and services, investment, personnel, funds, data, taxation systems and legal systems.

Question: Compared with other free ports, what are the characteristics of the Hainan Free Trade Port?

Wei Jianguo: generally speaking, there are three characteristics.

First of all, the entire island will be built as a free trade port, which means an area of 35,000 square kilometers. This is far bigger than other free ports in the world. The huge size of the island will offer much better radiation and linkage than other free ports.

Secondly, the Hainan Free Trade Port is supported by the huge domestic market of China. After the pandemic, China will create a new development pattern that promotes both the domestic and international markets simultaneously. Hainan will bridge China’s industrial chain with the rest of the world.

Last but not least, in terms of building the Hainan Free Trade Port, China has great institutional advantages and can quickly mobilize various resources such as manpower, material resources and policies, and various production factors. This is great competitiveness of the Hainan FTP.

Question: How do you see the role of Hainan Free Trade Port in global free port competition?

Wei Jianguo: Hainan Free Trade Port is a special economic area with international competitiveness and influence. Its construction will draw on the advanced experience of other free ports but it will not replace Singapore, Hong Kong. They will learn from each other and progress together. Appropriate competition is also conducive to the improvement of the openness of the entire region.

The global supply chain, industrial chain and service chain are moving to the east, which is the new trend. The Asia-Pacific region will become the center of future industrial agglomeration. Hainan, Singapore and Hong Kong are important parts of this region and they have cooperated closely in regional cooperation such as RCEP, Guangdong-Hong Kong-Macao Greater Bay Area, and the Maritime Silk Road. The opening-up of Hainan will enhance the attractiveness of the entire region and gather more high-end industries and Talents.

Hainan, Hong Kong and Singapore will complement each other. Hainan will focus on the development of tourism, modern services and high-tech manufacturing, while Hong Kong and Singapore will focus on financing and shipping. In other fields, the three have more complementarity than competition. For example, Hainan’s development will provide more market opportunities for Hong Kong’s financing, legal, trade, investment, fashion design and other industries.

From a global perspective, the development of free ports worldwide has not been fast enough in recent years. Rotterdam, Dubai, Singapore, Hong Kong are all faced with bottlenecks and lack of new momentum. The Hainan Free Trade Port will inject new vitality into the global free ports.

Zero Tariffs Drive Manufacturing and Consumption

Question: Hainan Free Trade Port will implement zero tariffs and the goods with zero tariffs will be exempted from the routine supervision of the Customs. How do you evaluate this?

Wei Jianguo: China’s total tariff has been reduced to 7.5% since November 2018. China is a “good student” of the WTO system and it has voluntarily reduced taxes in special regions and industries. Zero tariff is a basic requirement and unique characteristics of global free ports.

The zero tariffs of Hainan Free Trade Port will be implemented in two steps. Some imported goods are exempted from import tariffs before the island-wide customs clearance operation. As the island-wide customs clearance operation begins, the imported commodities not included in the taxable goods catalogue are exempt from import duties. In the future, China is expected to further create an open pattern of zero tariffs, subsidies and barriers.

China will implement different tariff management systems for different commodities. For example, a “zero-tariffs” negative list will be made for production equipment; a positive “zero-tariffs” list will be created for materials used for production. These two lists are made according to the needs of enterprise investment and operation.

Question: For goods entering the Mainland from Hainan FTP, they are subject to import tariffs. However, the Plan states that for goods that do not contain imported materials or contain imported materials produced by certain industrial enterprises, and the value-added processing of goods in Hainan Free Trade Port exceeds 30%, they will be exempted from import tariffs. What does this mean for Hainan’s manufacturing industry?

Wei Jianguo: This will undoubtedly boost the development of Hainan’s manufacturing industry. It means a two-way opening-up: the import of “first-line” raw materials will enjoy zero-tariffs treatment, and the tariff exemption for certain products entering the mainland means that they have great advantages to compete in the large domestic market. High-end manufacturing will be encouraged here, such as integrated circuit, medical equipment and pharmaceutical production.

Question: Hainan will provide a positive list of the imported goods consumed by local residents before 2025, allowing tax-free purchases on the island. At the same time, the duty-free shopping limit for people outside of Hainan will be raised to 100,000 yuan per person every year, and the types of duty-free goods will also be expanded. What does this mean for Hainan’s business and tourism industry?

Wei Jianguo: This will greatly reduce the price of imported goods in Hainan, and benefit local residents and tourists. It will help the tourism industry and promote the development of the consumer market.

Local residents in Hainan can purchase certain duty-free imported goods. The positive list management is to ensure that the goods are purchased for their own use not for resale. For tourists, the limit of tax-free shopping increased from RMB 30,000 to 100,000 yuan per person, this is likely to stimulate explosive growth in Hainan’s tax-free shopping.

In fact, many Chinese tourists spend a lot of money on overseas shopping every year because the shopping tax is lower. The tax-free shopping in Hainan, on the one hand, will bring overseas shopping back to China. On the other hand, it will drive the rapid development of tourism consumption in Hainan. This will not only benefit the local people, but also promote regional and industrial development.

Currently, the global tourism industry has been hit hardly by the pandemic and Hainan is no exception. However, it is not possible to boost the tourism industry by just launching policies such as visa-free entry and tax-free shopping. Hainan needs to further extend the consumer chain of tourism by combining medical care, vacation and cultural creativities.

If we can establish the above mentioned industrial chain smoothly, I assume that Hainan will become the world’s best “shopping paradise” in the next 5 to 10 years.

Question: The Plan will reduce corporate income tax to 15% in the free trade port, how will this affect enterprise in the free trade port? Compared with other global free trade ports, how competitive is the corporate income tax in Hainan?

Wei Jianguo: The implementation of preferential corporate income tax is a common practice adopted by free ports around the world. It should be noted that Hainan’s 15% corporate income tax is not only lower than the domestic level (25%), but also lower than most of the free trade ports such as Singapore, London, and New York.

For example, Singapore levies a corporate income tax of 17% uniformly; Hong Kong’s corporate income tax has a two-tier progressive tax rate, with 8.25% tax rate for profits below 2 million, and 16.5% for profits above 2 million; Dubai’s corporate income tax only applies to foreign banks and petroleum enterprises; the corporate income tax of the London Free Trade Zone is 19%; in the New York Free Trade Zone the rate is 21%. As can be seen, the corporate income tax in Hainan is the lowest in the world, which will attract many enterprises to Hainan.

Due to lower tax rates, Hong Kong, Singapore and other free ports have become the headquarters of many global companies. Beijing, Shanghai and other regions of China are also developing the headquarter-related economy, but Singapore is well ahead of China in this regard as it has more than 6,000 corporate headquarters because of its lower income tax.

Hainan also has the potential to develop headquarter economy. The local government sent a delegation to Hong Kong, Singapore, Rotterdam and other places to learn from their experience. A lower tax rate will attract multinational companies to set their headquarters in the free trade port.

The Plan mentioned that tourism, modern service industry, and high-tech industrial enterprises established in Hainan Free Trade Port will be exempted from corporate income tax if their income derived from the new overseas direct investment is made before 2025. Qualified capital expenditures of enterprises are allowed to be deducted or companies can accelerate depreciation and amortization, which is very attractive to companies.

Question: In terms of personal income taxation, the Hainan Free Trade Port has an over-progressive tax rate between 3% and 15%, how competitive is this in terms of attracting global talents?

Wei Jianguo: The personal income tax in Hainan Free Trade Port will be implemented in two steps: for high-end talents, the part above the 15% income tax will be exempted before 2025. Before 2035, all individuals who have lived in the Hainan Free Trade Port for a total of 183 days within a year will be subject to personal income tax at three progressive tax rates of 3%, 10%, and 15%. Compared with the current personal income tax in Mainland China, from 3% to 45%, Hainan’s personal income tax incentive is very competitive.

Dubai has a zero personal income tax, Singapore implements an excess progressive tax rate between 2% and 22%, while Hong Kong is between 2% and 17%. In the United Kingdom, a three-level excess progressive tax rate between 20% and 45% is implemented and in the United States, the highest marginal tax rate of its seven-level progressive tax rate is 37%. Thus, the 3%-15% excess progressive tax rate of Hainan Free Trade Port is very competitive.

The plan also made a series of institutional arrangements in terms of entry-exit and residence policies, including the implementation of e the the  negative list management of work permits for foreign personnel, which allows foreign personnel to serve as legal representatives of state-owned enterprises and other organizations.

Question: The Plan also wants to simplify the tax system, which requires the combination of different indirect taxes such as value-added tax and consumption tax, what is your comment on this?

Wei Jianguo: Reforming the tax system and reducing the proportion of indirect taxes are the direction of China’s tax reform. Hainan Free Trade Port will take the lead in the merger of the tax systems and act as a pioneer in China’s tax reform.

China’s taxation system is relatively complicated and simplifying the taxation system is the trend. The experiment in Hainan will pave the way for tax reform in the rest of China.

During the previous establishment of different pilot free trade zones in China, we encountered many problems. Hainan Free Trade Port did not try to bypass these problems but actively seek solutions, showing the world China’s determination to deepen its reform and opening-up.