There is an exemption available for domestic and imported machinery used by a Foreign Investment Entity in the production of goods in China.

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1 Fact Sheets The following data sheets are for use in the Institute for Tax Professionals 2016 Bootcamp and are based on experience with the various public coalitions and publicly available information. While intended to be materially correct, participants should not use or rely upon this data for actual site selection or other business activity. IPT and the Instructors supporting the class make no warranties regarding the accuracy of the data for actual business use. 1.0 Tianjin, China (Port of the Emperor) It was once said that there are only two true sciences: Physics and Finance, the only difference being that the laws of Physics don t seem to apply everywhere in the universe. Though political and legal systems vary widely, the basic finance of any EDO deal remains familiar. The Ministry of Commerce of the People s Republic of China (MOFCOM) has federal responsibility for incentives, backed up by Provincial and local commerce authorities. Tianjin falls into a SEZ, or Special Economic Zone, which allows the area to participate in special tax incentives, and delegates incentive authority to Provincial and local authorities. Tianjin also has an area designated as a foreign free trade zone, but you ve been told initially that your operation doesn t fit into their targeted industries for that location. 1.1 Property Tax In China land, almost without exception, remains the property of the people, which means it is the property of the Communist Party. Facilities are either privately owned on government land, or government owned and leased. Exemptions from property tax require approval at the Federal Level and local officials shy from taking a Foreign Investment EDO deal to federals. Don t expect property tax abatement in Tianjin. Notwithstanding, deals can be struck to offset property tax with either cash payments or infrastructure. 1.2 Sales Tax Value Added Tax China imposes a national Value Added Tax (VAT) to nearly all goods produced in the country. 75% of the funds goes to the Federal Government, and 25% to the local government. The general rate is 17% of the value added by the manufacturer in production and resale. The company is primarily concerned with the VAT it will have to pay on all of the manufacturing equipment required to construct the facility. Secondarily, the company is concerned about the 17% adder which will go into product sales, though less so, because the current Chinese labor rates fall far below any domestic option. There is an exemption available for domestic and imported machinery used by a Foreign Investment Entity in the production of goods in China. There is a rebate available for goods produced in China and ultimately exported.

2 1.2.2 Business Tax The Business Tax was eliminated in May of China has been expanding the VAT Tax and eliminating the earlier business tax by sector over the last few years. 1.3 Corporate Income Tax The standard corporate income tax rate in China is 25%, however it can be lowered to 15% for qualifying high tech businesses locating in China, or a foreign business locating in a Special Economic Zone (SEZ). In addition, foreign businesses locating in a SEZ can be offered a 0% tax rate for the first two years of operation and a 12.5% rate for the following three years. The term can be negotiated to start with the first year of material profitability. 1.4 Foreign Free Trade Zones Certain areas of Tianjin qualify as foreign free trade zones. You have been told by local PRC officials initially, that you do not qualify for a site in the Trade Zone. Raw materials imported into the zones are exempt from VAT and Customs Duties until they leave the zone for domestic use. If raw materials are imported, processed, and then directly exported, they escape the VAT and duties. 1.5 Infrastructure Support The local Tianjin Economic Development Authority provides flexible options for the creation of new common and private infrastructure in the zone: a) Companies may invest in their own facility and equipment and obtain a very aggressively priced long term land lease; b) The local authority will serve as landlord for a leased facility built to the company s specifications; or c) The company may joint venture with a Chinese firm and engage in either of the other two options with the domestic firm responsible for land and building agreements with the Tianjin authorities. Based on the value of the technology being brought to the area, the development authority will provide increasingly aggressive options to create and amortize the required infrastructure for production. Horizontal infrastructure (roads, utilities, etc.) have already been installed in development ready sites throughout the designated industrial areas in the SEZ. Any horizontal infrastructure not already installed can be installed at the cost and responsibility of the local economic development authority. 1.6 Personal Income Tax Abatement Under the SEZ, the Provincial and local economic development authorities can offer an abatement of all personal income taxes for company officers and key employees located in Tianjin. The program is very flexible as to timing and number of qualifying individuals. 1.7 Workforce Development and Workforce Pipelining The general Chinese educational system carries over from the communist era, with education provided to all, subject to periodic examinations to move people to the fields for which the government feels they are best suited. This is now supplemented by a private system which can offset government decisions as to work abilities. While constrictive by US standards, it does ensure an adequate population of

3 worker in each sector of the economy. Notwithstanding, since ABS will be bringing new technology to Tianjin, the existing curriculum will not provide floor ready workers. The idea of adapting trade school curriculum to support immediate direct company requirements is still evolving in China, but at least in Tianjin, they are flexible. Look to create a joint program with the trade schools in a flexible and program informal manner, funded by the Provincial and local economic development authorities. Workforce Pipelining for white collar workers is more difficult as the Chinese University system is still evolving, mostly from technology gained by US Universities moving overseas. 2.0 Harlingen, Texas Located in central south Texas along the Gulf of Mexico, Harlingen boasts a good blue collar labor force and close proximity to Mexico. They also boast a good white collar workforce, having supported the Launch Vehicle business in the Aerospace Industry for a long period. Recent cutbacks in aerospace employment however, have contributed to a higher unemployment rate, which the city hopes to curb, by encouraging new investment through economic development incentives. All politics is local and that is especially true in Texas. Start at the local level and take the community in tow with you to the State. 2.1 Property Tax Property Tax is local in Texas. Harlingen can grant and number of special abatements based on the quality of the jobs. Generally, school taxes, which make up about half the property tax, are not abated. To get the school tax abated you ll have to get the concurrence of the local school board. 2.2 Sales Tax The sales tax rate in Harlingen Texas is 8.25%. 6.25% goes to the state an 2% to the City. The County gets no allocation. There is a 100% exemption for manufacturing related equipment available. 2.3 Corporate Income Tax Texas has no Corporate Income Tax and none is imposed by either the City or County in Harlingen. 2.4 Foreign Free Trade Zones While Texas has a number of Foreign Free trade zones, there is no zone available in Harlingen. There is a nearby zone in Corpus Christi, Texas. Generally, materials processed in the zones are exempt from import/export duties and sales tax, until they leave the zone for domestic distribution. Imported materials do not pay duties or Texas Sales Tax upon entering the zone. While held in the zone, they do not incur property tax as inventory. If they leave the zone for domestic US sale, they incur sales tax and a reduced import/export duty. If materials are imported, processed in the zone, and exported, they effectively escape US taxation.

4 2.5 Infrastructure Support The primary tool in Texas for Infrastructure support at the State Level has been the Texas Enterprise Fund. Delivering between $5,000 and $10,000 per job up front, it provides a cash payment to the company for use in establishing the production facility (though there are technically no limitations on use). Beyond this, local communities engaged in urban and rural redevelopment, may be willing to provide existing building and/or land at a discounted purchase price or lease payment. With the recent closure of a major aerospace facility, the City of Harlingen has a 20 year old manufacturing building sitting empty, that was donated to the City. The 300,000 square foot facility sits on ten acres, and the city owns another 30 acres adjacent to it, in their economic development industrial park. The site was used for heavy manufacturing previously. Sitting empty, the building has to be maintained by the City at a cost of $2sf/annum or $0.6M per year. In addition, it is now off the property tax roles, which forgoes $0.4M annum in property tax. 2.6 Personal Income Tax Abatement Texas imposes no State Income Tax on its citizen s, therefore your employees will pay no State Income Tax. They will however be liable for Federal Income Tax unlike jurisdictions internationally, where both Federal and State Income tax is waived for key employees. 2.7 Workforce Development and Workforce Pipelining For immediate workforce development needs the Texas Workforce Commission creates programs in coordination with the Texas Community College System and Employers to develop and deliver curriculum addressing the required skills. In general, the TWC pays for course development and delivery, and the employer s 50% match is the employee s time while in training. For longer range workforce needs, the Texas University and Trade School systems are noted for their ability to partner with industry to develop business specific curriculum for both blue and white collar workers. At the blue collar level, the employer can set up a program to teach job specific skills, and then hire only his choice of the graduating class (pre-employment training). The State University system enjoys a healthy partnership with Texas targeted industries, providing low cost R&D and production, while incorporating those attributes into their curriculum. You will want to partner either with Universities near Harlingen, or those which attract a significant student population from the area (example: University of Texas / Austin). 3.0 Los Angeles, California Recall, this is where the company has a facility with adequate capacity to handle the new venture. It also has a reasonably trained workforce in specialty metals there. Because the facility has been declining for the last two decades, the population is aging, with many senior workers and few new hires (as the last hired are first shed in downturns). California has long been last on the list for States offering incentives, with a Legislature and Executive branch that thought the California climate and workforce was adequate to draw in new business. That is

5 changing as the State saw a vast business exodus to Texas and the Southeast during the first decade of the twenty-first century. In 2014, the State passed a special incentive for the Aerospace Industry worth $0.5B, to attract the next generation bomber program. In addition, it has begun passing reasonably lucrative statutory incentives that grant tax abatements for new and expanding business. The State is becoming a target rich environment for generally modest abatements, exemptions, and other incentives, if you take the time to find them and are willing to endure the bureaucracy necessary to retain them. California requires a great deal of paperwork and has a large state government capable of enforcing the reporting requirements. 3.1 Property Tax Los Angeles County passed a property tax abatement program in the early 2000s, whereby local commissioners could waive all or part of the property tax for businesses generating net new jobs in California. Unfortunately, no one has ever been able to successfully pass local tax abatement by the rules of the legislation. 3.2 Sales Tax The California Sales Tax Rate in Los Angeles County is 9%. Sales Tax in California is governed by the Board of Equalization. The CBOE offers a statutory incentive for R&D and Manufacturers purchasing equipment for use in California. This is a partial exemption for about half the State s sales tax. If you are a little more aggressive, you can approach the CAEATFA organization (California Alternative Energy and Advanced Transportation Finance Authority). CAEATFA is overseen by the CBOE and offers a full exemption for R&D and manufactures developing and/or producing Alternative Energy and/or Advanced Transportation products. Though the title has never been amended, the legislation now also covers Advanced Manufacturing as well as machinery for recycled feed stocks and other organics. This is a discretionary incentive which must be applied for, and approved by the CAEATFA senior board. 3.3 Corporate Income Tax The corporate income tax rates in California are comparatively high at 8.84% of income. Fortunately, tax credits are becoming more available to offset the liability. The California Office of Business and Economic Development, otherwise known as GO-BIZ is an executive office organization that offers the California Competes credit to businesses wishing to stay, grow or move to California. This is a discretionary credit that must be approved by the Governor s Office by formal application. The company commits to a certain level of jobs and investment with milestones, and requests a portion of their capital investment be refunded in the form of a state corporate income tax credit. Ask too little and you leave money on the table. Ask too much and your application will be declined. The California New Employment Credit provides a tax credit for each net new employee to California fitting one of the five categories: 1) Out of work for at least 6 months prior to hire; 2) Honorably Discharged Veteran; 3) Ex-offender released from prison; 4) Recipient of the Earned Income Tax Credit; or 5) recipient of CALworks program. The credit is based on a rather complex wage determination formula, but generally nets between $3k and $9k per year, per qualifying employee. The credit may only be claimed by businesses located within a Designated Census Tract, which generally equate to the now debunked California Economic Development Zone program locations. ABC s existing plant in Los Angeles falls into an old economic development zone and therefore qualifies for the program.

6 3.4 Foreign Free Trade Zones There are 17 Foreign Free Trade Zones in California, of which 3 are located in the Los Angeles area. ABC s existing plant technically falls into the Long Beach FTZ, which covers most of Los Angeles County, however neither ABC nor the industrial park in which it is locate have ever pursued formal FTZ status. California FTZ s exempt businesses from paying import/export duties on raw materials that are imported, and finished goods that are exported. The zones also exempt companies from paying property tax on inventory held for resale. The California Board of Equalization has ruled that sales tax does still apply to goods being shipped into and out of a California FTZ, thus the FTZ designation is worth less in California than other locations. Practically, the FTZ allows a business to import raw materials to its plant, without paying import duties on the goods (though sales tax is still due in California). Once in the zone, the raw materials may be processed to finished goods and stored without paying California property tax on the inventory. When the finished goods are then sold outside the FTZ, the business pays a reduced duty. If sold in California, they incur California Sales Tax, if sold domestically outside California they incur that state s sales tax, if sold internationally, they effectively escape US taxation except for California sales tax on raw materials. 3.5 Infrastructure Support There are no infrastructure support economic development programs available in California. 3.6 Personal Income Tax Abatement There are no personal income tax abatement economic development programs available in California. Further, California s high personal taxes and high cost of living could significantly impact your ability to attract key personnel to move into the area. 3.7 Workforce Development and Workforce Pipelining California excels at workforce development and workforce pipelining. For immediate training needs, the California Employment Training Panel (C-ETP) accepts applications year-round from employers requiring training for new or existing employees. An ETP representative works with the employer to complete the application and approve the funding. The employer then completes the training and is reimbursed by the State in cash. The level of reimbursement is negotiable with the ETP, but generally approaches 50% with the employees wages counted in the cost. For longer range workforce needs, the California University and Trade School systems are noted for their ability to partner with industry to develop business specific curriculum for both blue and white collar workers. At the blue collar level, the employer can set up a program to teach job specific skills, and then hire only his choice of the graduating class (pre-employment training). The State University system enjoys a healthy partnership with California targeted industries, providing low cost R&D and production, while incorporating those attributes into their curriculum. There are a plethora of Universities and trade schools in the Los Angeles area to choose from, and the company may want to also look at signature schools from around the State for student populations from the Los Angeles area.

7 4.0 Macon Georgia Recall, this is where the company Real Estate Director has determined that the community is offering a 600,000 square foot manufacturing building at very attractive rates, in return for a jobs and investment commitment by a new employer (these are sometimes referred to as White Knight deals where a white knight is sought to reinvigorate the community). Georgia is part of the southeastern section of the United States, a region which has always been known for its aggressiveness in attracting new businesses. The States of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, and South Carolina are noted both domestically and internationally as one of the most aggressive regions in the world for attracting new business through aggressive and flexible economic development programs. 3.1 Property Tax Georgia has no direct property tax legislation to allow a local community to abate property tax via resolution (this is common elsewhere). Not to be deterred, Georgia offers significant property tax abatement program via Legal Construction. Georgia has no leasehold property interest statute for property tax, so company assets held by a Georgia economic development agency are exempt from property tax. Local jurisdictions operate programs that allow a company to transfer tax ownership of their property to a local economic development agency exempt from tax, under a shell capital lease structure ($1 annum rent $10 sales price). Because the transaction is a deliberate capital lease, the company retains ownership rights for all concerns accept tax under GAAP. The property remains exempt from all personal property tax for as long as the lease runs. Local communities however, then usually demand a Payment-in-lieu-of-Taxes Agreement (PILOT) to require the company to pay some property tax in support of county services. Normally the communities want to retain a PILOT to pay school tax (about 50% of property tax -rule of thumb), and a graduated tax schedule based on the affluence of the community (example 100% abatement for 5 years, then a graduated scale to full taxation in 10 years). In this case however, the City of Macon already owns the building through its local development authority, a 501C community owned corporation that is tax exempt. Therefore, the property is already exempt from taxation for a White Knight s use. The City of Macon has intimated that they will require no PILOT, but negotiations are pending. Also, the other states at which we are looking, impose a property tax on plant inventory. Georgia provides a 100% exemption of plant inventory from property tax. 3.2 Sales Tax The sales tax rate in Macon Georgia is 7%. Georgia has a statutory sales tax abatement program that abates all sales tax on manufacturing equipment purchases. However, you must document the transactions with the appropriate forms to survive an audit. Abatement is on the full value of the sales tax obligation. A more comprehensive exemption can be obtained by using Legal Construction and expanding the scope of the proposed public sector building lease to include factory tooling and equipment. This scenario is executed by expanding the lease to include required equipment and tooling purchases. Since the

8 purchaser is a 501C and therefore tax exempt, they do not pay sales tax on their invoices. The company is normally hired as a design agent to aid the economic development organization in actually procuring the goods, and executing the building remodel and fit-out. 3.3 Corporate Income Tax Georgia Corporate Income Tax The Georgia Corporate Income Tax rate is 6% of earnings declared in the State, but Georgia offers a plethora of economic development incentives programs to abate taxation. In general, you cannot abate more than 50% of your liability per year with credits, though credits embed a 10 year carry-forward Georgia Jobs Tax Credit pays a $1,250 - $4,000 credit for each net new job to Georgia, for 5 years. Carry forward is 10 years Georgia Quality Jobs Tax Credit pays a $2,500 - $5,000 credit for each net new job to Georgia that pays at least 10% above the average county wage. Good for 5 years. Can t be piggy-backed on the regular program above for the same employee. (If the company has abated all its available Georgia income tax liability, the credit may be taken against employee withholding taxes.) Carry forward is 10 years Georgia Port Tax Credit companies that increase their port traffic through a Georgia Port by 10% or more, or begin material new traffic, receive an additional $1,250 per employee claimed on either the Jobs or Quality Jobs Income Tax Credit. Carry forward is 10 years Mega-Project Tax Credit Companies creating 1,800 jobs and carrying a payroll of $150M or an investment of $450M can claim a tax credit of $5,250 per qualifying employee for 5 years. (If the company has abated all its available Georgia income tax liability, the credit may be taken against employee withholding taxes.) Program can t be piggybacked on Jobs or Quality Jobs programs. Carry forward is 10 years. This program is an example of special legislation, designed to benefit one new employer in the State Georgia Capital Investment Tax Credit Manufacturing and Telecommunications companies that have operated in Georgia for at least 3 years can claim an Investment Tax Credit equal to from 1% to 8% of their qualifying capital investment in the State. You can only take this credit or the Jobs Credit, but not both Georgia Retraining Tax Credit Businesses that train their employees may claim a tax credit equal to up to 50% of the cost of training, with an employee maximum of $500 per year Georgia Corporate Net Worth Tax Georgia imposes a business tax for the privilege of doing business in the State. The tax however can be as low as $10, and is capped at $5,000 per year. It is nonmaterial to a medium or large corporation. 3.4 Foreign Free Trade Zones

9 There are 3 Foreign Free Trade Zones in Georgia and 17 FTZ Magnet Sites. Magnet Sites are areas within existing industrial parks designated a having FTZ status. There are no FTZ s or Magnet Sites anywhere near Macon Georgia. Practically, the FTZ allows a business to import raw materials to its plant, without paying import duties on the goods or Georgia Sales Tax. Once in the zone, the raw materials may be processed to finished goods and stored. Since Georgia has no property tax on inventory, there is no inventory tax savings in Georgia in the zone. When the finished goods are then sold outside the FTZ, the business pays a reduced duty. If sold in Georgia, they incur Georgia Sales Tax, if sold domestically outside Georgia they incur that state s sales tax, if sold internationally, they effectively escape US taxation. It is generally very difficult to get a new Foreign Free Trade Zone implemented through the US Department of Commerce, but Georgia indicates that Magnet Zones can be approved on a streamlined process of from one to six months. 3.5 Infrastructure Support In this case, the Public Coalition (State and Local economic development officials) are offering the principal infrastructure for production on a tax-exempt basis via a discount lease. The question is, what is the value of the discount lease, and bridging over to tax, will there be a PILOT. Since ABC will be paying the lease and the PILOT to the same Local Public Agency, ABC doesn t really care about the mix. A common method of determining a discount rent is to do an economic impact study on the project, and calculate the indirect and induced impacts on the region from the new employer. The community then subtracts this ancillary impact from an estimated commercial rent, to get the discount rent. Since the building is currently not on the tax roles, it is a good company argument to say there is no cost to providing ABC a 100% exemption. If a PILOT payment is required for political purposes, the company should simply deduct that from the discounted rent calculation and move money from one bucket to another. In the end, there are not a lot of White Knight companies out there, and the community is likely spending approximately $1M a year to maintain the facility in mothball conditions. It is an open negotiation and much of the leverage lies on the company side. There will still be renovation expense and equipment and tooling to finish out the enterprise. Georgia offers a flexible system of financing aides related to economic development. In this case low interest financing could be granted to the local economic development authority acting as landlord, and all the work be done as tenant improvements. Likewise, as mentioned in the taxation section, equipment could be purchased in this manner and provided as part of the lease. 3.6 Personal Income Tax Abatement Georgia Personal income tax rates are relatively low at 1% to 6%, but there is no system for abatement of these taxes. 3.7 Workforce Development and Workforce Pipelining

10 Georgia does an excellent job of providing both immediate workforce development assistance and longer term workforce pipelining. For immediate workforce development needs they offer a plethora of programs aimed at new and recumbent worker training. The Workforce Division of the Georgia Department of Economic Development oversees the execution of all workforce development in the State, though there are also regional and local organizations working in partnership with them. WIOA Workforce Development The Workforce Innovation Opportunity Act is a piece of federal legislation, under which funds are given to the states and allocated to programs there. Georgia chose to create a cash reimbursement program using some of their WIOA funds. Thus this is somewhat of a federal program. Under the program, the company works with a local training administrator and completes an application for all required training. There is a complex calculation for actual reimbursement based on how the company spends the money, but in general Georgia WIOA Workforce Development pays 50% of the training costs inclusive of the employee s time. Georgia Quickstart Georgia Quickstart is a similar program to the WIOA Workforce Development program, but all training must be provided by the Technical College System of Georgia. It is provided at no charge to the employer, except the employee s time in training. Many companies are reticent to turn over their training to a third party organization that does not specialize in the fields being taught. Also, intellectual property exchange can be an issue for process related company proprietary data. Still the program offers full cost acceptance, and there is an opportunity to use floor supervisors as instructors and hire regular third parties as subcontractors to the Technical College system as a means of enhancing the company s participation. There are a number of other programs in Georgia related to improving the workforce, but they would be considered more social service than definable monetary advantage so they are not mentioned here. For longer range workforce needs, the Georgia University and Trade School systems are noted for their ability to partner with industry to develop business specific curriculum for both blue and white collar workers. At the blue collar level, the employer can set up a program to teach job specific skills, and then hire only his choice of the graduating class (pre-employment training). The State University system enjoys a healthy partnership with Georgia targeted industries, providing low cost R&D and production, while incorporating those attributes into their curriculum. ABC should look to Georgia universities and trade schools in the Macon area, as well as those that have a significant concentration of students from the Macon Area. 5.0 UNITED STATES FEDERAL ECONOMIC DEVELOPMENT PROGRAMS The US Federal Government offers a large number of grants and incentives through various agencies. A comprehensive list can be located at where you ll generally find around 2,000 open solicitations for Federal grants and incentives. While some state and local commerce and economic development authorities are cognizant of Federal programs and incorporate them into the economic development package, many other are not. The Federal Government often operates as an economic developer of last resort to close an EDO deal that requires more assistant. To the contrary, Federal incentives should be addressed early and often. These are few of the more popular Federal Incentive programs:

11 5.1 US Treasury New Markets Tax Credit Program On a roughly annual basis, the US Treasury releases approximately $3B-$4B in Federal Tax Credit Script to the states to be sold to Federal Tax payers with a high federal tax liability at a discount. The funds are then used by the States, through Qualified Entities as closing funds for larger economic development deals. Thus, the title is really a misnomer, as this program is really providing cash grants or forgivable loans to the economic development deal. The formula is complicated, but in general, the program can fund 20% of the investment required for an economic development deal. 5.2 US Department of Agriculture Loan Guarantees. The USDA has a program designed to promote jobs in rural communities where mechanized agriculture is depleting rural employment. The designation is simply population related however, taken from the 2010 census. A company investing in a new or expanded plant in a rural community can receive up to a 90% loan guarantee from USDA, sharply reducing financing costs. 5.3 US Department of Housing and Urban Development - CDBG USHUD offers the Community Development Block Grant program which provides low interest loans and grants for economic development as part of its charter. Generally, the grants are limited to public agencies, but often a new project requires improvements to publicly owned horizontal infrastructure. Also, communities have been very ingenious about defining public costs, extending the availability of the funds for project related work. 5.4 The Tennessee Valley Authority Economic Development Grants If the project is located in the Tennessee Valley Authority jurisdiction, cash grants are available for infrastructure. 5.5 US Economic Development Agency Grants, Loan Guarantees The US EDA falls under the US Department of Commerce. The EDA provides grants for companies developing new technologies and bringing jobs to communities with high unemployment rates. 5.6 US Import / Export Bank The US Import / Export Bank is responsible for increasing US exports, by aiding US Companies in gaining the financing necessary for export operations. They also play a role in Foreign Direct Investment, by encouraging foreign companies to invest in infrastructure in the US, thus reducing imports. 5.7 US Federal Home Loan Bank System Set up during the 1930 s as an anti-depression mechanism for lending, the banks today work with local and state economic development agencies to provide loan guarantees and financing assistance to lower the cost of finance in economic development deals. Et al visit a federal website or