Study on Tax Policies for the Development of. Ethnic Minority Regions in China

Transcription

1 Study on Tax Policies for the Development of Ethnic Minority Regions in China ABSTRACT ZHANG Dongmei 1 The preferential tax policies have been provided to ethnic minority regions (EMRs) 2 since People's Republic of China was founded. However, the economic development gap is still significant between EMRs and other regions in China. The tax policies for the development of EMRs are studied in this paper, including evolution, assessment, analysis and outlook. In fact, it is difficult to get contribution rate of the tax policies to economic development in EMRs with integrity and complexity. The current tax law and system definitively impact on the tax policy effect. Against the backdrop of supply-side fiscal reform, reform toward fair tax system is a more critical contributor than tax reduction to supporting EMRs development, and protecting local right to tax revenues with laws and regulations is more important than preferential tax treatment. In order to further narrow the development gap between EMRs and other regions, preferential tax policies of lower tax rate (and tax reduction and exemption) should continue to exist in the short and mid-to-long run. 1. Research Questions and Literature Review 1.1 Research questions Since the founding the P. R. China, various public policies have been formulated by the central government to support the development of ethnic minority regions (EMRs). One of the most important policies is tax policy, in particular preferential tax policy. China s fiscal reform has gone through three stages the centralized administration system 3 (tongshou tongzhi), the fiscal contracting system 4 (baoganzhi) and the tax assignment system 5 (fenshuizhi). As the reform proceeded, tax policies to support EMRs development have also been adjusted accordingly. Current tax policies to support the economic and social development 1 Professor, Economic School in Minzu University of China, Beijing, , beckyzhangdm@163.com. 2 Ethnic minority autonomous refer to the areas of 5 ethnic minority autonomous regions, 30 ethnic minority autonomous prefectures, and 120 ethnic minority autonomous counties(qi). Ethnic minority regions (EMRs) in this paper refer to 5 ethnic minority autonomous regions. 3 A highly centralized system, the central government was responsible for all the tax collection and expenditure. 4 The system required each level of governments to contract with its subordinate level to meet certain revenue and expenditure targets. 5 The system specifies how tax revenue is shared between central and local governments, and that is system of tax distribution. 1

2 of EMRs mainly focus on two areas the first is to support industrial development from a market-oriented perspective by means of tax reduction and exemptions to lower tax burdens, and the second is for the local government to provide differentiated public goods compatible with the demands of EMRs by accelerating resource tax reform based on local comparative advantages so as to increase local tax revenues of EMRs. Of course, central government s financial transfer payment to sub-national governments is a straightforward and effective way to realize equalization of basic public services. However in the long run, it is important to strengthen the fiscal robustness of EMRs for them to pursue self-sustained development and to improve public services provided by governments of EMRs. Since 2015, China has focused on promoting supply-side structural reform. Against the backdrop of fiscal reform with tax reduction as the pivot, it is important to think about how central government s tax policies should be adjusted to support EMRs development. How effective are those policies? Should the aim of the tax policies be redefined? To answer these questions, it is necessary to sort out the tax policies aimed at supporting EMRs development and conduct quantitative assessment and in-depth analysis of these policies. Moreover, it is imperative to think about how to maximize the positive impact of tax policies on EMRs development from the perspective of taxation system, tax law and political system. 1.2 Brief review on literature Overseas literature dedicated to studying on tax policies that support regional development is extremely rare, and most of the time tax policies are formulated in consistency with industrial policies or trade policies to realize development goals. What is abundant is literature discussing the compatibility between tax policies and development policies (Oxfam, 2000; P. Hoebink, 2001, 2004; L. McLean Hilker, 2004; Maastricht, 2007). Taxation has both positive and negative impact on economy, and therefore tax policy has great potential in influencing economic development. Since it is very common for developing countries to struggle with pressure regarding fiscal revenue and tax collection efficiency, the coupling between tax policy implementation and development goals is worth further in-depth studies (Francis Weyzig and Michiel Van Dijk, 2009; Satya P. Das, 2012). In contrast, there is plenty of domestic literature on tax policies related to regional development and some of it is aimed exclusively at studying preferential tax policies for EMRs (D. M. ZHANG, 2007; J. J. LI et al, 2009, 2011; Y. Y. PIAO, 2011; T. HUANG, 2011; Y. J. QIAO et al, 2015; W. B. TANG, 2016; L. ZHANG et al, 2016). These papers have reached a basic consensus on the important role of preferential tax policies in strengthening support to EMRs development and have proposed innovative tax policies, legislative measures, etc. However, to fix the deep-rooted problems regarding tax policies supporting EMRs development, it is far from suffice to simply rely on the improvement of policies and rules on tax 2

3 collection and administration. In fact, solutions should be found in taxation system and tax laws to address issues related to distribution of local tax revenues and to define roles of EMRs in industry growth, so as to promote the rapid and sound development of EMRs. 2. Evolution of Tax Policies Supporting EMRs Development Consistent with the history of China s fiscal reform, the current paper divides the evolution of tax policies supporting EMRs development into three stages: 1) the period between 1949 and early years of reform and opening up; 2) the period after reform and opening up and before the initiation of tax assignment system; and 3) the period from the start of tax assignment reform till now. 2.1 From 1949 to 1979: Centralized fiscal administration During this period, the country implemented a highly centralized mechanism of planned economy, and accordingly the fiscal system was featured with power centralization. To mitigate the concerns of ethnic minorities toward the new governments at various levels, the central government adopted a series of tax policies aimed at supporting EMRs development, as shown in Table 1. Table 1 Major Tax Policies Supporting EMRs Development ( ) To roll out centralized fiscal administration across the country while allowing EMRs to implement the policy with certain degree 1950 of autonomy and some regions to have autonomous tax administration,. The Government Administrative Council gradually approved border trade, allowing China s border regions to trade with countries such as North Korea, Russia, Mongolia, Pakistan, 1951 Myanmar and Vietnam. The exchange of local goods by residents living at border areas (mainly ethnic minorities) for daily necessities was either exempt from tax or enjoyed lower tax rate. To restore agricultural production of EMRs, the central government adopted a low tax policy for agricultural areas where tax was calculated based on prescribed rate, certain tax was reduced or exempted in accordance with law and tax burden remained the same for increased production output Impoverished agricultural areas followed a policy of less tax 957 reduction for areas stricken by mild disasters, more for those stricken by heavy disasters, and all tax exempted for areas suffering from catastrophic disasters. Moreover, taxes for agriculture and husbandry were all exempted, and pasture areas enjoyed more favorable tax policies than agricultural areas and cities. There were also policies on ethnic minority products to 3

4 ensure the production and supply of industrial goods with strong ethnic minority and regional features, multiple specifications, complex techniques and small production volumes, so as to meet certain special demands of ethnic minority residents. Such policies covered planned supply of earmarked raw material, favorable prices and tax reduction and exemption. A number of mainstay machinery manufacturing enterprises were relocated by the government to the north-western and south-western EMRs, and initiated many key projects in Inner Mongolia, Xinjiang, Gansu, Ningxia and other EMRs. These projects covered the production of steel and nonferrous metal, construction of large hydro-power infrastructure and construction of production bases of energy such as coal. Accordingly, tax policies were formulated to support industrial development of those EMRs. Ministry of Commerce and Ministry of Finance released the Joint Notice on Three Preferential Treatment Measures for Ethnic Trading Enterprises in Remote Mountain Areas and Remote Pasture Areas, which specified that 17 counties of Guangxi, 31 Counties of Yunnan, 45 Counties of Sichuan, 22 Counties of Guizhou, 31 Counties of Qinghai and 13 Counties of Gansu could enjoy favorable treatment. All of the three measures included in them preferential tax policies and offered multiple favorable policies on the production and supply of goods for EMRs, for example preferential policy on supply of daily necessities of ethnic minority residents, policy on national reserve of Bianxiao Tea 6, administration and preferential policy on gold and silver ornaments exclusively for ethnic minority residents, policy on the production of goods exclusively for ethnic minority residents and favorable tax policy for designated producers of goods that were included in the catalog of ethnic minority goods (of provinces, districts and cities) and that were within prescribed quota. Report on Strengthening the Production and Supply of Goods Exclusive for Ethnic Minorities by the Ministry of Light Industry and the Ministry of Commerce was approved by the State Council, in which preferential tax policies were included. Source: summarized by author During this period, tax policies supporting EMRs development were mainly focused on tax reduction and exemption for the production and trade of daily 6 Bianxiao Tea, commonly known brick tea, is sold exclusively in the border regions, plateau and pasture areas in China. The CPC and the government classify it as daily necessity of ethnic minority residents to ensure its production and supply. 4

5 necessities of EMRs and ethnic minority residents. The Program for the Implementation of Regional Ethnic Autonomy of the People's Republic of China in 1952 and the Temporary Methods on Fiscal Administration of Ethnic Autonomous Regions in 1958 laid the legal foundation for EMRs fiscal system. The Report on Improving Fiscal System of Ethnic Autonomous Regions and Rules on Improving Fiscal System of Ethnic Autonomous Regions (Draft) in 1963 specified the fiscal and budget administration methods for ethnic autonomous regions, which empowered ethnic autonomous regions with tax administration power to certain extent. 2.2 From 1979 to 1993: Fiscal contracting system During this period, fiscal administration was directed toward the fiscal contracting system. In compliance with regional development strategies, the central government provided EMRs with certain subsidies and continued to implement tax policies supporting EMRs development, as shown in Table 2. Table 2 Major Tax Policies Supporting EMRs Development ( ) A fiscal system started to be rolled out across the country where responsibilities of tax collection and revenue expenditure were divided between central and sub-national governments and among different levels of local governments, and fiscal contracting was carried out across the country. Certain special rules concerning 1980 EMRs remained unchanged, and the central government specified that governments of eight ethnic regions (i.e. five Ethnic Minority Autonomous Regions together with Yunan, Guizhou and Qinghai) could keep all the tax revenues and enjoy subsidy in case of shortfall. The subsidy would remain unchanged for 5 years. Notice on Increasing the Procurement Price of Raw Material of Bianxiao Tea by the Ministry of Commerce, the State Administration of Commodity Prices and the State Ethnic Affairs Commission 1982 specified to increase the standard and procurement prices of six types of raw materials of Bianxiao Tea by more than 10% and to lower tax by 20%. Temporary Methods on Administration of Small Border Trade specified that small border trade would be administered by the people s governments of relevant provinces and autonomous 1984 regions, and that border trade among residents should not exceed certain transaction amounts within which customs, product tax and VAT would be exempted. Report of Ministry of Commerce on Issues Regarding Promoting Commerce of Ethnic Minority Regions specified necessary support to 1985 commercial activities of ethnic minorities, for example to continue the policies on tax reduction and exemption for commercial enterprises of counties enjoying the three preferential treatment 5

6 measures, to promote the production of ethnic minority goods, etc. Request for Instructions on Issues Regarding Policies on Poverty Alleviation of Ethnic Minority Regions by the State Ethnic Affairs Commission and the Leading Group of State Council on Economic Development of Impoverished Regions rolled out favorable policies on tax and fees to promote the growth of advantageous industries. Joint Notice on Helping Ethnic Minority Regions to Develop and Exploit Geological and Mineral Resources by the Ministry of Geology and Mineral Resources and the State Ethnic Affairs Commission specified measures to help EMRs to accelerate the development and exploitation of geological and mineral resources and also provided relevant favorable tax treatments. Notice to Release the list of Enterprises within Textile Industry Designated to Produce Ethnic Products by the State Ethnic Affairs Commission, the State Administration of Taxation, the People s Bank of China and the Ministry of Textile Industry designated 500 enterprises within the textile (silk) industry to produce ethnic products, and those enterprises could enjoy tax reduction and exemption policies and favorable loan policies. Notice on Issues Regarding Foreign-Related Tax Policies on Opening-up Border, Coastal and Inland Provincial Capitals and Cities along the Yangtze River by the State Administration of Taxation specified that foreign producers in 18 border, coastal and inland provincial capitals as well as 5 cities along the Yangtze River could enjoy a reduced enterprise income tax rate of 24%. Foreign producers engaging in prescribed business could, with approval of the State Administration of Taxation, have their enterprise income tax rate lowered by 15%. Source: summarized by author Tax policies in this period kept the tax reduction and exemption of the previous period that aimed at ensuring the production, livelihood, trade and poverty alleviation of EMRs, apart from which, there were also fiscal revenue policies to compensate EMRs under the regional development strategy of the country and tax policies to boost the opening-up initiative of EMRs in non-coastal areas. The year 1984 witnessed the approval and implementation of the Law of the People s Republic of China on Regional Ethnic Autonomy in which numerous articles specified that EMRs were entitled with preferential treatment, support, subsidies and grants from superior authorities. During this period, legal and institutional foundation was set up for the EMRs to perform autonomous fiscal administration. 2.3 From 1994 till now: Tax assignment system 6

7 The reform toward the tax assignment system in 1994 was a milestone in the evolution of China s fiscal system. The exploration on public fiscal system started in The taxation system was reformed across the board under the principle of unified tax code, fair tax burdens, streamlined tax system and reasonable division of power. During this period, a significant feature of fiscal policy regarding EMRs development was the enhanced transfer of payment from the central government to EMRs, and relevant tax policies were primarily focused on bringing benefits to EMRs, as shown in Table 3. Table 3 Major Tax Policies Supporting EMRs Development (1994 till now) The State Council decided in the National Eight-Seven Poverty Alleviation Plan to dedicate human and financial resources from 1994 to 2000 to provide adequate food and clothing for 80 million impoverished people in rural China. Newly established 1994 enterprises in the old revolutionary areas, ethnic minority autonomous areas, inland border areas and impoverished areas recognized by the government could enjoy full or partial income tax rebate within 3 years after tax payment was made. Preferential tax policies were formulated for the pilot of EMRs reform and opening-up, the pilot of rural reform and the zone of high-and-new technology development. HulunBuir and Wuhai of Inner Mongolia, the Yanbian Korean Autonomous Prefecture, the 1994 Qiandongnan Miao and Dong Autonomous Prefecture and the Ili Kazak Autonomous Prefecture of Xinjiang Uygur Autonomous Region were among the first to join the pilot of EMRs reform and opening-up. The State Council formulated border trade policies and released the Response on Issues Regarding Ethnic Trade and Production of Ethnic Goods for the Ninth Five-Year-Plan Period, which was 997 aimed at implementing preferential economic policies concerning interest rate for loan of designated enterprises, fiscal discount and taxation. The Notice on Issues Regarding Taxation of Ethnic Trade Enterprises by the Ministry of Finance and the State Administration of Taxation specified on the reduction, exemption and rebate of VAT and enterprise income tax. Favorable tax policies were formulated for ethnic trade counties, 1998 ethnic trade corporations at provincial and prefecture level and enterprises designated to produce ethnic goods during the ninth five-year-plan period, and preferential tax treatments were also covered in the Notice on Supplementary Rules to Further Promote Border Trade. The State Administration of Taxation released the Notice on 1999 Applying a Reduced 15% Tax Rate for Enterprise income tax to Foreign Invested Enterprises in Mid-Western Regions for Three 7

8 Years. State Administration of Taxation released the Notice on Issues Regarding VAT Exemption for Subsidies to Programs of Returning Farmland to Forest and Grassland. The Notice on Issues Regarding Preferential Tax Policies for the Initiative to Develop the Western Regions by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs specified that domestic and foreign invested enterprises engaging in industries encouraged by the government in the western regions of China could enjoy a reduced 15% enterprise income tax rate from 2001 to Upon the fourth year of the Initiative for Development of Western Regions, the central government enhanced support to western regions in terms of public investment, tax policies and transfer of payment, for example formulating favorable tax policies on the construction of Qinghai-Tibet railway and the West-East natural gas transmission project. The Notice on Continuing to Implement the Preferential Policies on Ethnic Trade and Production of Ethnic Products by the State Ethnic Affairs Commission stipulated that favorable tax policies would continue. The Notice on Continuing to Implement Preferential VAT Policies for Goods Sold by Ethnic Trade Enterprises and the Bianxiao Tea Produced and Distributed by Government-Designated Enterprises and Distributors by the Ministry of Finance and the State Administration of Taxation specified that from 2006 to 2008, VAT was exempted for goods (excluding oil and tobacco) produced by ethnic trade enterprises at/below country level in ethnic trade counties and sold by supply and marketing cooperatives as well as for Bianxiao Tea produced by government-designated enterprises and sold by relevant distributors. The Ministry of Finance and the State Administration of Taxation released the Notice on Issues Regarding Changes to the Catalog of Items Applicable to the Preferential Tax Policies on the Western Region Development Initiative. The Enterprise income tax Law and the Tax Policies Supporting Development of Cultural Industry contained tax policies dedicated to ethnic autonomous regions and cultural industries of ethnic minorities. The Notice on Preferential Income Tax Policies for Newly-Established Enterprises in Areas with Financial Difficulties of Xinjiang specified that from 2010 to 2020, newly-established enterprises in areas with financial difficulties of Xinjiang could enjoy favorable enterprise income tax treatment provided that 8

9 they were included in the Catalog of Favorable Income Tax Treatment for Enterprises Engaging in Encouraged Industries in Areas with Financial Difficulties of Xinjiang. The State Council released the Opinions on Supporting the Construction of Kashgar and Horgos Economic Development Zones which specified relevant fiscal and tax policies. The Notice on Continuing to Implement the VAT Policies on Bianxiao Tea by the Ministry of Finance and the State Administration of Taxation specified that Bianxiao Teas was exempted from VAT for from 2011 to Fiscal policies promoted and implemented by the State Ethnic Affairs Commission included the Notice on Issues Regarding Taxation of Ethnic Trade Enterprises, the Preferential Policies on Ethic Trade and Production of Ethnic Goods, the Initiative to Develop Border Regions and to Enrich Residents of Border Areas, the Preferential VAT Policies for Goods Sold by Ethnic Trade Enterprises and for Bianxiao Tea Produced and Distributed by Government-Designated Enterprises and Distributors, etc. The Ministry of Finance and the State Administration of Taxation formulated respectively the Notice on Adjusting Resource Tax for Crude Oil and Natural Gas and the Reform of Resource Tax on Coal. The Catalog of Value-Added Tax Preferences for Products and Labor Services Involving the Comprehensive Utilization of Resources by the Ministry of Finance specified on the reform and adjustment of resource tax. The Ministry of Finance and the State Administration of Taxation released the Notice on the Application VAT Refund (Exemption) Policies to Goods Entering the China-Kazakhstan Horgos International Border Cooperation Center. The Ministry of Finance, the State Administration of Taxation and the Ministry of Water Resources released the Temporary Methods on Pilots of Water Resource Tax Reform (for the pilot in Hebei Province). Source: summarized by author An important feature of tax policies during this period, apart from those to support EMRs development on areas such as poverty alleviation, ethnic goods and ethnic trade, is that a lot of them were formulated to bring benefits to EMRs in such forms as tax policies on the Western Region Development Initiative and on resource tax reform and improvement. Another critical feature is the focus of tax policies on promoting opening-up of EMRs. 9

10 3. Effectiveness of Tax Policies Supporting EMRs Development 3.1 Preferential tax policies alleviate tax burdens of EMRs Under the unified tax system and tax code framework, measurements of macro tax burden (MTB) of EMRs against the national average tend to show the direct impact of preferential tax policies on EMRs. Domestic studies suggest that less developed areas, particularly community-level governments of those areas, have higher proportion of non-tax revenue to total fiscal revenue in their efforts to raise fiscal revenue. Because non-tax revenue also adds to the tax burden of local enterprises and residents, the current paper measures and compares macro tax burdens of EMRs from different perspectives Overall MTB: EMRs vs. sub-national localities Overall MTB in this section refers to the proportion of a region s total fiscal revenue to GDP of that region 7. A comparison of MTB between EMRs and sub-national localities of the country 8 based on data from 1952 to 2005 tends to show the overall MTB of EMRs, as illustrated in Figure % 40.00% 30.00% 20.00% 10.00% 0.00% % % Inner Mongolia Guangxi Ningxia Tibet Xinjiang EMRs Sub-National Localities Figure 1 Comparison of Overall MTB between EMRs and Sub-National Localities Average ( ) Source of data: See Appendix 1 7 This measurement is used by the IMF to calculate tax burden. 8 Sub-national localities of the country refer to 4 municipalities, 5 autonomous regions, and 22 provinces. 10

11 The overall MTB of the five EMRs fluctuates around 10% while the national average moves around 20%. The average MTB of EMRs is lower than that of national average by 10 percentage points (9.88%) with the largest gap appearing in 1973 (18.44%) and the smallest in 2001 (0.57%). This suggests that tax policies supporting EMRs development have reduced EMRs tax burdens significantly, facilitating EMRs industrial development Provincial-level MTB: EMRs vs. sub-national localities The tax assignment reform in 1994 divides inter-governmental revenues into central fiscal revenue and local fiscal revenue. This section discusses the tax burden imposed by the local governments of EMRs, and in this context, the MTB refers to the proportion of a region s general budgetary revenues to the region s GDP, as illustrated in Figure % 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Inner Mongolia Guangxi Ningxia Tibet Xinjiang EMRs Sub-National Localities Figure 2 Comparison of Provincial MTB between EMRs and Sub-National Localities Average ( ) Data source: See Appendix 2. The average provincial MTB of EMRs is basically the same with that of national average. The former was higher than the latter by 0.3% in 1998 and lower by 1.51% in Since 2001, the sub-national localities average has been higher than EMR s average by 1 percentage point (0.64%). Generally speaking, the MTB of EMRs under provincial level has been lower than national average since 2001, suggesting that local governments of EMRs dealt with relatively small tax burdens compared with local governments of the other regions Narrow MTB: EMRs vs. sub-national localities This paper also takes into account the narrow MTB, i.e. the proportion of tax 11

12 revenue to GDP. Statistics from 2000 to 2015 are used because of data availability, as shown in Figure % 20.00% 15.00% 10.00% 5.00% 0.00% Tax Burden in EMRs Tax Revenue of Central Government/GDP in EMRs Tax Burden in Sub-National Localities Tax Revenue of Central Government/GDP in Sub-National Localities Figure 3 Comparison of Narrow MTB between EMRs and Sub-National Localities Average ( ) Source of Data: See Appendix 3. As shown in Figure 3, narrow MTB of EMRs was lower than national average from 2000 to 2015 with the smallest gap in 2000 (2.6%) and the largest in 2014 (5.86%). Moreover, EMRs had lower proportion of tax revenue of central government to local GDP compared with sub-national localities average and their tax burden coming from the central level was not heavier than sub-national localities average. The proportion of central-level tax revenue to total tax revenue of EMRs ranges from 44.92% to 59.51%, however the national average ranges from 51.61% to 64.06%. Comparison of data from different perspectives shows that EMRs has smaller MTB than other localities of the country, meaning that the direct impact of preferential tax policies lies in the mitigation of EMR tax burdens. 3.2 Differences in tax structure before and after resource tax reform suggest that preferential tax policies contribute to EMRs fiscal revenue Currently there are 17 types of taxes in China and they are further classified into 5 categories: 1) turnover taxes including VAT, consumption tax and customs duty 12

13 (business tax has been replaced with VAT); 2) income taxes including enterprise income tax and individual income tax; 3) resource taxes including resource tax, urban land use tax and farm land occupation tax; 4) property taxes such as real estate tax, vehicles and boats operation tax and tax on contract; and 5) behavioral taxes including stamp tax, city maintenance and construction tax, land appreciation tax 9, vehicle purchase tax, tonnage tax and tobacco tax. China adopts a composite tax system with two pillars turnover taxes and income tax. The division of tax revenues between the central and the provincial governments became very clear in 1994, but there were no specified or legally prescribed rules regarding how the sub-national tax revenues and the portion of shared tax revenues belonging to local governments should be distributed among various levels of local governments. Therefore tax revenue in this paper also refers to the sub-national tax revenue of the five autonomous regions, and the local tax structure is analyzed to study the implication of resource tax on the growth of EMRs fiscal revenue. 10 See Table 4. Table 4 Comparison of Sub-National Tax Revenue Structure Between EMRs and Sub-National Localities (%) Five Autonomous Regions Domestic VAT Business Tax Enterprise Income Tax Personal Income Tax Resource Tax Land appreciation tax is sometimes categorized as resource tax or property tax by some textbooks. 10 In terms of local-level tax revenue structure, analysis is focused on turnover tax, income tax and resource tax (as tax type), which also provides data for further studies on major tax types of EMRs and their industry development and trends. 13

14 Sub-National Localities Domestic VAT Business Tax Enterprise Income Tax Personal Income Tax Resource Tax Source of data: Calculated based on statistics from the China Taxation Yearbook from 2000 to See Appendix 4 about the tax revenue structure of Inner Mongolia, Guangxi, Ningxia, Tibet and Xinjiang. As shown in the above table, the proportion of turnover tax revenue to sub-national tax revenue and the proportion of income tax basically share the same evolution path from 2000 to However the proportion of resource tax demonstrates a strong upward trend, as shown by the fact that the figure of national average varies by less than 0.5 percentage points yet that of EMRs shows apparent fluctuation, increasing from 2.61% in 1999 to 5.74% in To be more specific, in terms of the proportion of resource tax to total tax revenue, Inner Mongolia, Ningxia and Xinjiang autonomous regions experience significant growth, Guangxi, a relatively mild increase and Tibet, a decrease. As resource tax is gradually applied more broadly, for example in the Hebei pilot program in 2016, Guangxi is expected to see more contribution of resource tax to local tax revenue (for more data see Appendix 4). Therefore, it is concluded that resource tax reform has contributed a lot to the increase of EMRs local fiscal revenue. 4. Analysis on the Root Causes of Problems Concerning Tax Policies Supporting EMRs Development The ultimate goal of tax policies supporting EMRs development is to enhance the capability of EMRs to pursue self-sustained development. In fact, the major players to promote regional development are governments, enterprises and 14

15 households. It requires complex and systemic efforts to build self-sustained development capability and the prosperity of enterprises and households depends on industrial development in a competitive market where specific tax policies are implemented. Therefore, from a market perspective, tax policy is mainly dedicated to enhancing industrial competitiveness of EMRs, and from a government perspective, tax policy is aimed at strengthening the public service capacity of EMRs governments. As a result, it is important to analyze EMRs industries from a taxation perspective and to study on local tax system. 4.1 Current tax code and EMRs economic conditions enhance the effectiveness of tax policies Rules of current tax code on tax type administration are more likely to cause divergence between tax source and tax revenue in EMRs The fact is that enterprises are more likely to register and reside in economically developed areas, which is particularly the case for headquarters. Rules of China s current tax code on place of tax payment lead to the flow of most tax revenues to developed areas, and this is typically the case to enterprises whose branches are located in different provinces, municipalities directly administrated by the State Council and autonomous regions. First, about VAT which is the most important part of turnover tax. Current rules concerning VAT are the Temporary Rules on Value-Added Tax in 2008 (Directive No. 538 of the State Council) and the Notice on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner by the Ministry of Finance and the State Administration of Taxation. Concerning the place of VAT payment, it is specified in the latest tax rules that: 1) Business operator with fixed premise should declare tax to the competent tax authority of the place where the institution is located or the individual resides. Head office and branch of the same business operator, if not located in the same county (or city), should declare tax to local competent tax authorities at places where they are located respectively. With the approval of the Ministry of Finance and the State Administration of Taxation or public finance and tax authorities authorized by MOF or SAT, the head office may declare consolidated tax to the competent tax authority at the place where the head office is located; and 2) Business operator with fixed premise that sell goods or provide labor service at counties (or cities) other than the place where it is located should apply to the competent tax authority of the place where it is located for Certification of Tax Administration for Outbound Business Activities and declare tax to the same authority; the abovementioned business operator, if without the certification, should declare tax to the tax authority of the place where the sale or labor service occurs, and if tax is not declared, tax should be collected by the tax authority of the place where the business operator is located. However, tax code concerning place of business tax payment prior to 2015 specified that Taxpayer who provides taxable labor 15

16 service should declare tax to the competent tax authority of the place where the taxpayer is located or the individual resides; taxpayer who provides labor service in construction industry and other taxable labor service specified by the fiscal and tax authorities of the State Council should declare tax to the competent tax authority of the place where the service is provided; and taxpayer who sells or rents real estate should declare tax at the place where the estate is located. Second, about enterprise income tax which is the most important part of direct tax. In and prior to 2012, enterprise income tax is a major part of the consolidated tax of head office and branches. In 2012, the State Administration of Taxation released the Temporary Methods on Administration of Collection of Enterprise income tax in Consolidated Taxation on Cross-Regional Business Operation, in which it is stipulated that income tax of institutions whose head office and branches are located in different provinces or cities should be collected under the principle of unitary calculation, multi-tiered administration, pre-payment of tax at place of business, consolidated settlement and coordination among fiscal authorities, and as a result, horizontal distribution of regional taxes became more fair. Although it is specified in the tax code that otherwise specified by the State Council, an enterprise should not pay income tax in consolidation with other enterprises, enterprises with branches can still choose place of tax payment by using legal person qualification and via secondary branch. In addition, about consumption tax that is not collected at local level. Tax return of central government to local governments is divided into consumption tax return and the part for consumption tax reform, and consumption tax of some consuming goods is collected during retail stage. As a result, tax revenue that should be attributed to EMRs is collected at economically developed areas, for example, the consumption tax of refined oil. Various studies have discussed the unfairness in the horizontal distribution of tax revenues in China including those of LIU Yi et al (2009) on distribution of VAT and business tax revenues, those of HUANG Xialan (2009) on divergence of tax sources among regions and LIU Jinshan (2014) on deviation of turnover tax and regional economic development. Imbalances in the horizontal distribution of tax revenues under the current tax code highlight the impact of preferential tax policies on EMRs. What truly reflects the effectiveness of favorable tax treatment is the mitigation of tax burdens of EMRs under a fair distribution framework of tax revenues among regions. However, it is not suffice to solve the problem completely by simply adjusting tax code concerning place of tax payment and tax policies Economic conditions of EMRs make them dependent on resource-intensive industries in the short term EMRs are located in remote areas with complex landscape and diverse climate 16

17 conditions because of historical and geographic reasons, which endows EMRs with rich ecological and environmental resources. Currently, EMRs have a total land area of 6.23 million square kilometers, accounting for 63.89% of the national total. The area of grassland takes up 75.07% of the country s total; the pasturing area and the semi-farmland-semi-pasturing land, 75%; forest volume, 46.57%; and water resource reserve, 65.93%. The major mineral resources of EMRs are coal, iron ore, phosphate ore and sylvine which account for 37.1%, 24.4%, 40.7% and 95.9% of national total respectively 11. Inner Mongolia abounds with more than 60 kinds of underground minerals, Xinjiang has 118 kinds of minerals and Ningxia nearly 50 kinds. Guangxi has one of the country s largest reserves of underground rare metals, and Tibet has more than 40 kinds of minerals. However, economic conditions mean that resource-intensive industries are the largest component of EMRs industrial structure. Resource tax reform has, to some extent, increased local fiscal revenue of EMRs. But low-tech resource-intensive industries with poor added-value are mostly in the lower end of the industrial chain, and that explains why resource tax is the largest contributor to tax revenue. The non-renewable and gradual depletion of resources mean that the contribution of resource tax is not sustainable. In order to keep the proportion of resource tax revenue to EMRs fiscal revenue, resource tax collection has to reach out to more areas. In fact, pilot on water resource tax was already started in Hebei province in Tax policy determines tax structure to some extent, and may further influence regional economic development through economic growth determinants. Overseas studies on the relationship between tax structure and economic growth have not reached any consensus (Ganghof, 2006; Cnossen, 2012; Tiwari and Mutascu, 2014). In particular, China is faced with more severe problems such as the incompatibility between tax structure and economic structure (Guo Jing, et al, 2015). For the government to administer taxation by law (LI Fei, 2014), it is important to implement structural tax reduction policies (Xu Shanda, 2017)and to analyze the relationship between EMRs tax structure and social and economic development from the perspective of tax incidence. 4.2 Tax policies supporting EMRs development should be more compatible with development goals Competition of local governments tax policies mitigates tax preferences on EMRs Promotion of Chinese officials under the current political system leads to heavy 11 Department of Economic Development of State Ethnic Affairs Commission and the Department of Comprehensive Statistics of the National Economy of National Bureau of Statistics. China s Ethnic Statistical Yearbook The Ethnic Publishing House, 2008: p

18 competition among local governments. All the 31 provincial governments exert themselves to excel at public service provision, human resource development and tax revenue growth. Therefore, the effectiveness of tax reduction and exemption for local governments of EMRs is very limited, if any. For example, the Article 34 of the Law on Regional Ethnic Autonomy specifies that "autonomous authorities of Ethnic Autonomous Regions, while implementing national tax code, may reduce or exempt taxes on those items that belong to local fiscal revenue and should be treated favorably and encouraged with tax-related means, apart from items on which taxes are reduced or exempted with approval of the central government". In Article 29 of the Law on Enterprise Income Tax, it is stated that autonomous authority of ethnic autonomous locality may decide to reduce or exempt certain portion of income tax paid by local enterprises given that the portion is shared by the autonomous ethnic locality. Non-ethnic regions may also provide preferential tax treatment within its authority, which mitigates the effectiveness of local preferential tax treatment of EMRs. Such favorable policies include those on tax base (such as tax remission, losses offset with profits and exemption of fees), on tax amount (such as investment tax credit and direct tax reduction and exemption) and on time of tax payment (such as tax deferral and accelerated depreciation). As a result, the more effective favorable tax policies are those coming from the central government, for example the tax reduction and exemption policies dedicated to supporting EMRs prior to 1994 and the preferential tax policies for the Western Region Development Initiative of EMRs that covered wide areas and brought great benefits to the public Building on major tax types of EMRs based on regional industrial advantages to improve fiscal capacity It can be drawn from Figure 1 that turnover tax and income tax are the primary pillars of local tax revenues of EMRs. From 2000 to 2015, the total revenue of VAT, business tax, enterprise income tax and individual income tax took up more than 57% of sub-national tax revenue of EMRs 12, which demonstrated the same trend with that of the national average (65%). This means that the other 11 tax types accounted for less than 50% of local tax revenue. Turnover tax and income tax are regarded as the best indicators of industrial development status of EMRs. Under the current tax system, there is still a long and difficult way to go for resource taxes (including resource tax, urban land use tax and farmland use tax, property taxes (such as real estate tax, vehicles and vessels tax and deed tax) and behavioral taxes (including fixed asset investment orientation regulation tax, stamp tax, urban maintenance and construction tax, land appreciation tax) 13 to become major tax types in EMRs 14. In the short and long term, to increase local 12 Since the replacement of business tax with VAT in 2016, the central government and the local governments each get 50%. 13 Tobacco tax is also a part of local taxes. 14 Some developed countries make property tax the pillar tax type in local tax structures, some have income tax as the pillar and some adopt a dual-pillar structure based on a 18

19 fiscal revenue of EMRs, the most fundamental solution lies in the development of EMRs advantageous industries, and the most direct and effective tax policy is the increase of turnover tax and income tax. And this leads to the issue in the first place reduction of tax burdens. 5. Improving Tax System and Policies Supporting EMRs Development It is pointed out in the Third Plenary Session of the 18 th CPC Central Committee that we should improve legislation, clarify government responsibilities, reform tax system, stabilize tax burden, promote transparent budget, enhance efficiency and build a modern fiscal system that mobilizes the initiative of the central and local governments. Improving tax system is the root and key to realize the goals of tax policies. The general goal of tax policies supporting EMRs development is to build the capacity of EMRs to pursue self-sustained development. It is important to adopt measures strongly compatible with policy goals, and this requires a thorough study on the formulation of China s tax policies and rules, for example on how tax rules are made and who has power over tax collection and administration. Such a topic goes beyond economic or fiscal area and reaches out to the political world. 5.1 Tax reform toward fair distribution of local tax revenues The Legislation Law of China specifies that basic tax system covering creation of new tax type, determination of tax rate and tax collection and administration should be governed by law, and that the power of tax code formulation and tax collection and administration resides in the National People s Congress and its Standing Committee. A fair tax system not only calls for rules that ensure the role of taxation in income redistribution, but also requires fair representation and democratic participation of tax experts, taxpayers and government officials in the formulation of tax rules and regulations. For preferential tax policies on less developed areas to truly reduce their tax burdens, the right to tax revenues of the localities should be assured in the design of tax rules. 5.2 Lower tax rate promoting industrial development of EMRs Compared with the favorable tax policies for special economic zones, coastal development zones and economic and technological development zones, it is a more righteous undertaking of the government to provide preferential tax treatment to less developed EMRs that receive special support and incentives from the country. Compared with the efforts of the central government to realize public services equalization of EMRs by large amount of financial transfer payment, it would be more effective to promote social and economic combination of both. 19

20 development of EMRs by providing preferential treatment for EMRs at central level taxation, by promoting industrial development of EMRs, by increasing local fiscal revenue of EMRs and by offering local public goods that meet the differentiated demands of ethnic minorities. In short, against the backdrop of supply-side fiscal reform, reform toward fair tax system is a more critical contributor than tax reduction to supporting EMRs development, and protecting local right to tax revenues with laws and regulations is more important than preferential tax treatment. In order to further narrow the development gap between EMRs and other regions, preferential tax policies of lower tax rate (and tax reduction and exemption) should continue to exist in the short and mid-to-long run. Appendix Appendix 1 Comparison of Overall MTB between EMRs and Sub-National Localities Average ( ) (%) Inner Mongolia Guangxi Ningxia Tibet Xingjiang EMRs Sub-National Localities