China fleshes out Hainan free trade port plan

Lowering taxes and raising duty-free quotas, China has taken concrete steps in line with a master plan released on June 1 to build the southern island province of Hainan into a high-level free trade port, showcasing the country's commitment toward both post-pandemic recovery and long-term economic growth.

In the latest of these moves, the Ministry of Finance and the State Taxation Administration lowered the income tax rate to 15 percent for eligible companies registered in Hainan, and exempted income tax on proceeds of new, outbound direct investment for companies in tourism, modern services, and tech-intensive sectors.

As a trailblazing example of institutional innovation needed at the Hainan free trade port, the new tax plan is key to cultivating a business environment for the country's high-level opening-up, said Li Xuhong, a professor at the Beijing National Accounting Institute.

To be eligible for the 15 percent tax rate, companies have to make sure that they run their businesses from the island province, which Li said will prevent companies from flocking into the free trade port only to pay lower taxes.

The two central departments also capped the personal income tax rate at 15 percent for individuals with high-level and in-demand expertise working in Hainan, a move that analysts say will help draw a much-desired, talented workforce to Hainan.

"The two new tax policies will become a major determinant in investors' decision to come to the Hainan free trade port," said Li.

Chinese authorities announced on June 29 that they will increase Hainan's annual tax-free shopping quota to 100,000 yuan (about $14,142) per person each year from the current 30,000 yuan for travelers. They will also expand the categories of duty-free goods, fueling market expectations for the consumption of luxuries.

Industry insiders are particularly encouraged by the removal of the current tax-free limit of 8,000 yuan for a single product, which in effect extends the duty-free cap for an item to 100,000 yuan.

The policy is expected to help scale up sales of some valuable goods, including wristwatches, jewelry, luggage, and handbags, said Mei Lin, an analyst at China Merchants Securities.

Shares of companies authorized to sell duty-free products soared on July 1, with the renowned department store Wangfujing Group Co Ltd rising from the daily limit of 10 percent, for the second consecutive day, to close at 49.69 yuan.

New policies in the past month also covered customs regulations, vessel registration, and air transport. The trial of the Seventh Freedom of the Air in Hainan allows foreign carriers to operate flights between two foreign countries without the need to touch down in the airline's home country.

The country's top economic planner said in late June that it will allocate a total of 3.5 billion yuan from the central budget to fund infrastructure construction and public services improvements in the Hainan free trade port.

The free trade port landed its first 35 key investment projects during mid-June, which included eight foreign-funded ones, as the province attracts global investors with its opening-up.

French energy giant EDF Group, the Shenzhen Stock Exchange, and China Eastern Airlines were among the participating enterprises.

"Hainan will embrace new opportunities in areas like advanced technologies and low-carbon economy, and our company hopes to be more involved in the free trade port's development," said Fabrice Fourcade, senior vice-president of EDF Group, and its chief representative in China.