Submitted By: Mark Fairman

For nearly three decades, foreign investors had reaped huge benefits from their geographic locations in the PRC. Tax Holidays in provinces along the Eastern seaboard (Shandong, Jiangsu, Fujian, and Guandong) have allowed for large imbalances in exports between regions—as well as imbalances between foreign and domestic firms.

The initial tax holiday allowed manufacturers to pay no income taxes for their first two years and taxed only half of the standard 25% for the next two. Also, duties and taxes for exports of foreign manufacturers are differed indefinitely. Along with the ridiculously cheap cost of labor, tax exemption has been a major draw for foreign investors over the past years.

This situation sounds great for companies moving operations abroad, but the Chinese government has started phasing out these exemptions (except for high-tech firms and R&D) at the beginning of 2008. They are doing this to allow a more level playing field between the eastern provinces and the central and western provinces of China, as well as an attempt to upgrade their manufacturing model by luring in more high-tech firms.

So what does this mean for a young entrepreneur thinking of doing business in the PRC? One solution to this problem might be to locate facilities in the central provinces of Chengdu and Xian, where the Tax Holidays are still in effect. Of course, with this move, there is weaker transportation network and no direct port access. Do the benefits of this move outweigh the costs? Are there business opportunities created by a shift in manufacturing locations?

For a more in-depth into the particulars of the 2008 tax reform, click here.