Foxconn Leads Fight to Save Business Tax Breaks in China: Assembler of iPhones holds up proposed factory over curbs on promised subsidies

March 25, 2015

By GILLIAN WONG in Beijing and LORRAINE LUK in Hong Kong March 25, 2015

Foxconn and other foreign businesses in China are fighting to save tax breaks and other benefits promised by Chinese cities and provinces, as Beijing ramps up a campaign against big spending by local governments.

The crackdown could lessen the attractiveness of foreign investment in China, which totaled $119.6 billion in 2014. While experts say the total benefits at stake are difficult to quantify, Foxconn alone has been negotiating to preserve roughly five billion yuan ($804.6 million) in promised subsidies in a central Chinese city, according to people familiar with the matter.

Foxconn Chairman Terry Gou met last month with the mayor of the city of Zhengzhou, Ma Yi, to discuss saving the benefits, these people said. Taiwan-based Foxconn, formally

Hon Hai Precision Industry

Co., makes


Inc.’s iPhone 6 at a sprawling factory in the central Chinese city that employs more than 200,000 people.

The discussions are holding up a proposed 35 billion yuan Foxconn plant to be based in Zhengzhou that would

make high-end phone displays

, the people said.

A Foxconn spokesman declined to comment, while Zhengzhou officials didn’t respond to requests for comment.

Foreign business groups say a new effort by the Chinese government to tame local subsidies has thrown promised tax breaks and other inducements into doubt. Local governments are now balking at honoring previous tax breaks, the groups say, while local officials are seeking guidance from Beijing on other goodies like promises to sell land at a discount or waive social-insurance payments.

“The suddenness of the move caught many companies by surprise,” said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai.

“Most companies would like to see existing incentives grandfathered because they had made their business decisions based on the incentives,” Mr. Jarrett said. “Those incentives are important to their bottom line.”

The foreign business groups say the uncertain incentives represent their latest business challenge in China. Business groups have complained that China uses its antimonopoly law to target foreign companies, though China says it has also stepped up enforcement against local companies. Foreign technology companies are challenging measures proposed for the Chinese banking industry that they say would require them to turn over proprietary technology.

The push to clean up investment incentives affects domestic as well as foreign companies, experts say. China’s State Council, or cabinet, issued guidelines in December asking local governments to assess and eliminate many incentives ranging from tax reductions to discounted land pricing.

It is aimed at stopping what Beijing regards as disorderly and harmful bidding wars by local governments to attract foreign and domestic investment.

Officials have asked local governments to submit detailed overviews of preferential policies by the end of this month. Unauthorized tax incentives drawn up by local governments without State Council approval must stop, the council has said, meaning companies should be subject to China’s full 25% corporate tax rate.

The State Council declined to comment while China’s Finance Ministry didn’t respond to requests for comment.

Beijing is facing a slowdown in tax revenues as overall growth flags. At the same time it is grappling with how to handle massive local debt, which at last count totaled 17.9 trillion yuan and which some economists call a major threat to the financial system.

China is also seeking to keep in line with its trade agreements. Last month, the U.S. challenged a Chinese local subsidy program before the World Trade Organization.

Chinese subsidies are difficult to quantify, but experts say they can be considerable. China’s Securities Daily newspaper, the government’s main newspaper for securities news, said in January that in the first half of last year, 2,235 listed Chinese companies reported receiving support totaling 32 billion yuan.

China isn’t alone: Good Jobs First, a U.S. group that monitors subsidies, says the U.S. federal government has awarded $68 billion in grants and tax credits to companies since 2000.

In Zhengzhou, Foxconn has asked the local government to honor previously granted investment subsidies that are estimated to amount to about two billion yuan, one person familiar with the talks said.

The government has estimated that the new guidelines would eliminate another three billion yuan of incentives and subsidies to Foxconn over the next five years, the person said.

Foxconn is also asking the government to help bear some costs such as the construction of the new display plant and infrastructure, another person said.