Monetary Policy

Taxation Report of Shenzhen Local Taxation Bureau on Supporting Financial Innovation of Qianhai and Promoting the Development of Commercial Factoring Industry

To Shenzhen Municipal Government: 
  According to the guiding ideology of our city for comprehensively deepening reform, following the direction of “three features and one platform” (market, rule of law and internationalization, along with Qianhai Strategic Platform), in order to support the development of the innovative financial industry in Qianhai, give full play to the functions of taxation services for its transformation and upgrading, aiming at the taxation status of rapidly developed commercial factoring industry in Qianhai, the Bureau has conducted an in-depth and careful taxation research and survey, and taking into account relevant experiences and practices of other domestic provinces and municipalities, reports on the taxation issues relating to the commercial factoring industry in Qianhai as follows:  
  I. Rapid development of the commercial factoring industry in Qianhai
  Factoring is a mature international trade financing product. The “commercial factoring” means that a seller (creditor) enters into a factoring agreement with a factor, under which the seller transfers its current or future accounts receivable to the factor to obtain funding or obtain comprehensive services, such as separate account management, collection of accounts receivable, and bad debt guarantee, from the factor. With the advantages of being flexible, efficient and professional, the commercial factoring can solve the financing needs of small and medium-sized enterprises and the real economy and is a kind of innovative financial services whose development is encouraged currently by the State.
  By the end of 2013, there are 284 commercial factoring enterprises, 107 of which settle in Qianhai, Shenzhen and account for more than 1/3 of the total number of these enterprises in China. The total business volume of commercial factoring in China reaches 20 billion yuan. According to the estimates of the Ministry of Commerce, in the next 3-5 years, the annual business turnover of the commercial factoring industry will reach 500 billion yuan. Because the parties concerned are generally optimistic about the development prospects for Qianhai financial center, since this year, the number of commercial factoring enterprises registered in Qianhai is rapidly increasing and until the end of May 2014, there are 235 commercial factoring enterprises and the taxation levied reaches 4.202 million yuan. About 10 enterprises can continuously carry out large-scale business. As the trend continues, a series of leading enterprises will appear in Qianhai in the future, so the commercial factoring has very promising development prospects.
  II. Taxation of the commercial factoring industry in Qianhai and related opinions
  (1) Levying sales tax on the interest differential of the commercial factoring industry
  The commercial factoring belongs to the innovative financial services with factoring interest income as the main operating revenue. Its actual income is only the interest differential. Pursuant to the current policy, the sales tax should be levied for the interest income in full amount. The taxes account for 18.31% of its gross sales profit, so the commercial factoring enterprises give feedback opposed to the heavy tax burden and the problem of double taxation. In view of these situations, in order to encourage and foster the rapid development of commercial factoring in Qianhai, the Bureau decides through study to levy the sales tax on the balance of the interest income minus the loan interest paid to financial institutions, aiming at all commercial factoring enterprises registered in Qianhai.
  The effects of promoting the industrial transformation and upgrading of Qianhai are especially obvious after adopting the policy of levying sales tax on the interest differential of the commercial factoring enterprises. Firstly, it can greatly reduce the sales tax burden of commercial factoring enterprises, promote the rapid development of the commercial factoring industry and form the commercial factoring industry cluster in Qianhai in the short term. As estimated, the sales tax paid by taxpayers in the commercial factoring industry will decrease by 90%. Secondly, it can give full play to the financing function of the factoring cash pooling, take advantage of the industrial radiation effects and help to build the financing platform for small and medium-sized enterprises of China in Qianhai. It is estimated that the accumulated business scale of the factoring industry in Qianhai in the next three years will be about 7 billion yuan, but there is still large room for its development compared with the accounts receivable of 26 trillion yuan all over China. Therefore, the industry has very promising development prospects. Promoting the rapid clustering of factoring enterprises in Qianhai through the favorable tax policy is of importance significance for building the financial center in Qianhai.
  Of course, although levying sales tax on the interest differential of commercial factoring enterprises complies with the actual operating characteristics of the commercial factoring industry and some domestic provinces and municipalities set a precedent, at the national policy level, there are no express provisions and audit risks still exist if the Bureau make a breakthrough in policy.
  (2) Commercial factoring enterprises included in the financial industry and applying the enterprise income tax policies for financial institutions
  The commercial factoring industry has the financial characteristics, but now it is under the administration of competent commercial authorities. If the industry is recognized as the financial industry, the taxpayers can calculate the provision for impairment as per 1% by referring to the applicable criteria of financial institutions and deduct it before paying the enterprise income tax. In order to promote faster development of the commercial factoring industry, the Bureau recommend that the commercial factoring enterprises in Qianhai are administrated as financial enterprises and the Bureau may refer to the deduction policy before paying the enterprise income tax applicable to financial institutions.
  Under the correct leadership of the municipal party committee and government, according to the strategic planning requirements for developing Qianhai formulated by the State Council, the Bureau will vigorously implement the tax incentive policies to promote the rapid development of innovative financial services in Qianhai and play a positive role in terms of taxation for constructing the Qianhai financial center.



  Shenzhen Local Taxation Bureau (Seal)
  July 22, 2014