China's Companies Get A New Tax Incentive For Making Social/Charitable Donations

Implications:  

China’s Communist leaders want to see more of the wealth generated by both public and private enterprise being invested into charitable and social “good deeds”,

92.5% of Chinese firms made donations in cash last year – this is now set to increase

Although it remains to be seen how much of a direct effect the new tax breaks to corporate philanthropy will have.

Analysis:

The annual session of the National People’s Congress (NPC), which is China’s premier policy-making forum, has recently concluded with a raft of new policy aimed at promoting better investment in the corporate sector, particularly with the fast-growing private sector in mind. Much of the latest corporate tax adjustment has been aimed at equalising the tax burden between domestic and foreign companies, in line with China’s WTO entry commitments, so that both will pay an equal rate of 25% (where foreign companies used to get a preferential 15%). These commitments meant that China had to fully comply to international WTO guidelines by the end of 2006.

One of the revisions to have come out of the latest round of policy-making, is a change to the proportion of company charity donations, against their annual profits, that are now exempt from tax. This proportion has now risen from the original 10% to 12%. This represents a clear message from the government. China’s Communist leaders want to see more of the wealth generated by both public and private enterprise being invested into charitable and social “good deeds”, and is encouraging a greater scale of corporate philanthropy and responsibility. It is also interesting to note that as well as tax exemptions on donations, there are also new tax incentives for companies investing in water-saving and energy-saving projects.

So what was the level of corporate donation before now? Well, in April 2006, the Hurun Report, which describes itself as a “luxury business portal” released a list of the top-50 corporate philanthropists, which was published by Rupert Hoogewerf. The report sees donations ranging from just under US$2,000, right up to US$250,000. Most of the donations were made towards improvements in education, into social welfare establishments and poverty relief. All of the donations on the List were made by wealthy business leaders, but philanthropy is not the preserve of the rich in China. The China National Aviation Holding Travel Service, for instance, recently held a birthday party for eight employees in which staff members donated to the China Primary Health Care Foundation.

As far back as 2000, when a survey was conducted by the Shanghai Academy of Social Sciences’ Sociology Institute, some interesting data on corporate giving was emerging. Questionnaires on donation were distributed to 950 companies, of all ownership types. Of the 503 respondents, 92.5% had made donations in cash, goods or services within the last year, suggesting that most companies in Shanghai have engaged in corporate philanthropy, even if the non-responders had made no donations. 53% of respondents had made contributions under RMB50,000, 36% between RMB50,000 and RMB300,000, 7% RMB300,000 to RMB1m, and 4% over RMB1m. 57% of the donors had stated that their contributions went towards “poverty alleviation”, 32% to “social welfare” and 23% to “education”. Slightly more than 40% had given for disaster relief.

But this survey covered just Shanghai, and there is still no broad corporate donations culture in China. And, from the point of view of charities and NGOs in the country, the nation’s corporations are an as yet largely untapped resource. This is not due any particular lack of institutional collective charity – indeed, such activities have long been promoted by the Chinese government. Witness the nation’s Tree Planting Day, where people and companies donate trees to be planted to help reforests lost areas of woodland, as well as provide trees to aid halting the spread of deserts.

Perhaps what is most significant about the new tax incentive for businesses to donate, is that this provides a monetary incentive for companies to be more charitable, and one with a much more immediate cost benefit. As more companies in China begin to take advantage of such tax incentives, they will also begin to sense the other additional benefits of such giving, that are perhaps not so immediately apparent. Indeed, public opinion of companies in China does not rest upon brand image alone. There is growing awareness, among Chinese consumers, as to which companies are more actively involved in aiding charity and good causes. The benefit to companies in this, is that consumer perception of philanthropy often converts into increased consumer loyalty to that company, and hence, better sales.

In the commercial environment in China at present, where competition in most sectors is fierce, and margins tight, it begins to make economic sense to give away money to charity. The long-term feedback from such positive contributions to society in general often outweighs the cost of giving, and as more companies latch onto this idea, then more will follow suit. The problem at the moment is that very few Chinese companies are yet aware that they can afford to make such contributions, or that there is a real benefit to doing so.

It may be that foreign companies in China have been showing the way in this respect. Now, with their tax burden about to rise from 15% to 25%, there is even more of an incentive for foreign companies to “lose” some of their profit margin in charitable donation. Not only will this reduce their increased tax bill, but many foreign corporations are aware of the feel-good response from the public, following such charitable activity, and how that can translate into improved PR in the broader sense. Companies used to fighting a rear-guard action to preserve their company image, such as McDonald’s and Nestlé, are already actively involved in charitable investment in China. This may well be a means, with some selfish motive behind it, to preserve their corporate image from a constant barrage of ill-feeling. However, it does help to generate a culture of corporate giving where little existed before.

Not only can foreign companies lead by example, but they can also lead by cooperation. Many foreign companies have entered the Chinese market via the joint venture route. They therefore have an influence on how their JV partners act, and any subsidiary companies, suppliers and buyers.

It remains to be seen how much of a direct effect the new tax breaks to corporate philanthropy will have. What seems most likely, is that emerging trend for corporate giving among Chinese companies is most likely to grow much more rapidly in the coming years. Also, along with increased Chinese corporate investment in markets outside China, particularly in the nations of Africa, money directed at charities and NGOs by Chinese companies could also become increasingly significant outside the boundaries of the People’s Republic.