Tax policies to target research centres in China

China's research-based companies are eager for the abolition of a temporarily suspended taxation policy which could dramatically increase their burdens. 

The 2008 version of Transitory Regulations on Value-added Tax (VAT), scheduled to take effect on 1 January 2009, repealed the previous tax-free policies for industries to import instruments and equipment, but allows companies to deduct the instrument VAT through commodity taxes on their products.

Although scientific institutes still enjoy the tax break for their imported instruments, as a research-based company, we can hardly be classified in China as a [public] scientific institute and enjoy favourable treatment, said Du Ying, president of Shanghai-based Hutchison MediPharma at a seminar held in Zhangjiang Life Science Park in late April.

On the other hand, as most pharmaceutical research and development (R&D) companies do not have products to sell, they have no commodity tax to deduct their VAT.

In pharmaceutical research, many instruments are very expensive, so the [up to 17 per cent] VAT would be a big hit to the companies already inflicted by the long drug development process, says Lu Jia of Zhangjiang Biotech & Pharmaceutical Company.

The threat is not to life science companies in Zhangjiang alone. All research-based firms that do not sell products could be impacted, Lu told Chemistry World.

Amidst these strong complaints, Zhangjiang Group, parent firm of Zhangjiang Biotech & Pharmaceutical, lobbied the government to postpone the taxation stipulation on imported instruments until the end of June.

During vice-premier Li Keqiang's inspection of Zhangjiang, we considered the appeal by industries, and Li promised to reconsider the taxation rule. This resulted in the half-year suspension, says Liu Xiaolong, vice-general manager of Zhangjiang Group.

But so far it is unclear whether the half-year suspension will become a permanent abolition of the instrument taxation.

Some big international pharmaceutical R&D centres have warned they will suspend their expansion plans if the taxation rule takes effect, Lu says.

Given the lower development costs and abundant local talent, many leading international pharmas, such as Astrazeneca, GlaxoSmithKline (GSK), Novartis and Roche, have set up their R&D centres in China, mainly in Zhangjiang.

Lu says that behind the new VAT policies is the government's willingness to strengthen the domestic instrument and equipment industry. Currently, most of the high-end instruments used in China, such as mass spectrometers and chromatograms, are dominated by foreign products.;

We hope that the desire to support one industry should not compromise the innovation capacity of other sectors, says Wei Xiaolin, vice-general manager of Zhangjiang Biotech & Pharmaceutical.