Tax Incentives, Subsidies

Preferential tax subsidy is a common type of subsidy. Having a good grasp of the provisions in relation to preferential tax subsidy under the WTO can be helpful to legalizing the preferential policies of taxation. Two domains are involved in preferential tax subsidy, subsidy and tax.SCM Agreement firstly defines subsidy by law in history. Thedefinition embodies three elements——subsidy granter, financialcontribution and conferring a benefit. Where a preferential measure satisfies these three elements, it constitutes a subsidy. However, what the subsidy law concerns is the one bearing specificity. According to the SCM Agreement, specific subsidies can be divided into prohibited subsidies and actionable subsidies. Prohibited subsidies are thoroughly rejected due to their fierce disturbances on the order of international trade, while actionable subsidies can be kept as long as there are no adverse effects caused.With regard to taxes, they are divided into direct taxes and indirect taxes under the SCM Agreement. The burden of direct tax will not shift, that is the one paying the tax assumes tax burden. But in the case of indirect tax, its burden will usually shift from the taxpayer to a domestic consumer. If an indirect tax is in connection with export, the exporting country will exempt, remit or defer the tax.The inherent difference between direct and indirect tax leads to the distinct rules on their prohibited subsidies.The direct tax preference in relation to export essentially constitutes a subsidy. The exemption, remission or deferral specifically related to an export, of a direct tax is a prohibited subsidy, with an exception that appropriate interests are charged on the tax deferral. Another relevant prohibited subsidy is the allowance of a special deduction directly related to export or export performance, over and above that granted in respect to production for domestic consumption, in the calculation of the base on which the direct tax is charged.The indirect tax preference shall be limited under a certain degree; exceeding that will be a subsidy. The exemption or remission, in respect of the production and distribution of an exported product, of indirect tax in excess of the "domestic levy standard" will be deemed as a prohibited subsidy. It is the same to the exemption, remission or deferral of prior-stage cumulative indirect taxes on goods or services used in the production of an exported product in excess of the "domestic reduction or deferral standard" .The actionable subsidy in relation to tax preference shares the common three elements with other subsidies. Its key point lies in the adverse effect unique for actionable subsidy, including injury to domestic industry, nullification or impairment of benefits and serious prejudice.The thesis, last but not least, introduces the status quo of China' s tax preferences and offers some proposals.