HONG KONG – Starting this month, Chinese biotech companies will enjoy a 50 percent reduction in value-added tax (VAT) in China, all part of a government plan to standardize taxes across the country.
Up until the end of June, manufacturers and distributors of biological products were paying a 6 percent VAT to the government, but an updated policy cut that rate in half.
"To achieve more specified and fair taxation, the State Council agreed to degenerate and unify VAT from 6 percent and 4 percent to an even 3 percent (for the biological products that are made of microorganisms, soluble microbial products, animal toxins, human or animal blood or tissue)," noted the Ministry of Finance of China and the State Administration of Taxation of China. The new policy went into effect July 1.
"The VAT rate in China changes quite regularly from product class to industry depending on what the policy of the day is," said Matthew Murphy, lead partner at international law firm MMLC Group. "And the policy today for biological products in China is investment."
"They [the government] want to develop a home-grown industry in China," he added. "That's one of the reasons we see the VAT rate change for biological products."
Chinese biotech companies whose primary business lies in products like vaccines or blood products expect to benefit from the change almost immediately. Some expect to see higher revenues during the second half of this year.
"We expect this new policy will beneficially impact our future financial results, including total sales and net income as sales revenue is recognized as the invoiced value of products sold minus VAT," said Weidong Yin, CEO and President at Sinovac Biotech Ltd., one of China's biggest vaccine makers.
Another blood product manufacturer, China Biologic Products Inc. (CBPO), celebrated the decision by the government to cut down on the tax rate.
"Although the company is still assessing the quantitative impact of this favorable VAT reduction on its future results of operations, [the firm] expects that, once implemented, this reduction in the VAT rate will have a positive impact on its sales and net income in the second half of 2014 and onwards," CBPO said.
China is undergoing a years-long review of its tax system, looking to streamline taxes and create an even playing field for foreign and domestic companies. It is also looking to create a more friendly environment for biopharmaceutical companies in terms of tax policy compared with countries like the U.S. and Ireland. (See BioWorld Today, May 11, 2014.)
China's tax policies for biotech companies "can be more welcoming and friendly depending on how the investment is arranged," Murphy told BioWorld Today. "For example, we have the regulations for high-tech companies with fantastic tax exemptions."
China already offers science and technology companies permanent tax deductions and exemptions. The corporate tax rate is 15 percent for companies classified as "high-tech enterprises," including biotech firms. At the same time, China has less restrictive policies than the U.S. for its biotech companies to qualify for tax incentives.
There are also numerous preferential tax policies for specific biological products in China.
For example, all AIDS drugs and contraceptives are VAT-free. The export rebate rate for pharmaceuticals was raised from 13 percent to 17 percent back in 2006. Export rebates for drugs targeting HIV/AIDS and genetic recombinant human insulin lyophilized powder were also raised from 5 percent to 11 percent and 13 percent, respectively, in 2008.
"It's quite a supportive environment if you set up the structure of the investment properly, to take advantage of the tax exemptions," Murphy said. "A lot of people don't set things up properly, so they don't get the right government approval, grants and etc."
Given the high investment costs and lengthy regulatory timelines of drug development, tax reductions can be a big help for biotech companies.
"[The VAT reduction] is not that exciting because we always see the VAT changes depending on the policy," Murphy said. "But the reduction of the VAT should lead to more investment providing people confidence that it will not go up again in the future."