China firms joining forces for tax fight

China's local enterprises and media owners have joined forces to lobby against a new advertising policy, which is threatening to cap their annual adspend budgets. Under the tax bureau's latest directive, local enterprises will be allowed to spend no more than two per cent of their total annual sales turnover on advertising, and five per cent on below-the-line. If advertisers spend more than this level, their marketing expenditures will not be counted as operational cost before tax. It appears that China introduced this draconian policy as part of a continuing crackdown on its wayward state-owned enteprises, which are saddled with massive debts from overspending. Foreign and joint-venture companies have been spared as they operate under a different tax regime. Said Zenith Media Beijing GM Derek Kwok: "The new tax law would limit them (SOEs) to use advertising as a major weapon in marketing their products." Multinational ad agencies are certain the new directive will not affect their billings as the bulk of their business involves international and joint-venture clients. However, China's mass media are bracing themselves for the heaviest blow as about 74 per cent of the mainland's total adspend is generated by local enterprises. Carat China managing director Winnie Lee said the policy would affect the advertising strategy and budgets of local companies. Zenith's Mr Kwok believes local enterprises may resort to "creative methods" to avoid this tax. "Ad dollars could be diversified to other marketing tools or other more underhand ways like rebates for the wholesalers and retailers." The directive will also open up a window of marketing opportunity for foreign corporations to counter their local competitors. While the latest directive has generated plenty of controversy, others who have seen policies come and go point to the many grey areas in guidelines for the advertising and media industry. J. Walter Thompson China CEO Tom Doctoroff said: "There have been many complaints from state-owned companies about this arbitrary regulation and it appears the whole issue is up for review on a national level. "These type of laws masquerading as trial-balloons are very common here and it's important not to panic when regulations of this nature are issued," said Mr Doctoroff. "I suspect the whole thing will blow away as it is patently unworkable, even for SOEs."

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