New tax on China yachts? More boats looking for Hong Kong berths?

by Sail-World Asia, and China Daily on 25 Feb 2011 Here's a news item from the China Daily today:

Owners of yachts - a luxury that is gaining popularity among China's newly rich - will have to pay an annual vessel tax based on the length of their craft if a draft law is passed by the top legislature. The latest draft of the vehicles and vessels taxation law was submitted to the National People's Congress (NPC) Standing Committee for second reading on Wednesday.

'Based on the principle of taxation determined by law, a user tax for yachts has been included in the latest draft and will be collected according to a vessel's length,' said Zhang Bailin, vice-chairman of the NPC Law Committee, who explained the draft to legislators.

He said the tax on yachts will range from 400 yuan ($61) to 2,000 yuan per meter. The rate of taxation will depend on the specific model of yacht and will be further stipulated by the State Council. Zhang also stressed the necessity of the legislation, saying it improves the taxation system because the current tax on vehicles and vessels has been collected in accordance with a provisional regulation issued by the State Council in 2007.

He Yicheng, a Macao-based businessman and member of the NPC Standing Committee, said on Wednesday during a group discussion that the tax on yachts may need to be higher if it is to have the desired effect of narrowing the gap between rich and poor. 'As high-end consumer goods, yachts are different from normal transportation tools and should be distinguished accordingly through the tax,' he said. 'The tax on a 10-meter yacht is lower than that of a vehicle with an engine larger than 4.0 liters, which is unreasonable.'

However, the draft has triggered concern among yacht dealers, who describe it as 'snow plus frost' on the fledgling industry.

Liu Dianfang, chairman of the yacht industry association in Xiamen, in East China's Fujian province, said the draft law, if passed, will hold back the momentum of the fast-growing yacht industry in China. Liu estimated there are 300 luxury yachts in China that each has a value of 3 million yuan or more. Xiamen, because of its proximity to Taiwan, harbors about 40 luxury yachts and has 11 yacht clubs out of the 23 throughout China.

'The new tax on yacht owners will discourage potential customers and hurt the market,' Liu said, adding that the law should also offer a clear definition of a 'yacht'. He said the definition is needed because, if a private fishing boat that is 4 or 5 meters that cost 20,000 to 30,000 yuan is considered a 'yacht', the tax will be a heavy financial burden on its owners because they will need to pay 1,600 to 2,000 yuan in taxes each year.

Liu's concerns were echoed by the finance manager at a leading yacht importer based in Xiamen. 'We're already heavily taxed with high import duties and a consumption tax adding up to 43 percent, said the woman surnamed Ni. 'We pay 2 to 3 million yuan for smaller yachts and 20 to 30 million for larger ones. It's a growing market that is attracting more Chinese customers. We hope the government will give it more support. Imposing a new tax will not serve that purpose.'

Zhao Yinan and Li Yao, China Daily

This sounds like yet another reason for Chinese boat owners to keep their 'floating assets' well away from China - in places like Hong Kong, where the marinas are are already full, and nobody has any plans to build more. After due consideration, one of Sail-World Asia's friends in the business in this part of the world offered the following comments:

'Such taxation will obviously be detrimental to an industry still in its infancy. Recreational boat and yacht ownership in China is already more expensive than in the most popular and well-developed locations worldwide.

In addition to 8-10% import duties for completed boats (and also components used on domestically-produced boats), there's 17% VAT, plus an additional 10% luxury tax for boats over approximately 30 feet. While domestically-built boats benefit from lower labour rates and shipping costs, duty is levied on imported items, and the same 17%% VAT and 10% luxury tax apply. These fees are compounded and for imported boats, total 43% of boat value including purchase price and shipping. Slip/berth fees in many locations are higher than some of Europe's costliest marinas.

Instead of 'helping to bridge China's income gap,' excessively high user fees will prohibit far greater economic returns than a robust recreational marine industry would provide. Before the global marine slowdown Chinese factories employed thousands of workers who produced boats primarily for export. As a result of the downturn, many factories have reduced their labour forces and operate well below capacity. Many of those factories now focus on China's domestic market; indeed they are depending on internal growth to stay in business.

It's paradoxical that in a nation making major efforts to encourage consumer spending (i.e. domestic growth), some seem intent on slowing a potential new industry which could provide thousands of needed jobs in coming years. One needs only to look back at the ill-conceived 10% luxury tax U.S. lawmakers created in the early 1990s as example for misguided taxation. For those not familiar, it destroyed many thousands of marine-related jobs along many long-standing U.S. boat builders.

Once that tax was removed the marine industry blossomed: factories reopened, new jobs were created, and recreational boating grew with unprecedented speed and vitality. As profits grew, factories paid more taxes, workers earned salaries which spread throughout local economies, and marinas hired more people to service the increased customer needs.

The 10% luxury tax is already sending would-be Chinese boat buyers offshore; prohibitively high user fees will be another 'nail in the coffin.'

Few would question the validity of annual 'user' or 'registration' fees for recreational boats, but they must be realistic. In fact, boat owners would probably gladly pay for increased marine patrols promoting and ensuring greater safety in Chinese waters.'

Make up your own mind...